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Candlestick Charting for Dummies


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Table of Contents

Introduction 1 About This Book 1 Conventions Used in This Book 2 What You're Not to Read 2 Foolish Assumptions 3 How This Book is Organized 3 Part I: Getting Familiar with Candlestick Charting and Technical Analysis 3 Part II: Working with Simple Candlestick Patterns 4 Part III: Making the Most of Complex Patterns 4 Part IV: Combining Patterns and Indicators 4 Part V: The Part of Tens 5 Icons Used in This Book 5 Where to Go from Here 6 Part I: Getting Familiar with Candlestick Charting and Technical Analysis 7 Chapter 1: Understanding Charting and Where Candlesticks Fit In 9 Considering Charting Methods and the Role of Candlesticks 10 Getting a feel for your options for charting 10 Realizing the advantages of candlestick charting 10 Understanding Candlestick Components 11 Working with Candlestick Patterns 12 Simple patterns 13 Complex patterns 13 Making Technical Analysis Part of Your Candlestick Charting Strategy 14 Trading Wisely: What You Must Understand Before Working the Markets 14 Trading can be an expensive endeavor 14 Paper trading costs you nothing but time 15 Developing rules and sticking to them 15 Chapter 2: Getting to Know Candlestick Charts 17 Recognizing the Many Benefits of Candlestick Charting 18 Seeing is believing: Candlesticks are easy to read 19 You can spot bears and bulls quickly 20 Seeing into the future (sort of) 22 Showing price patterns 23 Admitting the Potential Candlestick Charting Risks 25 Comparing Candlestick Charts with Alternative Charting Methods 26 Line charts 27 Bar charts 27 Point and figure charts 29 Chapter 3: Building a Base of Candlestick Chart Knowledge 31 Constructing a Candlestick: A Core of Four 31 Price on the open 32 High and low price for the session 35 Price on the close 38 Considering Additional Information Included on Candlestick Charts 39 Volume 39 Open interest 40 Technical indicators 42 Fundamental information 43 Chapter 4: Using Electronic Resources to Create Full Charts 49 Turning to the Web for Candlestick Charting Resources 50 Using Yahoo! Finance for charting, trading, and investing 50 Working with 52 Charting on 54 Using for candlestick charting 56 Creating Candlestick Charts Using Microsoft Excel 57 Finding the data for your chart 57 Making sure the data is in the correct format 58 Building an Excel candlestick chart 59 Adding a moving average to an Excel candlestick chart 60 Adding a trendline to an Excel candlestick chart 63 Adding volume data to an Excel candlestick chart 64 Exploring Your Charting Package Software Options 66 Remembering a few key points when selecting charting software 67 Considering a few charting package options 69 Part II: Working with Simple Candlestick Patterns 71 Chapter 5: Working with Straightforward Single-Stick Patterns 73 The Bullish White Marubozu 74 Understanding long white candles 74 Identifying the three variations of the long white candle 78 The Bullish Dragonfly Doji 80 Recognizing a dragonfly doji 81 Trading based on a dragonfly doji 83 The Bearish Long Black Candle 84 Understanding long black candles 85 Identifying black marubozus 86 Trading based on long black candles 88 The Bearish Gravestone Doji 90 Identifying the gravestone doji 90 Trading based on gravestone dojis 92 Chapter 6: Single-Stick Patterns That Depend on Market Context 95 Understanding Market Environments 96 The three market states 96 Identifying the market trend 96 Delving Into Dojis 98 The long legged doji 98 Other dojis 104 Looking At Other Patterns: Spinning Tops 108 Identifying spinning tops 108 Using spinning tops for profitable trading 109 Discovering More about Belt Holds 112 Spotting belt holds on a chart 113 Buckling down for some belt hold-based trading 113 Deciphering between the Hanging Man and the Hammer 118 Spotting and distinguishing the hanging man and the hammer 118 Trading on the hanging man and the hammer 119 Chapter 7: Working with Bullish Double-Stick Patterns 123 Bullish Reversal Patterns 124 Bullish engulfing pattern 124 Bullish harami 128 Bullish harami cross 130 Bullish inverted hammer 134 Bullish doji star 137 Bullish meeting line 140 Bullish piercing line 142 Bullish Trend-Confirming Patterns 145 Bullish thrusting lines 145 Bullish separating lines 147 Bullish neck lines 150 Chapter 8: Utilizing Bearish Double-Stick Patterns 155 Understanding Bearish Reversal Patterns 155 The bearish engulfing pattern 156 The bearish harami pattern 159 The bearish harami cross pattern 161 The bearish inverted hammer pattern 164 The bearish doji star 167 The bearish meeting line 168 The bearish piercing line or dark cloud cover pattern 172 Making a Profit with Bearish Trend Patterns 174 The bearish thrusting lines 175 The bearish separating lines 178 The bearish neck lines 180 Part III: Making the Most of Complex Patterns 185 Chapter 9: Getting the Hang of Bullish Three-Stick Patterns 187 Understanding Bullish Three-Stick Trend Reversal Patterns 187 The three inside up pattern 188 The three outside up pattern 191 The three white soldiers pattern 193 The morning star and bullish doji star patterns 196 The bullish abandoned baby pattern 199 The bullish squeeze alert pattern 201 Working with Bullish Three-Stick Trending Patterns 204 The bullish side-by-side white lines pattern 204 The bullish side-by-side black lines pattern 207 The upside tasuki gap pattern 210 The upside gap filled pattern 214 Chapter 10: Trading with Bearish Three-Stick Patterns 217 Understanding Bearish Three-Stick Trend Reversal Patterns 217 The three inside down pattern 218 The three outside down pattern 220 The three black crows pattern 223 The evening star and bearish doji star patterns 226 The bearish abandoned baby pattern 229 The bearish squeeze alert pattern 231 Forecasting Downtrend Continuations 234 The bearish side-by-side black lines pattern 234 The bearish side-by-side white lines pattern 237 The downside tasuki gap pattern 240 The downside gap filled pattern 242 Part IV: Combining Patterns and Indicators 247 Chapter 11: Using Technical Indicators to Complement Your Candlestick Charts 249 Using Trendlines 250 Drawing trendlines 250 Considering trendline direction 251 Taking advantage of automated trendlines 252 Utilizing Moving Averages 253 Selecting appropriate moving average periods 253 Using simple moving averages 253 Using other types of moving averages: What have you done for me lately? 255 Combining two moving averages 258 Combining three moving averages 258 Examining the Relative Strength Index 260 Calculating the RSI 261 Reading an RSI chart 262 Cashing In on Stochastics 263 Grasping the math behind the stochastic oscillator 263 Interpreting the stochastic oscillator 264 Buddying up with Bollinger Bands 265 Creating Bollinger bands 265 Using the bands 266 Chapter 12: Buy Indicators and Bullish Reversal Candlestick Patterns 267 Buying with the RSI and Bullish Reversal Candlestick Patterns 267 Using the RSI to help pick a long entry point 268 Using the RSI to help pick long exits 270 Buying with the Stochastic Indicator and a Bullish Reversal Candlestick Pattern 272 Using the stochastic indicator to help pick a long entry point 273 Using the stochastic indicator to help pick long exits 274 Chapter 13: Sell Indicators and Bearish Reversal Candlestick Patterns 279 Shorting with the RSI and Bearish Candlestick Patterns 279 Picking short entry points with the RSI and candlesticks 280 Using the RSI to help pick short entry and exit points 282 Using the Stochastic Indicator and Bearish Candlestick Patterns for Shorting 285 Picking short entry points 286 Deciding when to get in and out of shorts 288 Chapter 14: Using Technical Indicators Alongside Bullish-Trending Candlestick Patterns 291 Using Trendlines and Bullish-Trending Candlestick Patterns for Buying and Confirmation 292 Using trendlines and bullish-trending candlestick patterns to pick long entry points and confirm trends 292 Picking long exits and determining stop levels with trendlines and bullish-trending candlestick patterns 294 Combining Moving Averages and Bullish-Trending Candlestick Patterns 297 Using moving averages with bullish-trending candlestick patterns to confirm trends 297 Using the moving average and bullish-trending candlestick patterns to pick long exits and determine stop levels 300 Chapter 15: Combining Technical Indicators and Bearish-Trending Candlestick Patterns 303 Putting Trendlines Together with Bearish-Trending Candlestick Patterns for Selling and Confirmation 303 Short trades and trend confirmation with trendlines and bearish patterns 304 Bearish trendlines and candlestick patterns leading to short entries and exits 306 Combining Moving Averages and Bearish-Trending Patterns for Short Situations 309 Pinning down short entry points and confirming trends 309 Using moving averages and bearish-trending candlestick patterns to pick short exits and select stop levels 311 Part V: The Part of Tens 315 Chapter 16: Ten Myths about Charting, Trading, and Candlesticks 317 There's No Difference between Candlesticks and Bar Charts 317 Market Efficiency Makes It Impossible to Beat the Market over the Long Run 318 Only a Full-time Professional Can Make Money in the Markets 318 Technical Analysis is Nothing More Than Reading Tea Leaves 319 Charting is for Short-Term Traders Only 320 You Must Be Rich to Start Trading 320 Trading is an Easy Way to Get Rich Quick 321 Candlestick Charts Require More Data and Are More Difficult to Create 321 The Trading Game is Stacked against the Small Trader 321 Selling Short is for Professional Traders Only 322 Chapter 17: Ten Tips to Remember about Technical Analysis 323 Charts Can Give False Signals 323 People Will Give You a Hard Time 324 There's No Definite Right or Wrong Opinion of a Chart 324 A Single Chart Doesn't Tell a Whole Story 324 Charting is Part Science, Part Art 325 You Can Overdo It 325 Develop a Backup System 326 Error-Free Data Doesn't Exist 326 No System is Silly As Long As It Works 326 Past Results Don't Always Predict Future Performance 327 Index 329

About the Author

Russell Rhoads is a trader and analyst for Peak Trading Group in Chicago. His career in trading and market analysis covers over 17 years. He has a BBA and MS in Finance from the University of Memphis and has done graduate level work in Financial Engineering at the Illinois Institute of Technology. Russell also holds the Chartered Financial Analyst designation.

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