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Getting Started in

CANDLESTICK CHARTING

Tina Logan

JOHN WILEY & SONS, INC.

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Getting Started in

CANDLESTICK CHARTING

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The Getting Started in Series Getting Started in Online Day Trading by Kassandra Bentley Getting Started in Asset Allocation by Bill Bresnan and Eric P. Gelb Getting Started in Online Investing by David L. Brown and Kassandra Bentley Getting Started in Investment Clubs by Marsha Bertrand Getting Started in Internet Auctions by Alan Elliott Getting Started in Stocks by Alvin D. Hall Getting Started in Mutual Funds by Alvin D. Hall Getting Started in Estate Planning by Kerry Hannon Getting Started in Online Personal Finance by Brad Hill Getting Started in 401(k) Investing by Paul Katzeff Getting Started in Internet Investing by Paul Katzeff Getting Started in Security Analysis by Peter J. Klein Getting Started in Global Investing by Robert P. Kreitler Getting Started in Futures, Fifth Edition, by Todd Lofton Getting Started in Financial Information by Daniel Moreau and Tracey Longo Getting Started in Emerging Markets by Christopher Poillon Getting Started in Technical Analysis by Jack D. Schwager Getting Started in Real Estate Investing by Michael C. Thomsett and Jean Freestone Thomsett Getting Started in Tax-Savvy Investing by Andrew Westham and Don Korn Getting Started in Annuities by Gordon M. Williamson Getting Started in Bonds, Second Edition, by Sharon Saltzgiver Wright Getting Started in Retirement Planning by Ronald M. Yolles and Murray Yolles Getting Started in Online Brokers by Kristine DeForge Getting Started in Project Management by Paula Martin and Karen Tate Getting Started in Six Sigma by Michael C. Thomsett Getting Started in Currency Trading by Michael D. Archer and James L. Bickford Getting Started in Rental Income by Michael C. Thomsett Getting Started in REITs by Richard Imperiale Getting Started in Property Flipping by Michael C. Thomsett Getting Started in Fundamental Analysis by Michael C. Thomsett Getting Started in Hedge Funds, Second Edition by Daniel A. Strachman Getting Started in Chart Patterns by Thomas N. Bulkowski Getting Started in ETFs by Todd K. Lofton Getting Started in Swing Trading by Michael C. Thomsett Getting Started in Options, Seventh Edition by Michael C. Thomsett Getting Started in A Financially Secure Retirement by Henry Hebeler Getting Started in Candlestick Charting by Tina Logan

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Getting Started in

CANDLESTICK CHARTING

Tina Logan

JOHN WILEY & SONS, INC.

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Copyright © 2008 by Tina Logan. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978)750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Logan, Tina. Getting started in candlestick charting / Tina Logan. p. cm. — (The getting started in series) Includes bibliographical references and index. ISBN 978-0-470-18200-0 (pbk.) 1. Stocks—Charts, diagrams, etc. 2. Stocks—Prices—Forecasting. 3. Investment analysis. I. Title. HG4638.L64 2008 332.63’2042—dc22 2008002758 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

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Contents

Preface

vii

Acknowledgments

xi PART I

CANDLESTICK CHARTING Chapter 1 Introduction to Candlestick Charting

3

Chapter 2 Constructing Candlestick Lines

11

Chapter 3 Candlestick Reversal Patterns

27

Chapter 4 More on Reversal Patterns

79

Chapter 5 Tails

91 PART II

EAST MEETS WEST Chapter 6 Price, Volume, and Volatility

99

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CONTENTS

Chapter 7 Trend Analysis

115

Chapter 8 Gaps

151

Chapter 9 Support and Resistance

175

Chapter 10 Putting Candlestick Reversal Patterns to Work

199

Chapter 11 Practice Sets

217

Conclusion

233

Appendix A

235

Appendix B

239

Glossary

243

Bibliography

249

About the Author

251

Index

253

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Preface

f the markets moved in a logical fashion, anyone could learn a few basics and make money trading. But that is not the case. It is the emotional crowd that moves markets. Traders’ and investors’ greed and fear, imprinted on charts, are like a road map to the markets. Those who learn to read and decipher the underlying messages of that price movement can gain a much-needed edge in a competitive environment. That’s where Getting Started in Candlestick Charting comes in. This book will provide you with a solid foundation from which to begin using candlestick charts. You’ll learn to recognize candlestick reversal patterns and embed them in your mind through an understanding of how they reflect the messages of crowd sentiment. Candlesticks will help you gauge the strength of price moves and spot potential reversals early, before the crowd reacts. If you have steered clear of candlestick charting until now because it seems like there is a mind-numbing number of patterns to learn, you can put that concern to rest. It is not necessary to learn dozens of candlestick patterns. This book narrows the focus to several commonly formed candlestick reversal patterns that you can learn to recognize in short order. You can start right away utilizing candlesticks to improve your chart analysis skills, and, of course, to increase your profitability. You will find this book very helpful if you desire to:

I

• Learn candlestick charting but don’t want to get overwhelmed. • Learn to recognize high probability trade setups. • Improve your swing trading techniques. Candlestick charting is a stellar tool for fine-tuning swing trading strategies. • Learn how to improve the timing of your entries and exits. • Develop a knowledge base in classic Western technical analysis and understand the role of candlesticks within that broader framework. Every effort was made to produce this important learning resource in a user-friendly format. The chapters are organized in a manner in which they build one upon the other. The content is written in layman’s terms with a level of detail that ensures understanding by beginning and intermediate-level traders.

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PREFACE

I make no apologies for defining technical terms and describing concepts that advanced level chartists might consider to be familiar territory. However, even advanced chartists who choose this book with the intent of adding candlesticks to their technical skill set will find that it suits their purpose. Since a picture is worth a thousand words, there are numerous illustrations and real-world charting examples included throughout the chapters. Through careful dissection of the charts, and the commentary and analysis included with them, you’ll already be recognizing the key Japanese candlestick patterns and Western technical events before you finish the last page of this book. In Part I of the book you’ll learn about candlestick charting. Chapter 2 demonstrates how the candlestick lines are constructed. In Chapter 3 you’ll be introduced to several common candlestick reversal patterns. You’ll learn their definitions and the psychology behind each formation. The patterns are well illustrated to help you train your eye to recognize them when analyzing charts. A summary of the candlestick patterns presented is included in Appendix A. Once you have thoroughly studied the details of each pattern in Chapter 3, use this guide for quick reference until you are so familiar with the patterns that you no longer need it. Chapter 4 will solidify your understanding of how the reversal patterns are formed and factors that may impact their signals. Chapter 5 wraps up Part I with a discussion of “tails” and how their presence sends a message about the current market sentiment. Part II of the book shows you how to put candlestick charting to work. You’ll learn how to blend Eastern candlestick charting with classic Western technical analysis. Candlesticks are not a complete trading system. In order to recognize their full potential you must understand how they fit into the broader picture. It is crucial to realize the important roles played by volume, volatility, trends, gaps, support, and resistance. These topics are covered in Chapters 6 through 9. If you are new to chart analysis in general, you’ll find these chapters to be invaluable. Even if you are already well versed in Western technical analysis, you’ll learn how to merge candlestick charting with Western techniques to gauge market movement and locate high probability setups. Chapter 10 shows you how to find the reversal signals and how to put them to work in your trading strategies. After gaining new knowledge, it is imperative that you immediately practice applying what you have learned. To assess your newfound skills, several practice sets are included in Chapter 11. There is an old proverb that states: “I hear and I forget. I see and I remember. I do and I understand.” You’ll test your ability to recognize the candlestick patterns and Western technical occurrences introduced throughout the book. It will be time well spent. The answer keys and author’s commentary are provided for you to check your work. As its title suggests, Getting Started in Candlestick Charting will provide you enough detailed instruction to get right to work using candlestick charting

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ix

techniques. Once you have mastered the common reversal signals, if you wish to learn more patterns there are several resources listed in the bibliography at the back of this book. Getting Started in Candlestick Charting will also help you start to build your foundation of knowledge of Western technical analysis. If you wish to add to that foundation with more advanced analysis, trade management techniques and implementing trading strategies, I offer additional training in these areas. Feel free to contact me by e-mail at [email protected] or visit my website at www.Tinalogan.com. I sincerely wish you the best of luck with your trading. TINA LOGAN San Diego, CA 2007

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Acknowledgments

irst I wish to thank Steve Nison for his perseverance in bringing candlestick charting to the Western hemisphere. His groundbreaking books Japanese Candlestick Charting Techniques and Beyond Candlesticks convinced me to add candlestick charting to my repertoire of technical analysis skills. I’ve never looked at a chart the same since. Stephen Bigalow was also instrumental in my candlestick journey. His candlestick books are written based on his experience using the candlesticks in the trading trenches. Mr. Bigalow generously invited me to contribute a chapter to his second book High Profit Candlestick Patterns. Thanks also to authors Gregory Morris and John Person for their fine contributions on the subject of candlestick charting. Special recognition goes to two traders who, thankfully, arrived just at the right times in my trading career. First, Chris Manning who is responsible for getting me hooked on technical analysis. He had a knack for taking a tough, and sometimes dry, subject and making it come alive. His teachings were instrumental in encouraging me to develop a strong knowledge base in Western technical analysis. Later I was introduced to Herbert Otto, a nearly 40-year veteran of the markets. I continue to marvel at, and appreciate, how he generously shares his vast knowledge of both fundamental and technical analysis. Without the support of my dear friends Michele Furlong and Jelaine Whipple, who believe in me and constantly encourage me, I may not have survived the writing of this book! Pat Johnson and Donna Love deserve praise for all they have done in assisting me in so many ways. They have a genuine interest in helping people and it does not go unnoticed. And thanks to my friends and colleagues at the Anthony Robbins Companies. I am certain that I would not be trading today had I not made that critical stop in my life’s journey. Thanks to my family for not complaining as I indulge my obsession with the markets. Although they may not share my enthusiasm for analyzing stock charts for countless hours each week, they seem to have accepted that I will continue to do so. I would like to recognize three amazing women who were mentors at pivotal times in my life: Mrs. Muriel Gamble, Mrs. Roberta Cave, and Dr. Deborah Ballard-Reisch. They all contributed greatly to pushing me forward and upward.

F

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ACKNOWLEDGMENTS

Thank you to Jennifer MacDonald and the John Wiley & Sons team, who were willing to give me this opportunity to make a contribution to their Getting Started in series of books. I am amazed at all that goes into writing a book and how organized they are at getting the final product to the presses. And last but not least, thanks to my many special clients. Their loyalty and encouragement has allowed me to continue to indulge my passion for training and trading.

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1 Part

Candlestick Charting