Introduction 1
About This Book 1
Foolish Assumptions 2
Icons Used in This Book 2
Beyond the Book 3
Where to Go from Here 3
Part 1: Getting Familiar with Candlestick Charting and Technical Analysis 5
Chapter 1: Understanding Charting and Where Candlesticks Fit In 7
Considering Charting Methods and the Role of Candlesticks 8
Getting a feel for your options for charting 8
Realizing the advantages of candlestick charting 9
Understanding Candlestick Components 9
Working with Candlestick Patterns 11
Simple patterns 11
Complex patterns 12
Making Technical Analysis Part of Your Candlestick Charting Strategy 12
Trading Wisely: What You Must Understand Before Working the Markets 13
Trading can be an expensive endeavor 13
Paper trading costs you nothing but time 14
Develop rules, and stick to them 14
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
Spotting bears and bulls quickly 20
Seeing into the future (sort of) 21
Showing price patterns 23
Admitting Potential Candlestick Charting Risks 25
Comparing Candlestick Charts with Alternative Charting Methods 26
Line charts 26
Bar charts 27
Point and figure charts 28
Chapter 3: Building a Base of Candlestick Chart Knowledge 31
Constructing a Candlestick: A Core of Four 32
Price on the open 32
High and low prices for the session 35
Price on the close 37
Considering Additional Information Included in 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 50
Working with Barchart 53
Charting on CNBC.com 54
Creating Candlestick Charts with Microsoft Excel 55
Finding the data for your chart 56
Making sure that the data is in the correct format 56
Building an Excel candlestick chart 57
Adding a moving average to an Excel candlestick chart 58
Adding a trendline to an Excel candlestick chart 60
Adding volume data to an Excel candlestick chart 61
Selecting Charting Packages and Apps 63
Remembering a few key points when selecting charting software 64
Considering a few charting package options 65
Part 2: Working with Simple Candlestick Patterns 69
Chapter 5: Working with Straightforward Single-Stick Patterns 71
The Bullish Long White Candle 72
Understanding long white candles 72
Identifying the three variations of the long white candle 76
The Bullish Dragonfly Doji 78
Recognizing a dragonfly doji 79
Trading based on a dragonfly doji 80
The Bearish Long Black Candle 82
Understanding long black candles 82
Identifying the three variations of the long black candle 84
Trading based on long black candles 85
The Bearish Gravestone Doji 89
Identifying the gravestone doji 89
Trading based on gravestone dojis 90
Chapter 6: Single-Stick Patterns That Depend on Market Context 93
Understanding Market Environments 94
Recognizing the three market states 94
Identifying the market trend 94
Delving into Dojis 96
The long legged doji 96
Other dojis 101
Looking at Other Patterns: Spinning Tops 105
Identifying spinning tops 105
Using spinning tops for profitable trading 106
Discovering More about Belt Holds 109
Spotting belt holds on a chart 109
Buckling down for some belt hold-based trading 110
Deciphering the Hanging Man and the Hammer 113
Spotting the hanging man and the hammer 114
Trading on the hanging man and the hammer 114
Chapter 7: Working with Bullish Double-Stick Patterns 119
Bullish Reversal Patterns 120
Bullish engulfing pattern 120
Bullish harami 124
Bullish harami cross 127
Bullish inverted hammer 129
Bullish doji star 132
Bullish meeting line 135
Bullish piercing line 136
Bullish Trend-Confirming Patterns 139
Bullish thrusting lines 139
Bullish separating lines 142
Bullish neck lines 144
Chapter 8: Using Bearish Double-Stick Patterns 149
Understanding Bearish Reversal Patterns 149
The bearish engulfing pattern 150
The bearish harami pattern 153
The bearish harami cross pattern 155
The bearish inverted hammer pattern 158
The bearish doji star 160
The bearish meeting line 162
The bearish piercing line or dark cloud cover pattern 165
Making a Profit with Bearish Trend Patterns 168
The bearish thrusting lines 168
The bearish separating lines 171
The bearish neck lines 174
Part 3: Making the Most of Complex Patterns 177
Chapter 9: Getting the Hang of Bullish Three-Stick Patterns 179
Understanding Bullish Three-Stick Trend Reversal Patterns 180
The three inside up pattern 180
The three outside up pattern 183
The three white soldiers pattern 185
The morning star and bullish doji star patterns 188
The bullish abandoned baby pattern 191
The bullish squeeze alert pattern 193
Working with Bullish Three-Stick Trending Patterns 196
The bullish side-by-side white lines pattern 197
The bullish side-by-side black lines pattern 200
The upside tasuki gap pattern 203
The upside gap filled pattern 205
Chapter 10: Trading with Bearish Three-Stick Patterns 209
Understanding Bearish Three-Stick Trend Reversal Patterns 210
The three inside down pattern 210
The three outside down pattern 213
The three black crows pattern 215
The evening star and bearish doji star patterns 218
The bearish abandoned baby pattern 221
The bearish squeeze alert pattern 223
Forecasting with Bullish Three-Stick Trending Patterns 226
The bearish side-by-side black lines pattern 226
The bearish side-by-side white lines pattern 228
The downside tasuki gap pattern 231
The downside gap filled pattern 234
Part 4: Combining Patterns and Indicators 237
Chapter 11: Using Technical Indicators to Complement Your Candlestick Charts 239
Using Trend Lines 240
Drawing trend lines 241
Considering trend line direction 242
Taking advantage of automated trend lines 242
Using Moving Averages 243
Selecting appropriate moving average periods 244
Using simple moving averages 245
Using other types of moving averages: What have you done for me lately? 247
Combining two moving averages 248
Combining three moving averages 249
Examining the Relative Strength Index 251
Calculating the RSI 251
Reading an RSI chart 252
Cashing in on Stochastics 253
Grasping the math behind the stochastic oscillator 254
Interpreting the stochastic oscillator 254
Buddying Up with Bollinger Bands 256
Creating Bollinger bands 256
Chapter 12: Buy Indicators and Bullish Reversal Candlestick Patterns 259
Buying with the RSI and Bullish Reversal Candlestick Patterns 260
Using the RSI to pick a long entry point 260
Using the RSI to pick long exits 262
Buying with the Stochastic Indicator and a Bullish Reversal Candlestick Pattern 264
Using the stochastic indicator to pick a long entry point 264
Using the stochastic indicator to pick long exits 266
Chapter 13: Sell Indicators and Bearish Reversal Candlestick Patterns 269
Shorting with the RSI and Bearish Candlestick Patterns 270
Picking short entry points with the RSI and candlesticks 270
Using the RSI to help pick short entry and exit points 272
Using the Stochastic Indicator and Bearish Candlestick Patterns for Shorting 274
Picking short entry points 275
Deciding when to get in and out of shorts 276
Chapter 14: Using Technical Indicators Alongside Bullish-Trending Candlestick Patterns 279
Using Trending Patterns for Buying and Confirmation 280
Buying trend lines with bullish candlestick patterns 280
Determining sales and stop levels with trend lines 282
Combining Moving Averages and Bullish-Trending Candlestick Patterns 285
Using moving averages with bullish-trending candlestick patterns to confirm trends 285
Setting stops with the moving average and bullish-trending candlestick patterns 287
Chapter 15: Combining Technical Indicators and Bearish-Trending Candlestick Patterns 291
Combining Lines with Candles for Confirmation 292
Analyzing short trades with trend lines and bearish patterns 292
Bearish trend lines and candlestick patterns leading to short entries and exits 294
Combining Moving Averages and Bearish Patterns for Shorts 296
Pinning down short entry points and confirming trends 297
Picking shorts with moving averages and candlesticks 299
Part 5: The Part of Tens 301
Chapter 16: Ten Myths about Charting, Trading, and Candlesticks 303
There's No Difference between Candlesticks and Bar Charts 304
Market Efficiency Makes It Impossible to Beat the Market over the Long Run 304
Only a Full-Time Professional Can Make Money in the Markets 305
Technical Analysis Is Nothing More than Reading Tea Leaves 305
Charting Is for Short-Term Traders Only 306
You Must Be Rich to Start Trading 306
Trading Is an Easy Way to Get Rich Quick 307
Candlestick Charts Require In-Depth Data and Are Difficult to Create 307
The Trading Game Is Stacked against the Small Trader 308
Selling Short Is for Professional Traders Only 308
Chapter 17: Ten Tips to Remember about Technical Analysis 309
Charts Can Give False Signals 309
You Will Run into Skeptics 310
There's No Definite Right or Wrong Opinion of a Chart 310
A Single Chart Doesn't Tell a Whole Story 310
Charting Is Part Science, Part Art 311
You Can Overanalyze 311
Develop a Backup System 312
Error-Free Data Doesn't Exist 312
No System Is Silly as Long as It Works 313
Past Results Don't Always Predict Future Performance 313
Index 315
