Candlestick signals - The Doji

The doji is candlestick chart pattern consisting of one candle line. The ideal doji occurs when in a trading session the opening and closing prices are the same, but this rule is sometimes relative and you can consider candle line as a doji even when the opening and closing prices are few points or ticks away from each other. For example this is especially true in the forex market due to slightly different data from each platform. In charting software it looks like a cross.



Similarly like spinning top, the doji indicates market in complete balance and indecision between supply and demand. When the doji appears after an uptrend, it can signal market reversal. Probability of this signal is much higher when it's at a level of prior resistance. Altough a doji's appearance in a rally might signal a market top, but in a downtrend it may not signal a bottom, because indecision in an oversold market can be a staid place for a continuing downtrend.

The doji has it's power when it is alone or even greater when it's included in a two or three candle pattern. There are also more types of doji, depending on the position of the open and close price in candle line, but the main interpretation is similar.

Candlestick chart patterns - Spinning tops

From start, I will focus on single candle lines. Here belong also spinning tops. Some candle patterns consist of more candle lines, but we can get valuable information also from single candle line. Candlesticks help us visualize market psychology. They portray the battle between the bulls and bears. The essence of market move is in real body. Real body is part of candle line between opening and closing. And spinning top is term for a candle with a small real body. And it's not important if it's black or white (or red or green). Spinning top can but doesn't have to have lower or upper shadow. Only important factor is a small real body. One picture is worth more than tousand words:



Spinning top shows that neither the bulls or bears have dominant power. The main interpretation is that the market is in confusion and indecision. Spinning tops are also parts of many candle patterns that indicate market reversal.

Introduction to Candlestick Charts

What are candlestick charts? If you know something more about technical analysis, you probably know, that candlestick chart is type of chart used to describe price movement of an equity over time. In technical analysis in western world are more popular classic bar-charts than candlestick charts. Differences between these two I will show and describe later. One from reasons that candlesticks are not so popular between traders in western world is in my opinion that candlestick charts were introduced to them only roughly 20 years ago.

Candlestick charts have been developed in the 18th century by Japanese rice traders, that were trying to predict future prices of rice. Charts illustrated price movement based on open, high, low, and close market prices over a certain time period. You can see differences between bar charts and candlestick charts in the pictures bellow.







One from the main points of using candlestick charts is that they have their own chart patterns, that would be not so obvious in other types of charts. These chart patterns are tested by centuries of their using, what I think is enough solid proof of credibility of this method. The amount of data displayed in candlesticks is exactly the same as in bar charts, but the difference is in visual presentation and interpretation. Candlestick charts can be used for all trading time frames and with all investment vehicles like stocks, forex, commodities or options. Repeating patterns are not 100 percent accurate, but for profitable trading they don't have to be and many fortunes have been made by using this methodology.

Example of One from My Last Option Trades - Call Option on ESI

In this post I want to show you example of one from my last actual option trades with call option on stock ITT Educational Services(ESI) with exact option name ESI GP. I don't want go into more depth, but only to show you how can option trade look like. In the picture below you can see chart of ESI(as underlying stock of this option) with enter and exit of the trade and other circumstances.




With use of technical analysis I saw chart pattern on the chart of ESI called channel breakout. Very important factor was also that volume was much higher in comparison with other days. So I decided to buy call option ESI GP with strike price $80, expiring July 19, 2008 for $2.70 per share, what is $270 for 1 option contract. Price went up and after few days it created line of resistance and did not go up so I decided exit from the trade and take my profit. I sold this option for $3.80 what is 40% profit. This is one example how can option trade look like.

Technical Analysis of Stocks - part 2

Technical analysis is based on principle that history repeats itself. Behind this principle is human psychology. Charts reflect psychology of the market. Chart patterns have been studied and categorized over one hundred years. Some of these patterns have worked well in the past, so it is assumed that they will continue to work well in the future. These are based on study of human psychology, which tends not to change.

Next very important premise of technical analysis is that everything what can influence the price like fundamental, psychological, political, or other factor is actually reflected in the price of that market. And how is the price created? From technical point of view price movements reflect relation between supply and demand. If demand exceeds supply, price should rise. If supply exceeds demand, price should fall. This is basic economic principle. Behind demand are buyers and behind supply are sellers. Behavior of buyers and sellers is what drives the market. These willing buyers and sellers come to an agreement of price but are in disagreement as to value.

From all this results that analyzing price and it's history is indirect analyzing of fundamental and other factors that influence market behavior. Although this argument is quite controversial, most of technicians would agree. The question of this post is - what is all this analyzing for? The purpose of studying price charts and supporting technical indicators is to show trader which way is the market most likely to go. This last sentence is very important and notice that technical analysis is not for predicting future actions as a sure thing. Technical analysis uses term probability. When graphical picture of change of price in chart is in some pattern there is some probability that price will go in certain direction. This claim is based on research and analyzing price movements in the past.

Oftentimes happens that some traders who are new to technical analysis are little disappointed when some of their trades doesn't go well even though according to the chart analysis it should. Well, it's not magic. And it doesn't have to be. Technical analysis helps many traders and institutional investors to make very profitable trades, so it doesn't have to prove it's value.

One of the main objectives of chart analysis is to determine the trend of prices. The key concept and discovery in technical analysis is that prices move in trends. A trend represents a consistent change in prices in some direction. The most of trading techniques are based on determining trends and trading in the direction of those trends.

One of the most interesting facts about technical analysis is it's adaptability. First is the adaptability to different time dimensions. Chart analysis is used in day trading and also in longer term investing. Next is the adaptability to various trading mediums. Charts are analyzed in trading with stocks, commodities, foreign currencies, and so on. This is because the same principles are so widely applicable. This is a big advantage against fundamental analysis where traders are more specialized.

The bottom line is that the same data like open, high, low, and closing price are available to all traders, but how they analyze, interpret, and act on the information available is one from factors that differentiate one trader from others.

Technical Analysis of Stocks

For some of you who don't know what is technical analysis and how it works, I will try to explain it to you what it is about. Technical analysis is trading and investing tool that involves the study of past share prices or indices and is helpful in showing you when to enter and exit the trade. For technical analysis are needed charts. One example of chart you can see in the picture below. It's chart of Apple.




The dedicated technician analyses the charts and indicators to forecast future share price and index movements. There are traders whose trade decisions are based strictly on price and volume movement and there are traders who also use other tools like fundamental analysis to support their decisions and I belong to this second group. But technical analysis is essential for my trading.

In future posts I will go into more depth and I will write about charts, indicators, chart patterns, etc.