Posted by: Livy | February 12, 2009

Chart Fundamentals

Line, OHLC, and Candlestick Chart Basics

A chart is a visual representation of the price of a security over time. More advanced charts, such as the OHLC chart and the candlestick chart provide further information such as the open and close price. Advanced overlays such as volume, simple moving averages, on-balance volume (OBV) provide additional “road signs” to trend reversals and pattern formation and will be covered at a later time. Technical analyst’s will often ignore most outside news and make the vast majority of their trading decisions based on their interpretation of a chart and what it indicates will happen based off patterns, mathematical indicators, and back-testing. The purpose here is to give the chart fundamentals; indicators will come later.

There are many different sources for charts. Your online broker should have a few different options. In addition sufficient charts can be found at:

www.stockcharts.com
www.bigcharts.marketwatch.com
www.finanace.yahoo.com
www.google.com/finanace

www.barchart.com

Line Chart
The most fundamental of charts, and often seen on news channels such as CNBC, CNN, FoxNews, your local network syndicates, and newspapers is called the line chart. It simply shows the price of a security over time with a line drawn between the end-of-day prices. Little explanation is needed here and an example should suffice. The price is on the vertical axis, the measure of time on the horizontal axis. This particular chart also shows the volume at the bottom of the chart. Negative trends are in red, positive trends are in black.

Basic Line Chart

OHLC Chart
Another common chart seen on websites and charting software is known the OHLC chart. This stands for Open, High, Low, and Close. Each ‘tick’ is known as a price bar. A price bar is a representation of a price during a set amount of time (minute, hour, day, week, month, etc) that includes the open price, close price, highest price, and lowest price within that specific time frame. A price-bar adds another level of depth with this information on display and allows the trader a deeper level of interpretation and stronger sense of understanding in how that security acted during that specific price bar, and over the time of the chart.

First, let’s examine a price bar by itself. Remember, a price bar represents a specific unit of time, defined by the trader. This first example on the left shows an up-tick price bar, or if you were looking to see the value of this security go up, a “good day”. The example on the right shows a down-tick “bad day”, unless you are selling short. The left side of the vertical line always shows the open, the right side always shows the close.

ohlc

As one can imagine, a wide variety of shapes and sizes can be created over the time frame of a chart. Let’s look at the same chart from before, only as an OHLC chart. Notice that the “good days” are in black and the “bad days” are in red. The highlighted price bar on the right is today so far.

ohlc2

Candlestick Charts
Candlestick charting displays the price bar in a new and unique way, but the patterns they create can be strong indicators. The very shape of a candlestick can indicate a trend reversal, pattern confirmation, etc. They are easy to read and interpret, have been given unique names that make remembering the many patterns and indicators easy, which in turn makes recognizing the pattern easier. They are widely used and since the stock market is a ‘mob mentality’ knowing that thousands of other traders are seeing the same thing can help you make better decisions.

The candlestick form, like an OHLC price bar, represents a certain unit of time. The form emphasizes the open and close in what is known as the real body. Beyond the real body, unless the open or close was the high or low, a thin line extends; this is known as the shadow. Typically a white real body would be a “good day” and a black or red real body would be a “bad day”.

candlestick

A candlestick with no real body is known as a doji. Doji’s can be strong indicators of a trend reversal. In a doji the market open and close are at or nearly at the same level. This means that the security is in a transition phase and neither bulls nor bears got an upper hand and the day ended in a stand-off. A doji gains meaning from it’s placement within a set of bars. If the price series has been an in uptrend the doji may reflect that the bullish sentiment is coming to an end. Doji’s mean different things in different places, and that will be covered more in depth in the candlestick chart indicators and patterns.

dragonfly

The Hammer and Hanging Man are another form of the candlestick that can indicate a reversal, and need to be identified readily and easily in a chart. They both have a small real body and one long lower shadow. A hammer has a white real body and a hanging man has a black real body. Do not make assumptions of what this indicator means without further knowledge, it all depends on it’s placement within a chart or a price pattern. A very basic rule of thumb, with a number of variations, is that a hammer following a downtrend indicates a trend reversal up, and vice versa.

hammer

Finally, we identify the Harami. A Harami is the most basic of two bar patterns. It occurs when a small real body candlestick follows a large one. Harami means pregnant in Japanese. The entire small body candlestick, including it’s shadow, stay within the real body of the larger predecessor. A Harami can be black, white, even a doji. Harami’s are useful in discounting confirmation patterns. If you think you see an upward trend with a large white body candlestick, followed by a black Harami, your upward trend was probably just blown out of the water.

harami

Now that you’ve seen the very basic candlestick shapes, let’s again reexamine the original chart, in it’s candlestick form.

total

Further patterns and indicators will be examined in further articles. We will examine patterns, candlestick charts, and mathematical indicators such as On-Balance Volume (OBV), Moving Averages, Bollinger Bands, Relative Strength Indicator (RSI), and others.

I hope you find this of use as you work towards gaining a basic knowledge of charts and technical analysis.

Livy
1/27/2009

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Posted by: Livy | February 12, 2009

Charts: The Next Step

More price bars, gaps, islands, and changing trends

In the article, Chart Fundamentals, we covered the basic form and shape of the line chart Open, High, Low, Close price bar and chart, and the candlestick price bar and chart.  This article will take it a step further and identify potential trend reversals, confirmations, and price behaviors identified by the shape, size, and placement of an OHLC price bar. An OHLC chart is a big step past a line chart that can create patterns and provide indicators to can give a trader an idea of what is to come.  While not quite as extensively used as the candlestick chart, a thorough knowledge of the OHLC chart will create a strong foundation for increasing potential profits and moving onto the candlestick chart.  Many, if not all, of the basic indicators in an OHLC chart apply in a candlestick chart as well.  It is strongly suggested that you begin with a thorough knowledge of the concepts applied in this article and the OHLC chart before tackling the candlestick chart.

High and Low
The high and the low has significance within the other factors of the OHLC price bar, and the bars that precede it.  A wide spread between the high and the low shows a strong struggle between bull and bear, a small spread a weak struggle.

  • A high is bullish if it comes at the end of the day and/or it is above yesterday’s high.
  • A high is bearish if it comes at the beginning of the day or is below yesterday high, and even more so if below yesterday’s open, or worse still, yesterday’s low.
  • The low is bullish if it occurs early in the day and/or opens higher than yesterday’s close.
  • The low is bearish if it occurs at the end of the day or is below yesterday’s close.

Trends

Both the high and the low, in comparison to the open and close can be affected by market sentiment. For instance the market indexes have a poor day overall, but the high occurs at midday.  More than likely some piece of news related to that stock, or it’s sector, buoyed the price temporarily.  Other factors, some as simple as the cyclical nature of stocks, may increase buying or selling pressure and raise or lower the price accordingly. Highs and lows point to market sentiment and may create confidence in a trend reversal or continuation, but alone they don’t indicate one.

Open and Close
The open and close have more significance, but still correlate directly to the other factors within a price bar and the previous price bar.  In addition to these other internal factors, outside factors can play a stronger role than they did on the high and the low, specifically due to after-hours-trading and the effects it can have on the open price, and subsequently the closing price.  Many companies report  quarterly earnings either before or after the bell, or outside of normal trading hours. Needless to say this can have a profound effect on not only specific securities, but the market as a whole.

  • Be cautious with an opening bounce. Mutual funds and large securities such as an ETF may allocate funds accumulated overnight at the open, instilling false confidence that a security will go up. It may also be due to market sentiment anticipating good news that may or may not materialize.
  • When buying at the open research the specific security and determine how susceptible it is to after-hours-trading and market sentiment or anticipation.
  • It has been my personal experience that buying at the opening is a bad idea. After-hours-trading often times falsely inflates the price. It’s easy to get a sense of confidence based off this upturn, and watch the price quickly liquidate to a more appropriate (and lower) level.

The closing price is considered to be the most important part of a price bar by many. It indicates what the market feels about the price of a security. Lows and highs have often been tested and debunked.  The close is the final say. After-hours-trading that occurs even two minutes after the bell gets absorbed into the new open the next day.  The line chart is based solely off the closing price. Bids and asks are based are weighted on it in after-hours-trading.

  • Sellers, especially day traders, often sell at the close to reduce risk from any potentially negative news overnight.  Margin calls are also made in the afternoon and many options become due in the afternoon. The close can be a dangerous place if you are unfamiliar with it. Securities can defy trends just to start them anew first thing the next morning. If the high of the day is the end of the day, HOLD ON SALLY!
  • Day after day closes higher than yesterday’s close indicate buyers are willing to pay higher and higher prices. This is a bullish trend.
  • Day after day closes lower than yesterday close indicate sellers are willing to get less in return to dump the security.
  • Be careful to pay attention to both the open and the close. If you only pay attention to say the close getting higher, you may miss that the open is also getting lower and vice versa. It’s called an OHLC chart and not a OH chart for a reason.

Gaps of all kinds
A gap is when there is a significant (how significant is open to debate) gap between the open and close of a security price bar. There are two kinds of gaps. I call them cool gaps and uncool gaps. Uncool gaps, also known as common or normal gaps simply occur because. No other reason than that. Maybe after a long trend a group decided to take profits and sold out, or maybe a mutual fund decided to buy in and it created a gap. It just happens, especially in lower volume securities. An intraday chart may show a couple gaps on a low volume security. A cool gap is the kind we like, driven by market forces internal and external, it signifies a change in the trend or confirms a continuation of the current trend. Really, who doesn’t like positive constant reinforcement?

Breakaway Gaps:

  • Common sense dictates. If there is good news and a huge gap occurs, there you go. Volume should be up as well. Same way with bad news.
  • The price should be sliding, meaning in no significant trend already before the gap.
  • The gap is large. If the stock trades in the $1.50 range and the gap is $4.00, something mammoth occurred.
  • Look for confirmations afterward such as bullish or bearish trends in open and close. Runaway gaps or island reversals indicate more of the same or something new. So can doji (same shape as candlestick) at midday.

Runaway Gaps:

  • Simply further enforce the existing bull or bear trend.

Exhaustion Gaps:

  • Trend reversal indicator. Usually has lower volume as in the case of many false indicators. Will show a trend continuation in the same direction, but with below average volume.
  • Time to sell if in a bullish pattern, buy if in a bearish pattern

Island Reversals:

  • Long bar, again with low volume. Usually has gaps on both sides of it. This is the last hurrah of a trend. If it appears it’s the end of an era, whether that era was a few minutes or a month.
  • Don’t misinterpret a spike as an island reversal. Spikes may indicate reversals or confirmations of a trend, but shouldn’t be acted upon until the next price bar confirms it. Spikes are very “iffy”.

Gaps etc

Market indecision:

  • Can also indicate a change in trend. The market isn’t sure whether it wants to continue it’s current course. May stick with it, may change.
  • Inside days, an OHLC form of Harami, it points to indecision. In the illustration above the price bars before both of the breakaway gaps are an inside day. All factors are inside of the previous price bar
  • Outside days rely on information stated earlier. They are large bars that encompass the previous price bar, or the opposite of an inside day. The open and close dictate bullish and bearish, and how it relates to the current trend informs you of a continued trend or potential reversal
    • Low open high close is bullish
    • High open low close is bearish

Finally, remember these can occur in both OHLC charts and candlestick charts. Also remember the market is a beast of mob mentality. It could be a fluke. Use the indicators and channels described in the next few articles to help determine the validity.  Every trader is going to get burned from time to time by indicators and patterns that don’t follow the rules. If all indicators followed the rules all the time then trading stocks would be easy. Where’s the fun in that?!?

Livy

1/27/09

Posted by: Livy | February 12, 2009

My first post – Hello World

Hello there world! My name is Livy. You can read a little bit about me in the link on the lower left hand portion of the header picture “About”.

I blogged on MySpace in the past, in fact I may copy and paste some of them from that site on here, as some have a relevence that is timeless. Over the past six months however I felt a diminishing desire to post my thoughts, etc through that particular medium, and well, here I am.

I am opinionated on just about everything, and love to share that opinion with anyone that will listen and/or read it. I encourage comments and debate, I just ask that they be done “professionally” without putting any one down for their opinions. My opinion, your opinion, everyone’s opinion is just as valid as the next person’s, even if you don’t agree. That’s what makes them opinions and is a simple joy of being human.

In addition to my opinions, I will surely post happenings in my life such as trips, experiences, suggestions, and a general update on my life so friends and family can keep up to speed.

It may take me a few days to get the site orientated as I like it, and then I will begin blogging.

Cheers,

Posted by: Livy | February 12, 2009

Mathematical Indicators

There are a number of mathematical indicators that are available for use. Some might tell you that a particular one is the secret to making millions over night, but the truth is all of them have their particular strengths and weaknesses. As stated before, if there was one indicator that worked 100% of the time than trading stocks would be easy, and where’s the fun in that? Personal choice, which often comes simply from what works well for you or with your trading system, typically dictates the usage. This article will explain what these indicators show and how they are computed, but in terms you should be able to understand.

Moving Averages (MA)
A fundamental indicator, found on even the most basic of charts, is the moving average. The moving average is just that. It adds up the end of day price, or whatever your time measurement unit may be, for a certain period, then divides by that same certain period. Presto, an average. Plot that over time and you get nice pretty line. If a securities price is below the MA than it is considered bearish, above and it’s bullish. The most simple of trading techniques, is to buy when it cross above the MA line, sell when it crosses below.

There is more than one kind of moving average. Since a MA, like most indicators, reflects only historical prices the indicator could show an attractive upward moving line while the security price goes to the cellar.

  • The aforementioned is known as the standard moving average (SMA).
  • The exponential moving average (EMA) minimizes the difference between the current price and the MA line.
  • The weighted moving average (WMA) puts more emphasis on more recent prices
  • The adaptive moving average (AMA) reduces the importance of ‘out of the park’ prices that skews the data.

Many traders chart two separate MA’s and watch for a crossover.  This occurs when the short time frame MA line crosses the long time frame MA (bullish, time to buy) or vice versa (bearish, time to sell).  As you can imagine the shorter time frame MA is more volatile, but also more reactive to changes in the price so may provide a better indicator. Finally, if a stock has little change in it’s price over time the MA will be mostly useless, just like investing in a stock that doesn’t change in price.

Notice the legend in the upper left corner of the chart below. Look closely at what happens, even to a small degree, to the price of this security when the lines cross. It lags slightly, as an average based on historical data will do, but the price follows the bull and bear indicators with strong regularity. In this example I used a 5 day (one week) and 20 day (one month) SMA.
MA

Momentum
There are traders that make every decision based solely off the momentum indicator. They hope that physics will apply to the stock (sometimes it seems to) and an upward momentum indicates that the price will continue to go up. It’s basic Newton’s Law. Any line above zero is upward momentum, and any line below zero is downward momentum. Momentum is figured by taking the current price vs a historical price, usually 5 or 10 days. If there are a number of lines in a row that are the same height it doesn’t mean that the price isn’t moving, it simply means it’s moving with the same momentum from day to day. A broad rule is to sell when it drops below zero, and to buy when it rises above. In my personal opinion indicators that include momentum but also take into consideration other factors, like MACD, RSI, etc are more appropriate.

This particular example shows why multiple charting websites are necessary. Not every web page has every indicator, and you may notice this is from a different source.

Momentum

Moving Average Convergence and Divergence (MACD)
This indicator, plotted below the chart, takes the MA and momentum indicators one step further and charts the convergence (the trend as the two lines get closer) and the divergence (the trend as the two lines grow apart) with a momentum ‘soundwave’ underlay. Notice how similar the soundwave shape below is to the one above. The purpose of this is to give traders a little more knowledge to help anticipate the crossovers by showing the momentum of the lines.  Mistakes can be made in ‘predicting’ if the trend will continue, the lines could crossover then abruptly pull an about-face and return the way they came, but it provides a better picture that may allow earlier entry and exits. Used with an indicator such as the RSI or Stochastic this can be a powerful weapon in your arsenal.

MACDOn-Balance Volume (OBV) and the Chaikin Oscillator
Volume is an important indicator and should be on every chart you create that is going to be used to make trading decisions. Heavy volume indicates the market agrees with the change, light volume can indicate an anomaly or give guidance that a price bar is in left field, not part of a new pattern.

The OBV is a very simple and straightforward indicator. It brings together volume and price, the two most important parts of a stock. That being said, the OBV is a great tool to check, but subject to inaccuracy. It takes all the volume and adds it to the OBV line if the price of a security is up at the end of that time frame (minute, day, week, etc) and subtracts it if the price is down. Obviously in a time frame you can’t generalize that just because a price is up all of the action was buying. Traders watch for the OBV line to change directions from the price line. When it does, there usually is a change in price trend.  If they travel in the same direction the status quo will likely continue.

A variation that is a little ‘softer’ with less sharp points in the graph is known as the Chaikin Oscillator. The only difference is that we only add volume when the price is up over the midday point, rather than the end of day, and take away volume in the same manner if below the midday point.  The OBV is right below the line chart and the Chaikin Oscillator is at the bottom.

OBV and ChaikinRelative Strength Indicator (RSI)
The RSI builds upon the simple momentum indicator. The RSI takes the average up move and compares it to the average down move, giving weight to the upward or downward momentum.  It’s put on a scale of 0-100. Anything above 80 is considered overbought, anything below 20 is considered oversold. When the RSI changes direction from the price it is likely a reversal in price will follow. After all, if the RSI changes direction it means that the momentum has. This, in theory, gives traders a more efficient and timely indication of momentum.

RSI

Stochastic Oscillator (Fast and Slow)
It’s hard to describe this one in simple English, simply because the creator of this indicator, Dr. Lane, must have enjoyed complexity. Fortunately, the computer will do the calculations. This, like the RSI, gives the trader an idea if the stock is overbought or oversold.  Essentially this indicator compares the closing price with the price movements over time. As prices rise, the close tends to be near the top at the end of the day, as the prices sink, the close tends to be near the bottom. There are two lines, the actual oscillator (%K) and the signal line (%D). They are figured out as follows:
%K = 100 X (Closing price – Low price) / (Closing price – High price)
%D is the three period moving average of %K

This is known as the Stochastic Fast. The Stochastic slow lags, since it incorporates %D for %K, but is smoother and more reliable.  The chart below shows both forms and you can see while the trends are very similar, they do differ at times. Just as the RSI, anything over 80 is overbought and anything below 20 is oversold. It should be used with another indicator for confirmation of a price change. Just being oversold doesn’t indicate when the buying will resume.
StochUltimate Oscillator
Another method of determining if a security is overbought or oversold. The ultimate oscillator combines the price over three separate periods to create a line chart. The ultimate oscillator rarely has wild swings or extreme results. The most recent time frame is to all three separate time periods, so it has the most magnitude on the chart. When the line drops below 30 the security is oversold, above 70 is overbought. This is often used with other indicators to signify when the price reversal will occur, as it provides no indication when the price will turn. While it may not cross the 70/30 thresholds, the plotted line does mirror, and sometimes predict, the price movements of a security.
UltimateAverage Directions Movement Index (ADX)
This may also be called Wilder’s DMI in some places. It shows the strength of a price movement, but should be used with an accurate an up-to-date chart since it doesn’t indicate if the price is rising or falling. Many people also use the MACD or the momentum indicator to show which way the price is trending. There are three lines on the typical ADX.  There is the ADX, the +DI and -DI.

The DI+ and DI- measure the current price range to a historical price range, typically a two week period. They move in opposite directions and when the lines cross it indicates a buy when the +DI rises above the –DI and vice versa.  However, these lines cross frequently and any profits would be lost in excessive commissions.  Enter the ADX line. As a general rule of thumb don’t make a trade unless the ADX is above 30, indicating the trend has strength behind it and should produce the best profits. Each trader needs to determine their entry and exit points based off their needs and desires. If +DI is rising with the AMX then buy, if –DI is rising with the ADX, then sell short. Imagine if you sold short in early November as the ADX indicates (notice the lines touch, but don’t actually cross until the security plummets), and taken your profits at the end of November in the chart below!!
ADXThere are a number of different indicators. Many traders swear by two or three.  The truth is the indicators are only as good as the mind interpreting the data. Practice and experience will help make better use of these tools, but you can’t rely on one particular indicator to make profits, every single time. Explore the web and the charting software/website you use and broaden your knowledge beyond these fundamental indicators. The section on Support and Resistance will also take your ability to recognize trend reversals and solidify your entry and exit points to the next level and will include MA Envelopes and Bollinger Bands that are popular overlays in charting.

Livy
1/29/09

Posted by: Livy | February 12, 2009

Channels

Support, Resistance, and Breakouts: Drawing Channels

Creating channels on your chart, either by hand or with software using MA envelopes or Bollinger Bands, is a useful tool at identifying entry and exit points. Channels also can indicate bullish, bearish, and continuation trends, as well as gives the trader an idea to the recent volatility of the price. Many traders master this art and live by it. Each trader defines his or her own rules, but there are some general guidelines from which to start from, and the intent here is to educate you on those guidelines.

When drawing a support or a resistance line, you want to hit three, let me say that again, THREE highs or lows. Two is to unreliable. I say this before I even explain what they are because it is important. Equally important is the confirmation. Each additional time a price bar touches your support or resistance line, but doesn’t cross it (breakout) your line is confirmed. If you understand these points alone, you probably can begin drawing channels, but a deeper understanding of channels, and what the patterns they create represent, will make you a more successful trader. Finally, DO redraw your channels frequently over time. Redraw them to the point of being obsessive.

Support
Support is the lower price in which a security garnishes strong buying power. A valid and confirmed support line, assuming the current trend continues, is essentially as low as a price will go without any change in market sentiment or news that will adjust a trend. You create a support line by drawing a line through three bottom lows and extend it into the future.  You now have a support, a price in which, as long as the security acts in the same manner, a particular security should not drop below.

Resistance
The opposite of support. It’s the price ceiling in which selling pressure becomes significant. Many traders view a breakout upward of the resistance line as a buy indicator. The idea being that a new resistance is going to occur at a higher price.

When both the resistance and the support line are drawn, you have a channel.

Breakout
A breakout is when the price bar raises above or below the channel that has been created. If the channel is strong, and has been confirmed and tested many times by the price of a security, odds are strong that a trend reversal is occurring. Many traders wait for more than one price bar to determine a true breakout, rather than acting on what may be a false breakout. Prices do fluctuate, and market sentiment or news may temporarily push a price bar outside of your channel. Trading is not an exact science, it is up to you to determine if it’s a true breakout or a false breakout. If you make a mistake see if you can determine why, it may make future channels stronger and can give you insight to the behavior of that particular stock.
channelMathematical Channels (Upper Indicators)
There are a number of overlays that can be put on a stock chart. Most charting software refers to them as “upper indicators” Many ‘newbies’ try to use too many and their stock charts look more like engineering blue prints than they do stock charts. Find and choose one that fits your style and provides you with the best results. Only a few of the more popular ones are covered here.

MA Envelopes
This simply takes a moving average and adds channel lines in a user defined percentage of deviation, often 1-7%. A security could spend months outside of the MA envelope.

MABollinger Bands
The Bollinger Band is very popular. It uses a 15 day moving average for the center line, with a support and resistance line taken statistically at two standard deviations. 95% of the price fluctuations will occur within the channel. The bands are not signals, they are tags. The inventor himself strongly suggests using a momentum indicator along with this. You can see the dotted MA line along with the outside bands in the chart below.
BollingerKeltner Channels
While not among the more popular channels, this indicator utilizes a moving average with a band above and below it, much like a Bollinger Band. It takes the high, low, and closing price for the moving average. The bands that are formed are figured from the daily high minus the daily low over a period of 10 days. The creator suggests selling when a price bar breaks the upper band and buying when it drops below the lower band.
Keltner

Parabolic SAR
Developed by the same person that brought us the Relative Strength Indicator (RSI) this channel is used to establish trailing stops. The bottom line is used for long position and the top line is used for short selling. Establish a trend and then follow it. If the price is trending in a bullish pattern buy when the indicator moves below the price and vice versa. You’ll quickly notice that the channel only indicates above the stock in a downtrend and only below the stock in an uptrend.
Parabolic SAR

Channel and Line Patterns
The shapes that a channel creates, such as a flag, as well as the path the line creates, can be used as indicators. Some are powerful and have very high levels of reliability, others simply point to a bearish or bullish sentiment in the stock price.

Price Channel
Essentially what we have already covered. The example above is a bullish price channel because it has an upward slope. A bearish price channel would have a downward slope, and a continuation price channel would be flat. In reality, all price channels that have even lines are continuation patterns and unless a breakout occurs, the trend should continue and the stock price will behave in the same that it has been.

Pennant (Triangle) and Flag
Both the pennant and flag are very similar. A good resource for learning how to trade this type of pattern can be found at:

http://hubpages.com/hub/How-to-Trade-the-Flag-and-Pennant-Chart-Patterns-Video

Pennant
This channel shape indicates a continuation. The price channel becomes more narrow as time goes on. This is typically done with a lower price range between the high and the low, showing the trader that the market is confident that the security is accurately priced and very little struggle between the bulls and the bears.

Flag
The flag shape is a bullish or a bearish price channel. It is a price ‘pullback’, sort of a hiccup in a trend. It rarely lasts longer than two weeks and has to be preceded by a large amount of volume. When the flag has run it’s course, the trend will continue, meaning that the flag is also a continuation pattern even though it moves in the opposite directions of the trend.

Double Bottom (Reverse Head and Shoulders)
This is my favorite bullish reversal pattern. This occurs when the price line creates a “W” shape. It has gone down and tested the support twice and when it goes up, it usually goes up big.  There are some requirements for this to occur. The two lows need to be close to each other in terms of price (3-5%) and far from each other in terms of time (10-45 trading days).  Once the upswing passes the middle hump, and it meets the other criteria, we have ourselves a double bottom. Most successful advisors suggest you buy in when it gets confirmed on the way back up, not before. Also, trading this can be hard, as price retracements occur shortly after the confirmation as day traders, etc take their profits and run. These retracements can test your will.
Double Bottom

Head and Shoulders (Double Top)
Fairly close to the opposite of the double bottom, this bearish indicator shows three points rather than two, making it even stronger. The confirmation in the head and shoulders is a line drawn between the two low points in between the head. This is usually seen after a long uptrend and is characteristic of testing new highs and price retracements. If you are long on a position get the heck out! This is a great opportunity to short a position however.
Head and Shoulders

Posted by: Livy | February 12, 2009

Candlestick Patterns and Conclusion to Charts

Candlestick Patterns

I personally prefer to combine the patterns you’ve seen with candlestick indicators. Candlesticks are price bars too, and they will generate these same exact patterns. Candlesticks, however, can take it to the next level and provide further indicators of bullish, bearish, and continuation signals. Drawing and explaining them all out when there is an excellent resource on the web would be an exercise in futility. Both of the website I’m going to refer you to are operated by the same people and they are excellent resources, even if you don’t subscribe to the services of the second one.

http://www.candlesticker.com THE authority for candlestick indicators.
http://www.americanbulls.com You can subscribe if you wish and they’ll filter out the indicators that you desire, or for free you can search individual stocks. They usually update it a few hours after the market closes.

Hopefully you’ve learned something about reading and creating charts for yourself and it can make you a more profitable.  The internet is a wealth of information and you will be able to find more in depth information simply by searching any of the concepts that we’ve covered. Your online broker should have solid charting tools, if not use http://www.stockcharts.com or download an application like Quote Tracker. http://www.quotetracker.com  The more information you have at your fingertips, the more likely you are to succeed. For reading all the way through, I have an important piece of information for you:

Patterns behave almost identically in micro AND macro environments. What does that mean? If you notice that a particular stock acts in a certain way over a six month period and you are able to use an indicator to identify when it’s going to happen, you can use the same tool over a six hour period!!! Day traders can go and back test a theory they have on a stock over years and years of historical data… then apply it in their intraday trading style.  Happy hunting,

Livy 2/3/09

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