Candlestick Charting and Reversal Patterns - The Doji

By B.M. Davis

Candlestick charting is more popular than ever before, with a legion of new traders and investors being introduced to the concept by some of today's hottest investment gurus. Once mastered, candlesticks can provide unique visual cues that make reading price action easier and also help the trader in identifying turning points in a trend as it occurs, before a new price trend starts. Reversal patterns in western analysis often take many periods to form but the vast majority of candlesticks formations take only one to three time periods, and give traders more of a real time picture of market sentiment.
Many traders still don't know the major reversal patterns used in candlestick analysis and there is much misunderstanding concerning the practice. This article series will try to explain the different major candles, patterns and also when these signals are valid. We will start with the major candles and then graduate to the major reversal patterns. This is the first article in this series and we will be discussing the doji candle.
The Doji
Doji's are powerful reversal indicating candlesticks and are formed when the security opens and closes at the same level, implying indecision in the stock price. Depending on the location and length of the shadows (lines above and below the open and close), Doji's can be categorized into the following formations: doji, long legged-doji, dragonfly doji and gravestone doji.
As previously mentioned, the standard doji consists of a candle that closes and opens at the same price level. Doji's become more significant when seen after an extended rally of long bodied candles (bullish or bearish) and are confirmed with an engulfing candle. A long legged-doji is formed when the stock opens at a level, trades in a considerable trading range only to close at the same level as it opened. Long legged-doji's become more powerful when proceeded by small candles, as a sudden burst of volatility in a relatively nonvolatile stock; can imply a trend change is coming. Dragonfly Doji's are doji's that opened at the high of a session, had a considerable intraday decline, then find support to rally back to close at the same level as the open. Dragonfly Doji's are often seen after a moderate decline, and are bottom reversal indicators when confirmed with a bullish engulfing. Gravestone Doji's are the opposite of the Dragonfly Doji and are top reversal indicators when confirmed with bearish engulfing candle pattern. As the name implies, gravestone doji's look like a gravestone, and could signal impending end of a trend for a stock.
While the doji is one of the most powerful candles, it's best to wait until the next candle for confirmation before considering a trade. The doji by itself can mean a brief resting period or beginning of a price consolidation rather than a full blown trend reversal.

B.M. Davis is an active trader, trading coach and the publisher of Candlestick Trading For Maximum Profits. If you would like more information about candlestick trading or charting please visit http://www.candlestickcourse.com

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See also:   Gravestone Doji's and trend reversals.

Few Types About Doji

By Sebastian Litrell

There are two kinds of standard Doji Stars: Evening Star and Morning Star.
An Evening Star is at above after the long candlestick body during an uptrend market; while for the Morning Star, it is at below after the long candlestick body during a downtrend market.

Doji Star:

A Doji star is likely a sign to show that the current trend is going to change to another opposite trend. So, it is considered as a reversal sign indicates the current trend is likely to be end. The Doji Morning Star somehow is a sign of lowest bottom while a Doji Evening Star is a sign of the highest top.

A trader should have waited for the chart pattern to be completed before he or she takes the next move. The chart's pattern only can be considered as a complete chart when a candlestick body occurs after the short Doji. Although Doji is a reversal sign, but it could not stands well on its own. The candlestick body occurs after the short Doji would help much in determine the market trend. When there is a red body occurs after the Doji, it indicates the trend is in downtrend and if the candlestick body after the Doji is green, then it shows that the bulls is taking over the control. So, there should be a gap before the candlestick body turns up.

A Doji is known as an 'abandoned baby' or 'island' as it is isolated from the main flow candlestick body patterns.

Double Doji

This formation is formed by two similar Doji that appears one after another. It can be considered as a common phenomena and it is more useful if compare with single Doji as double Doji show us more about the indecision market. So, with this double Doji, it can be strongly sure that there would be a breakout for the current trend.

Dragonfly Doji

A 'Dragonfly' Doji has a long lower shadow and a very tiny candlestick body (sometimes it does not have a candlestick body). It is formed when the open, close and high prices are at the same level. This formation is rarely to be found. The current market first opened at a high price, then dropped during the trading session (because selling is more than buying), and then finally closed at the same high level with the opened price (indicates the bulls have the strength to force the prices up again). This formation is a bullish signs which normally found at the bottom of a downtrend market.

Gravestone Doji

As we can assume from the name, a 'Gravestone' Doji is a threatening sign for traders. The 'Gravestone' Doji has a long upward shadow and a very tiny candlestick body (sometimes it does not have). It is formed when the open, close and lows price are at the same level. During the trading session, the price did go up but return back to the opening level at the close. So, this 'Gravestone' Doji is a bearish sign. It is threatening the traders especially it occurs at the uptrend.

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The Evening Star doji candlestick pattern is fully described at StockMarketStudent.com

Why Most Forex Traders Use Technical Analysis

By Pauline Go

Fundamental analysis has been popular among forex traders for such a long time. However, the necessity for a bulk of information prompted several forex traders to quit using fundamental analysis and to resort to technical analysis.

In general, technical analysis revolves around its three underlying principles. First, the actual price movements and the market action are more important than their underlying causes. Next, patterns will emerge in the market that can identify the potential trend of the price of the currency. Last, the previous and future reactions of people can also shape the movement of the currency and the changes that may take place in human psychology from time to time are minimal.

These principles of this technical analysis have not received positive acceptance from the loyalists of fundamental analysis. These traditionalists would still prefer the old school perspective that an analysis of the movement of the market should focus on the factors that can influence such movement and on the actual influence itself. For those on the side of the contemporary approach of technical analysis, such information may not be necessary at all times. A technical analysis may already be sufficient to ensure the success of trading.

In using this type of analysis, you need to gather historical price data and enter these data into a computer. After feeding the data collected, the computer will then develop a graphical format of describing the patterns existing in the data. Looking for price data would not be a problem at all because the supply is abundant in the foreign exchange market. This graphical representation developed by the computer can already identify the current and future movements of the currency. How the currency is expected to move in the future can already be predicted through a comparison of its present and past movements.

The forex technical analysis theory uses five different categories. These categories are taken into consideration in developing forex charts. The five categories are indicators, number theory, waves, gaps and trends. Indicators, also known as oscillators, refer to the Relative Strength Index (RSI), Stochastic oscillator, and Moving Average Convergence Divergence (MACD). RSI measures the ratio of up-moves to down-moves, while Stochastic oscillator indicates if the
condition has been overbought or oversold. MACD plots two lines of momentum to signify the likelihood of a change in the trend.

The number theory encompasses Fibonacci and Gann numbers. The Fibonacci number sequence follows a pattern of adding the first two numbers to get the third, while Gann numbers use angles and lines in charts. Waves refer to the wave theory popularized by Elliot, which uses repetitive wave patterns in developing market analysis. Gaps are high-low or open-closing
and indicators of an absence of any trading. Trends indicate the direction that the prices are most likely to take. The two most commonly used tools of technical analysis are the Coppock
Curve and the Directional Movement Indicator (DMI).

Technical analysis has become increasingly popular with the advent of technology and computers. Aside from that, through this analysis, several markets can be studied and evaluated simultaneously by experienced analysts.

Pauline Go is an online leading expert in the finance industry. She also offers top quality articles like : Old Currency Value, Currency Exchange Rates

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Anticipating Shifts in Investor Sentiment Using the Put Call Ratio

by David P James

It is commonly believed that the equity markets are motivated by investor mood. You can regularly hear Wall Street analysts cite trader mood and sentiment as the main factor powering the markets. Some traders, therefore, examine charts and ratios in an effort to predict future shifts in investor sentiment.

Probably the most widely used barometer utilized to evaluate trader mood is the Put Call Ratio. The Ratio uses exchange volume of options contracts as a measurement for trader mood. An options contract provides the owner the choice, but not the requirement, to purchase or sell a stipulated quantity of shares at a fixed price level and defined time frame.

An investor who is expecting a stock to slide may invest in put contracts (the legal right to sell at a later date) whilst a trader who is expecting the stock to go up may invest in call contracts (the legal right to buy at a later date).

The most popular way of computing the put call ratio employs the trading activity of calls and puts. It's determined by dividing the quantity of puts exchanged by the amount of calls. For example, if 30,000 puts had been exchanged throughout a trading session but just 15,000 calls, the put call ratio would be 2.

Whilst utilizing trading volume to determine the put call ratio is the most common technique, some investors choose to use the actual dollar amount traded or the quantity of "open interest" for a stock. Open Interest describes the total quantity of contracts that have not yet been closed or expired. The Open Interest Put Call Ratio divides the total quantity of put contracts outstanding by the total quantity of call contracts. For instance, if there were 150,000 puts in the marketplace and 200,000 calls, the Open Interest Put Call Ratio would equal 0.75.

The ratio is usually fairly volatile day-to-day, which makes it tough to identify general trends. Because of this, most investors will look at weekly data or compute a moving average in order to smooth out the variances, therefore exposing longer-term trends and extreme situations.

The put call ratio is frequently utilized as a contrarian signal. If the ratio is very high, i.e. there's a lot of investors expecting a drop in prices, contrarian investors will seek out an opportunity to buy the stock. On the other hand, whenever the ratio is very low and many investors are forecasting a rally, they'll consider selling the market.

It ought to be noted that the put call ratio is frequently utilized in conjunction with additional sentiment indicators rather than as a stand-alone method. Additional sentiment indicators include the Volatility Index (VIX) as well as the Advance Decline Ratio.

To learn more about the Put Call Ratio and to get the day's most interesting stocks, visit http://www.PutCallRatio.net.

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Trend Trading Using Advance Decline Index

By Dan Pipitone

Trading the trends is one of the most followed stock trading strategies. Long traders buy stocks at the start of an uptrend and sell them when the trend diminishes. Similarly short traders take short positions at the start of a downtrend and close there positions when the trend ends. Sounds like a very good strategy! But the problem is "how can we know a trend is starting or ending" and "is the trend has enough strength to bring prices to new highs or lows". A simple but effective tool to solve this problem is the "Advance - Decline Index or A-D Index"

Advance - Decline index measures the strength of a market movement. It is one of the most widely used trend analyzing tools by short-term and long-term traders trading all types of financial instruments - stocks, bonds, currencies, futures, etc. AD index is defined as the 'difference between total number of bullish or advancing stocks and total number of bearish or declining stocks'. The value can be a positive or negative integer. But with this single value analyzing trend strengths is difficult. So traders plot this value on a chart as an 'Advanced-Decline line', connecting points of each time periods. One point of the line can be derived from a simple formula.

A-D point = A-D value of the period + A-D value of previous period.

The period can be of any time frame; day traders can use short time periods like 15 or 30 minutes or 1 hour, other traders can use daily, weekly or monthly periods. Most trading systems today have AD index as a standard indicator.

Interpreting advance-decline indicator is easy.

1. Market up and AD down - Strong uptrend.

2. Market up and AD up - Weak uptrend.

3. Market down and AD down - Strong downtrend.

4. Market down and AD up - Weak downtrend.

The major advantages of AD indicator are its simplicity and scalability. It can indicate trend weakening and possible trend changes. But AD index cannot be used as a main tool to predict trend reversals. Traders should use other indicators like volume indicators, Fibonacci tools together with AD index to predict trend changes.

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Top Ten Systematic Trading Methods

By Michael R Bryant

Systematic trading methods are the basis for trading systems and automated trading strategies. They consist of technical indicators or other mathematical methods that are used to generate objective buy and sell signals in the financial markets. Some of the most popular methods have been in use since before the advent of computers, while other methods are more recent. This article lists ten of the most popular systematic methods found in trading systems.

1. Moving average crossovers. Trading systems based on the crossover of two moving averages of different lengths is perhaps the most common systematic trading method. This method also includes triple moving average crossovers, as well as the moving average convergence divergence (MACD) indicator, which is the difference between two exponential moving averages. The moving averages themselves can be calculated in a variety of ways, such as simple, exponential, weighted, etc.


2. Channel breakouts. In this method, a price channel is defined by the highest high and lowest low over some past number of bars. A trade is signaled when the market breaks out above or below the channel. This is also known as a Donchian channel, which traditionally uses a look-back length of 20 days. The famed "turtle" system was purportedly based on channel breakouts.


3. Volatility breakouts. These are similar in some respects to channel breakouts except that instead of using the highest high and lowest low, the breakout is based on the so-called volatility. Volatility is typically represented by the average true range (ATR), which is essentially an average of the bars' ranges, adjusted for opening gaps, over some past number of bars. The ATR is added to or subtracted from the current bar's price to determine the breakout price.


4. Support/resistance. This method is based on the idea that if the market is below a resistance level, it will have difficulty crossing above that price, whereas if it's above a support level, it will have difficulty falling below that price. It's considered significant when the market breaks through a support or resistance level. Also, when the market breaks through a resistance level, that price becomes the new support level. Likewise, when the market drops through a support level, that price becomes the new resistance level. The support and resistance levels are typically based on recent, significant prices, such as recent highs and lows or reversal points.


5. Oscillators and cycles. Oscillators are technical indicators that move within a set range, such as zero to 100, and represent the extent to which the market is overbought or oversold. Typical oscillators include stochastics, Williams %R, Rate of Change (ROC), and the Relative Strength Indicator (RSI). Oscillators also reveal the cyclical nature of the markets. More direct methods of cycle analysis are also possible, such as calculating the dominant cycle length. The cycle length can be used as an input to other indicators or as part of a price prediction method.


6. Price patterns. A price pattern can be as simple as a higher closing price or as complicated as a head-and-shoulders pattern. Numerous books have been written on the use of price patterns in trading. The topic of Japanese candle sticks is essentially a way of categorizing different price patterns and linking them to market behavior.


7. Price envelopes. In this method, bands are constructed above and below the market such that the market normally stays within the bands. Bollinger bands, which calculate the width of the envelope from the standard deviation of price, are probably the most commonly used type of price envelope. Trading signals are typically generated when the market touches or passes through either the upper or lower band.


8. Time-of-day/day-of-week. Time-based trading methods, based either on the time of day or the day of week, are quite common. A well known trading system for the S&P 500 futures bought on the open on Mondays and exited on the close. It took advantage of a tendency the market had at that time to trade up on Mondays. Other systematic approaches restrict trades to certain times of day that tend to favor certain patterns, such as trends, reversals, or high liquidity.


9. Volume. Many systematic trading methods are based solely on prices (open, high, low and close). However, volume is one of the basic components of market data. As such, methods based on volume, while less common than price-based methods, are worthy of note. Oftentimes, traders use volume to confirm or validate a market move. Some of the most common systematic methods based on volume are the volume-based indicators, such as on-balance volume (OBV), the accumulation/distribution line, and the Chaiken oscillator.


10. Forecasting. Market forecasting uses mathematical methods to predict the price of the market at some time in the future. Forecasting is qualitatively different than the methods listed above, which are designed to identify tradable market tendencies or patterns. In contrast, a trading system based on forecasting might, for example, buy the market today if the forecast is for the market to be higher a week from today.

Please keep in mind that this list is based on popularity, which is not necessarily the same as profitability. Successful trading systems often employ a combination of methods and often in unconventional ways. Also, it's possible that other, less popular methods may be more profitable in some cases.

About the Author:

Michael Bryant has a PhD degree in mechanical engineering with a minor in computer science and has been trading and studying the financial markets since 1994. To learn how to build profitable trading strategies for almost any market and time frame, please visit Adaptrade Software (http://www.adaptrade.com/Builder/).

(c) Copyright - Adaptrade Software. All rights reserved.

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Day Trading Forex With Technical Indicators

By Paul Bryan

Day trading technical indicators are the representation of mathematical formulae a day trader can use to decide when to do the trading. Forex day trading involves buying and selling of various currencies with the goal of making a profit from the difference between the buying price and the selling price within a day.

The day traders employ different strategies like short term scalping where positions are only held for a few seconds or minutes or longer term swing and position trading, when they hold the position for the whole trading day. For their trades they follow one or more day trading technical indicators or develop a strategy based on a combination of many such indicators.

A day trading technical indicator is a series of data points that can be derived by applying a formula to the price data. Price data includes any combination of the open, high, low, or close over a period of time.

Some technical indicators may use only the closing prices while others incorporate volume and open interest into their formulas. The price data is entered into the formula and a data point is produced, which in turn creates the indicator.

The list of day trading technical indicators is practically endless. There are Absolute Breadth Index, Bollinger Bands, Bull/Bear Ratio, Candlestick Charts, indicators based on Dow Theory or Elliot Wave Theory, Envelopes, Fibonacci Levels, MACD, Moving Averages, TRIX, Weighted Close, and many more. All these can be used as a day trading technical indicators with slight or no modifications.

For example, the absolute breadth index or ABI is a market momentum indicator which shows the activity, volatility, and change taking place in the market without paying attention to the direction of the prices. High readings implicate active markets. As a day trading technical indicator, it can predict future direction if combined with other indicators.

Bollinger Bands on the other hand are a kind of moving average envelope. It exist at standard deviation levels above and below the moving average and generally stay within the upper and lower bands. As a day trading technical indicators, it predicts the future market movements. Fibonacci numbers with 4 theories - arcs, fans, retracements, and time zones, which highlight reversals in trends.

Day trading technical indicators has three functions-to alert, to confirm and to predict. So a trader can never miss a trading opportunity or run into loss if he or she can use the indicators judiciously.

The best approach will be to develop a strategy based on more than one indicator. Learning how to use these indicators is more of an art than a science. Through careful study and analysis, a day trading technical indicator can be developed over time, but they can never be full proof.

To find out more about trading Forex more accurately visit Day Trading Technical Indicators

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Why Above the Market Orders Don't Work Investing in Stocks

The above the market orders happen when you place an order with your broker, with the intention of buying a stock as it is going up, usually through a resistance line that an investor has chosen. Some investors believe in technical analysis and they look at resistance, which is the point where a stock stats leveling out after moving up or down. At the supposed resistance level, it is believed that many times the stock will break its fall or uptrend and start going up or down until it meets resistance again. If an investor places an order like this, he or she can try to catch the upward trend of a security or investment supposedly after resistance is met and the trend starts upward. In an above the market order, you want the stock to be going UP breaking through some level before a buy order is placed and hopeful profit will be made.

Comments:

I don't think that this strategy works very well because it's based on technical analysis which doesn't always work. Warren Buffet himself said that he realized technical analysis didn't work when he could turn the charts upside down and get the same answers for his investing. It's assuming that when a stock meets resistance - or any investment that it will then turn around and keep going up. I think this is very unsound because many times instead of going up it will just fall down again. Experts have never been able to find any pattern in the stock market, and trying to rely on resistance for consistent returns is foolish for the stated reasons.

Many times however some investors simply can't resist the temptation of using technical tools like this to buy stocks because their friends, family, or supposed experts tell them it is a good idea. If you have to use this type of analysis for your stocks, than make sure that you cut your losses SMALL. If they stock does go down at least the losses can remain small if you use a stop limit order, however if you hold onto the security for more than one day market makers can make the price LARGELY lower than what you bought it for proving this philosophy foolish.

Investing With The Bad Economy And High Current Unemployment Rates

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Klinger Oscillator and Percentage Volume Oscillator

In the world of technical analysis there are an endless variety of technical indicators. In fact, there are so many indicators that it is often difficult to distinguish between one and another. Many are variations of the same theme using the same input parameters and producing similar results.

Before developing a trading strategy it is important to wade through the raft of available technical indicators and determine what they actually do, then choose those that are unique, combine well with other indicators and most importantly, provide a trading advantage.

As an example, if a trader is intent on using Chaikin Money Flow then it probably doesn't make any sense to also choose the Klinger Volume Oscillator as part of the same stock trading strategy. Both of these indicators are based on accumulation and distribution of shares and both use price and volume as inputs.

Another example would be to select both the Stochastics Oscillator and Relative Strength Index (RSI) for use as overbought/oversold indicators. Both indicators deal with short-term price extremes and capitalize on a tendency for mean reversion.

One easy way to avoid overlap of functionality is to first determine the most important input parameters, then choose one technical indicator for each parameter. One could arguably say that the two most significant trading factors are the security's price and volume (in that order). Price is an obvious choice but stock volume is often ignored. Volume is important because it provides a clue to whether the security is in demand, or alternatively whether the stock is being dumped. With both directions of price movement, the greater the volume the more significant the price action is.

Selection of a price-only trading signal is a relatively easy thing to do. For example, a trader could use an RSI, Stochastics, Simple or Exponential Moving Average (EMA), or a multitude of others. However, it is not so easy to find a volume-only technical indicator. There are plenty of combined price/volume indicators such as the Klinger Oscillator and Chaikin Money Flow, both mentioned above. But they do not provide the price-independence that is being sought for the second indicator.

There is one volume-only indicator called the Percentage Volume Oscillator (PVO). There may be others out there but they are likely based on a similar formula. The PVO is calculated by subtracting the fast EMA from the slow EMA of volume as a percentage. Increasing volume is detected when the Percentage Volume Oscillator fluctuates around the zero line with increasing oscillator values. Decreasing volume is determined when the PVO fluctuates around the zero line with decreasing oscillator values.

An important use of the Percentage Volume Oscillator is when a stock breakout occurs. Such breakouts do not always succeed and instead of reaching new highs they often drop back to less lofty heights. You can generally judge the quality of the breakout based on the PVO. If a stock breaks out on significantly higher volume then the breakout will likely succeed. Conversely if the volume is below average then the stock price will probably fall back after a few days.

Steve Auger is a freelance writer and the administrator of the website stockmarketstudent.com. Stock Market Student includes an encyclopedia of stock market terminology, providing additional information on the technical indicators Percentage Volume Oscillator and Klinger Oscillator.