Profiting from Technical Analysis and .Examples of Ten Candlesticks ... vi Profiting from Technical Analysis and ... x Profiting from Technical Analysis and Candlestick

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  • Profiting from Technical Analysis

    and Candlestick Indicators

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  • Profiting from Technical Analysis

    and Candlestick Indicators

    Powerful Methods for Accurately Timing Trades

    Michael C. Thomsett

  • Editor-in-Chief: Amy Neidlinger Executive Editor: Jeanne Levine Operations Specialist: Jodi Kemper Cover Designer: Chuti Prasertsith Managing Editor: Kristy Hart Senior Project Editor: Betsy Gratner Copy Editor: Karen Annett Proofreader: Katie Matejka Compositor: Nonie Ratcliff Manufacturing Buyer: Dan Uhrig

    2015 by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458

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    Printed in the United States of America First Printing December 2014

    ISBN-10: 0-13399337-X ISBN-13: 978-0-13-399337-0

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    Library of Congress Control Number: 2014950977

  • Contents

    Introduction: The Self-Fulfilling Prophecy . . . . . . . . . . . . . . . . . . . .1

    Chapter 1 Charting TechniquesPredicting the Future . . . . . . . . . . . . . . . . . .5The Desire for 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Articulating Risks in Trading Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8The HypothesisRelative Correlation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10Identifying the Errors of Popular Charting Beliefs. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Requirements for Proof of What Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

    Chapter 2 Traditional AnalysisThe Power of Pattern Recognition . . . . . .17Charts and Directional Identification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

    Double Tops and Bottoms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19Price Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Triangles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23Wedges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Trendlines and Channel Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

    Testing the Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33Bringing Order to the Pattern: Measuring the Trading Range . . . . . . . . . . . . . . . . . . .35Accuracy in Prediction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40Validating the Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41Measuring the Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

    Chapter 3 Candlestick PatternsRecognizing Evolving Strength or Weakness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47Candlestick Comprehension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47A Review of the Candlestick and Its Attributes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51The Ten Candlesticks and Their Attributes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53Six Basic Candlestick Formations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54Examples of Ten Candlesticks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

    Three Black Crows Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56Three Stars in the South Pattern. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59Three-Line Strike Bull Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60Three-Line Strike Bear Pattern. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62Three White Soldiers Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64

  • vi Profiting from Technical Analysis and Candlestick Indicators

    Identical Three Crows Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65Bearish Engulfing Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67Morning Star Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69Bearish Belt Hold Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71Mat Hold Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72

    Pitfalls: Scaling and False Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

    Chapter 4 Reversal SignalsSpotting the Turning Point . . . . . . . . . . . . . . . .79Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80Proximity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83Confirmation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86Failed Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

    Chapter 5 Continuation SignalsThe Mid-Trend Signs . . . . . . . . . . . . . . . . .91Retracement Versus Reversal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92Strength and WeaknessCandlestick Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96Strength and WeaknessWestern Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

    Chapter 6 Combining West and EastCandlesticks and the Technical Signs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105Combinations in Different Time Spans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105Continuation Combination Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107Bullish and Bearish Combinations Together. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109

    Chapter 7 ConfirmationAn Essential Second Part of a Signal. . . . . . . . . .117Relative Correlation and Inertia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117Multiple Confirmation Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119Examples of Strong Reversal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121Examples of Weak Reversal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124Examples of Strong Continuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126Examples of Weak Continuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128Maximum Versus Minimum Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130Contradiction as a Different Kind of Relative Correlation . . . . . . . . . . . . . . . . . . . . .131

    Chapter 8 Support and ResistanceKey Price Points in the Trend . . . . . . .135How Much Time Is Needed to Establish Support or Resistance?. . . . . . . . . . . . . . . .136Stationary and Dynamic Formations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139Breadth of TradingGrowing or Shr