Without going in to its history just lets begin with it and learn how you can get benefit out of it.

Candlestick charts display the open, high, low, and close of an instrument and shade the “candle” portion white if the close of the period is greater than the open of the period, and black if the close for the period is less than the open. The high and the low of the period are then connected by a thin line which is referred to as the wick.

These sticks gives the complete picture of the battle between buyers and sellers during the market session.

And also shows who were more dominant during the entire day.

Below is an example.

Certain formations of candle sticks are good indicators of Trend Reversal.

For Example a Spinning Top and a Doji formation denotes that the trend is most likely to change,

Similarly a Doji formation can help in confirming a change in Trend.

Bullish Engulfing Pattern and Bearish Engulfing Pattern.

These patterns are nothing but combinations of 2 different candle sticks at some special location.

Say the market is in Down Trend and today’s stick was white in color (Buyers were dominant) and if this white stick is Engulfing the previous stick, that indicates a change in trend. Or in simple words we can say that since it was a downtrend the sellers were active till date and today Buyer came in and bought all the shares from the sellers and the demand for that particular stock has increased.

Hammer and Hanging Man

Hammer is also a trend reversal pattern which is found in a downtrend.

Its long lower wick indicates that there was heavy selling pressure but later Buyers came in and made the stock close above its opening price.

It always not necessary that closing will be above open price but still if its above the Bulls are more active and the chances are more for the beginning of uptrend.

Hanging Man

Its just the opposite of a Hammer and is found in a Uptrend.

IMPORTANT LINE -: All these Trend Reversal Patterns Must be Confirmed With the Volumes

7^th June 2008

On Friday US market was down about 3%. Crude Prices at all time HIGH.

Inflation above 8%

Technically NIFTY broke its long term Trend Line(Both on Weekly and Daily Charts) – Bearish

MACD Shows Bearish Signal

RSI (Relative Strength Index) Just above 30 – Bearish

STC (Stochastics) %K line crossing above %D Line – Bullish

Daily Pivot (Only For Monday)

Weekly Pivot

R – Resistance, S – Support

NIFTY Daily Chart

Monday will be a crucial day for NIFTY, if its sustains above its pivot i.e 4662 and above 4692 this week then we can see 50% retracement of the recent downfall (May 16^th to June 6^th 2008).

And its Resistance will at 4843.15

In long term any turn downwards from 4843 can bring NIFTY to 4188.90

And in case if it sustains above 4900 on closing basis then and only then we can think of some good target for NIFTY upwards.

You can see the bull flag pattern is encompassed by two parallel lines.

These lines can be either flat (representing sideways movement) or pointed downward (representing the consolidation in the market).

The pole of the flag is formed by the big move upwards which completes the bull flag.

The pattern is seen as the market potentially just taking a “breather” after a big move before continuing its move upward and is thus referred to as a bullish pattern.

Now coming to the actual point as when to enter in to a trade using this patern.

First of all calculate the height of your bull flag’s pole.

Now when the prices break out from the parallel line (ofcourse the upper line as the trend is bullish) we enter in the trade.

The lowest point in the parallel line is your 1st Stop and target is the length of your flag’s pole.

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Double Top resembles ‘ M ‘.

Double Bottom resembles ‘ W ‘.

Below figures will surely justify this and make you understand the use of this particular indicator.

Double Top

Double Bottom

How to trade this pattern (Double Top)?

Well as we have identified the resistance so we should short that stock or any other financial instrument just below the resistance level, with Stoploss just above the resistance line.

And our target will be the distance of trough in “M” (ie for the figure it should be 228.0 – 224.44= 4.44) below the blue line. i.e our target should be 224.44(blue line) – 4.44 (Distance of Trough) = 220.0

(in this case target was not achieved still one could have made a huge profit out of this GBP/JPY currency pair.)

Now needless to write a disclaimer as all the technical indicators give us a good entry and exit point by not loosing much of money and hence other indicators must also be used in conjunction with each other.

Should you have any questions, please comment

Support

It is the price level where the demand for particular stock is very high, and buyers just BUY as it reaches that level, of course with stoploss few points below that level.

Resistance

On the contrary it is that price level where supply of a particular stock is very high and no trader/investor is willing to carry on with their long position and simply sell.

Note – Investors make money only by buying stock i.e when price moves UP, where as Traders make money both side by short selling a stock and again buying back at a lower level to make profit.

Here are some pictures which will help you determine support and resistance levels.

Also keep in mind that when a stock crosses its resistance, the resistance become its Support and similary when the prices fall below Support level, the support not acts as resistance.

1. Line Chart – Shows least amount of data.

The dots of lines are nothing but the closing price in the particular time period. So for example if you look at a daily chart. The dots of line shows the closing price of that particular stock or financial instrument on a daily basis. Well i suggest not to use it as it doesn’t give us a valuable information from a traders perspective.

2. OHLC – Also known as ‘Open – High – Low – Close’ Chart. Known as OHLC as it gives details about Open – High – Low and Closing Price of a stock. It very informative. Description (On a daily Chart) :

• Left bar Represents Price At which it Opened on that particular date.
• Right bar represents price at which it Closed on that particular date.
• Top of the middle bar represents Day’s High.
• Bottom of the middle bar represents Day’s Low.
• If the color of the bars is green means Closed Price was above the Open Price and vice-versa.

Please see the attached picture if you have questions please let me know.

3. Candle Stick – Most frequently used, in this post i shall only discuss as how to read them we shall discuss about candle sticks as indicators in a different post.

Description is similar to OHLC, its quite easy to understand a candle stick because of its appearance.

The line above and below the body of candle are called Wicks.

If the body is Green, Closed price is Above the Open Price and if its Red the Closing Price is Below Open Price.

Have a look at the picture below and let me know if you have questions.

Example first look up the Monthly chart then the Weekly, Daily, Hourly, Minutes and so on.

The purpose of doing so is to identify the trend of the market.

There can be only 3 Trends -

• Uptrend
• Downtrend
• Sideways

Just have a look at the screen shot and let me know if you have any questions.

Note: Attached is the Weekly graph of ICICI Bank.

Today we shall discuss about ‘Technical Analysis‘.

Many times we listen on news or from many market experts saying “Its a bull market and every fall is a buy”.

But do you ever get a clue from them as :

1. At what Price you should buy?

2. At what time you should buy?

3. Where will you place your StopLoss?

5. Last but not least when will you come to know the bull run is over and its time to book your profits and close your open positions?

Answer to all these most important questions is Technical Analysis.

This analysis is purely based on Technical Charts of the financial instruments and many mathematician, statisticians have discovered various Technical Indicators which helps us in making decision before the actual movement of price.

Again the decision, analysis you do is up to you as how you interpret and how you trade.

These indicators are mere an Indicator and many times i have experienced that it fails. Hence one should have a checklist of some important indicators and if majority of them say Buy then the stock price is most likely to rise. And even if it doesn’t moves in your favor you will be intelligently placing your stoploss.

One can easily find out bookish definition of Technical Analysis but as per my experience i will draft it in my words and trust me this will clear your concept of technical Analysis,

So friends consider Tech Analysis as an Art which most of the traders have learnt before they started trading, and of course they all were taught the same things what i shall be teaching you.

So when you look at a chart and based on your indicators you predict a upward move, no doubt that other 90 out of 100 trader are also feeling and predicting the same, hence all these 90 traders buy and buyers win over sellers and eventually price moves up.

Any questions?

Please share your comments, will be happy to answer you all.

Till then its Prashant Singh signing off, will return with my next topic.

Bye n Happy Trading.