BEGINNER
3. U
nderstanding Single
Period Chart Patterns
H A N TE C R E SE A R C H WE BINARS - Technical Analysis Series
Line Charts, Bar Charts and Candlestick Charts
The price chart can be presented in a variety of different ways. The vast majority of
analysts use either line, bar or candlestick charts.
Line charts are the most basic chart format. They
a single data point to represent a whole session (or
trading period), usually the end of day Close price.
This data point is then connected to the equivalent
point of the previous session to form a line.
Bar charts give much
the highest price for the day
closing price
more price information
than line charts.
Containing data for the
opening price
Open, High, Low, and
the lowest price for the day
Close (OHLC) prices, bar
charts give a gauge of
how price has moved through the whole day.
Candlestick charts
high
upper
again use OHLC but
shadow
open
close
also have different
real
body
colours to represent up
close
open
days (or periods) and
lower
shadow
low
down days (or periods)
for the Open versus
the Close. A candlestick has two parts: the Body (the
difference between the Open and Close) and the Tails
or Shadows. A candle with the Close higher than the
Open (i.e. an up day) has a white body, and one with
a Close lower than the Open (i.e. a down day) has a
black body.
1
3. Understanding Single Period Chart Patterns
H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series
Single Period Bar Chart Patterns
There is much that can be ascertained from the
analysis of a single bar. Where the price opens, where
the price closes and the size of the daily range are all
important in assessing whether it is the bulls that are
in control or the bears.
The Open/High/Low/Close bar can reflect the
psychology of the market. The single day bars shown
below show what can be determined from the close
price compared to the daily range. If the price closes
Buyers strongly
in control
Buyers lacking
conviction
Buyers beginning
to lose control
towards the bottom of the range, this would suggest
that the sellers have gained control. Alternatively, a
close price near the high of the range would suggest
that the buyers have ended in control. If the closing
price is around the middle of the range this suggests
uncertainty with the current move.
However we can also look at the close price compared
to the open. The tables below set out the implications
of certain moves.
Sellers strongly
in control
Sellers lacking
conviction
Sellers beginning
to lose control
No overall control
by the buyers or
the sellers
The buyers are
gaining control
The sellers are
gaining control
Additionally, if the open price is towards the
middle of the range, this suggests uncertain
trading. However where the price closes can
suggest who is beginning to gain the upper hand.
Inside Days and Outside Days
An Inside Day (or inside bar if you are trading
intraday) is a signal of uncertainty with the current
trend. This is where the entire daily trading range
is swallowed up by the previous days range. The
psychology is that it is an uncertain move and could
signal a stalling in the trend. There are two ways
to trade Inside Days. Firstly you can put a buy order
above the high of the previous day high. A move
such as this would signal that following the bout of
consolidation the bulls are ready to back the price. Or
alternatively, you could put a sell order just under the
low of the previous low, signalling that the bears are
gaining the ascendency after the consolidation.
An Outside Day (or outside bar if you are looking at
intraday trading) is a signal that reflects the strength
of the underlying trend. It is the complete opposite
to the Inside Day and is where the entire daily
range swallows up the previous session. This is then
compounded by a close price that is again outside the
previous days range. If the price is in an uptrend, a
bullish outside day will have the close above the high
of the previous days high. In a downtrend, a bearish
outside day will have a close below the low of the
previous day low.
The Inside
Day/Bar
The Outside
Day/Bar
3. Understanding Single Period Chart Patterns
6. Bollinger Bands
H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series
Key Reversals
One of the most powerful single bar patterns is
the key reversal. Coming at the end of a trend and
ideally at either the high or the low of the move, a
key one day reversal marks a significant change in
sentiment. Key reversals can also work across chart
with a variety of different time frames, such as a key
one day reversal, key one hour reversal, or even a
key one minute reversal.
A bearish key reversal is the opposite, coming
at the top of an uptrend and marks a culmination
in buying pressure as selling pressure is renewed.
A bearish key reversal will often mark important
reversal towards a new downtrend. The signal can be
traded by going short and placing a stop above the
high of the key reversal bar.
A bullish key reversal will come at the end of a
downtrend. The price makes a new low, below the
previous session low, only for the selling pressure
to become exhausted and the move to be rejected.
The buying pressure then returns during the same
session, to result in a close above the previous session
high. This suggests a significant swing in sentiment
towards the bulls and will often mark the bottom
of major downtrends. They can often be traded by
going long and placing a stop below the low of the
key reversal.
The figure below illustrates a both a bullish and a
bearish key reversal.
The daily chart of Euro/Dollar shows a series of outside days, inside days and a bullish key one day reversal
from February to April 2013. Note how the outside days in February are powerful trend continuation
patterns. Then, right towards the bottom in late March there are two consecutive inside days which reflect
the uncertainty that is building up. This was then followed by the big trend changing bullish key one day
reversal.
3. Understanding Single Period Chart Patterns
6. Bollinger Bands
H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series
Single Period Candlestick Chart Patterns
There are literally hundreds of candlestick patterns that have been identified, many of which have weird
and wonderful names. Japanese traders love their candlesticks and subsequently, many candlestick patterns
have Japanese names, such as doji and marubozu.
There can be one day candlestick patterns, two day patterns, in addition to three day patterns and multi-day
patterns. However, for the demands of space, and to keep it relatively simple, we have listed some of the
more common single day candle patterns that traders should be aware of.
Some traders set up their candlestick analysis using different colours, however for the purpose of this
document, we shall use white candles to signify a bullish day and black candles for bearish.
A long white candlestick indicates strong buying pressure. The further the close
is above the open, the longer the white candlestick is. This shows that prices
advanced significantly from open to close and implies that buyers were aggressive.
Although long white candlesticks are generally bullish, much depends on their
position within the broader technical picture. After an extended decline, a long
white candlestick can mark a potential turning point or key support level. A long
black candlestick is the opposite pattern and is negative.
A Marubozu candlestick is very potent long candlesticks. The Marubozu has
no upper or lower shadows, and the high and low are therefore represented by
the open and the close. A White Marubozu forms when the price opens at the
low and closes at the day high. This strongly bullish candlestick indicates that
buyers controlled the price action from the first trade to the last trade. A Black
Marubozu forms when the price opens at the high and closes at the low. This
strongly bearish candlestick indicates that sellers controlled the price action from
the first trade to the last trade.
Long versus Short
Marubozu
White
Marubozu
Doji
Doji candlesticks signal uncertainty with the current trend. They form when the
price opens and closes at (or almost at) the same level, and usually around the
middle of the candlestick. It shows that the price has tested moves both higher and
lower, but indecision has ultimately been the winner. The length of the upper and
lower shadows can vary and the resulting candlestick looks like a cross, inverted
cross or plus sign. The longer the shadows, the more significant the uncertainty,
whilst shorter shadows can represent either equilibrium throughout or a lack of
trading (so volume also needs to be checked). Any bullish or bearish bias is based
on preceding price action and future confirmation.
Dragonfly doji form when the open, high and close are equal and the low creates
a long lower shadow. The resulting candlestick looks like a T with a long lower
shadow and no upper shadow. Dragonfly doji indicate that sellers dominated
trading and drove prices lower during the session. By the end of the session, buyers
resurfaced and pushed prices back to the opening level and the session high. It
suggests a failed attempt.
Black
Marubozu
Dragonfly
doji
Gravestone
doji
Gravestone doji form when the open, low and close are equal and the high
creates a long upper shadow. They are the opposite of a Dragon fly doji.
4
3. Understanding Single Period Chart Patterns
6. Bollinger Bands
H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series
The Hammer is a bullish reversal pattern that forms after a downtrend. Hammers
can also mark bottoms or support levels. The low of the long lower shadow shows
that sellers drove prices lower during the session. A strong finish shows that buyers
then regained control to end the session on a positive note. However, hammers
require additional bullish confirmation as the low of the hammer shows that
plenty of sellers remain. Further buying pressure, preferably on good volume, is
recommended before acting. Hammers are similar to selling climaxes, and heavy
volume can serve to reinforce the validity of the reversal.
Hammer
The Shooting Star is a bearish reversal pattern that forms after an uptrend. It is
the opposite pattern to the Hammer. A Shooting Star can mark a potential trend
reversal or resistance level. The candlestick forms when prices move higher on
the open, advance during the session but closes well off the high. The resulting
candlestick has a long upper shadow and small black or white body. After a large
advance (the upper shadow), the ability of the bears to force prices down is a
warning. Bearish confirmation is required after the Shooting Star and can take the
form of a gap down or long black candlestick preferably on heavy volume.
Shooting Star
Hanging Man
The Hanging Man is a bearish reversal pattern that acts as a warning signal
that can mark a top or resistance level. Forming after an advance, a Hanging
Man signals that selling pressure is starting to increase. Even though the bulls
regained their poise to push prices back up by the close, the appearance of selling
pressure is a warning. A Hanging Man requires bearish confirmation before action
is recommended. This could be a gap down or long black candlestick on heavy
volume.
The Inverted Hammer looks like a Shooting Star, but forms after a decline or
downtrend. Inverted Hammers represent a potential trend reversal or support
levels. After a decline, the long upper shadow indicates buying pressure during the
session. Although the bulls were not able to sustain the buying pressure and prices
closed well off of the high to create a long upper shadow, the warning sign is that
the buyers are ready to move once more. Due to the failure of the initial move
higher, bullish confirmation is required before action.
Inverted Hammer
H A N T E C R E SE A R C H WE B INARS - Technical Analysis Series
Trust Through Transparency
Hantec House, 12-14 Wilfred Street, London SW1E 6PL
T: +44 (0) 20 7036 0888
F: +44 (0) 20 7036 0899
E: info@hantecfx.com
W: hantecfx.com
Risk Warning for Educational Material
This document is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No.
502635. The document is prepared and distributed for information and education purposes only.
Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not suitable for all investors due to the high risk nature of
these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX,
Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange
rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully
understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into
FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should
only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed
at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on
past performance figures. If you are in any doubt, please seek further independent advice.
This document does not constitute personal investment advice, nor does it take into account the individual financial circumstances or
objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does
not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the
views or suggestions within this document are those solely and exclusively of the author, and accurately reflect his personal views about any
and all of the subject instruments and are presented to the best of the authors knowledge. Any person relying on this document to undertake
trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.
Figure 4: Range trading using the Bollinger Bands on Silver
T: +44 (0) 20 7036 0888 | F: +44 (0) 20 7036 0899 | E: info@hantecfx.com | W: hantecfx.com
