A STUDY ON THE FORMATION OF CANDLESTICK PATTERNS WITH

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Amrudha Romeo et al International Journal of Management Research Review. time interval It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to box plots but are unrelated Candlestick charts are. thought to have been developed in the 18th century by Munehisa Homma Japanese rice. trader of financial instruments They were introduced to the Western world by Steve Nison in. his book Japanese Candlestick Charting Techniques Candlesticks contain the same data as a. normal bar chart but highlight the relationship between opening and closing prices The. advantage of candlestick charts is the ability to highlight trend weakness and reversal signals. that may not be apparent on a normal bar chart Candlestick Charts are an effective way of. visualizing price movements,IMPORTANCE OF THE STUDY. Technical analysis is widely used by forex equity and commodity traders to determine the. short term as well as the long term trends of the market The scope of technical analysis is. increasing every day as more and more people are trying to learn the skills of technical. analysis to earn good returns Scope of candlestick patterns as one of the tools used in. technical analysis, 1 It helps investors and traders predict the trend of the market Up trend downtrend and. sideways moves of the market are easy to predict with the help of chart analysis. 2 Timing plays an important role in trading and investing With the help of candlestick. patterns traders and investors can predict the right time to enter and exit a trade thereby. enabling good returns Chart patterns candlesticks moving averages Elliot wave analysis. and other indicators are very useful for traders to make entry and exit points. 3 Candlestick patterns gives early signals and also paints a picture about the psychology of. investors and traders regarding what they are doing Price volume analysis also indicates the. movement of market makers and their activities related to a particular market. 4 Candlestick charts gives a quick result for traders who use 1 minute 5 minutes 30. minutes and 1 hour charts For instance the formation of a head and shoulder on 1 minute. and 5 minutes chart gives fast results as compared to the daily charts. Technical charts provide a lot of information that helps the traders and investors build their. positions and take trades Information like support resistance chart pattern momentum of. the market volatility and trader s psychology are just some examples of types of information. provided by technical analysis and used by traders in the Forex market. STATEMENT OF THE PROBLEM, To find whether candlestick patterns are useful in taking investment decisions by comparing. its accuracy with technical indicators reference to Nifty index for the past five years. REVIEW OF LITERATURE,Technical Analysis, Technical analysis is a security analysis discipline for forecasting the future direction of. prices through the study of past market data primarily price and volume It is a process of. identifying trend reversals at an earlier stage to formulate the buying and selling strategy. Copyright 2012 Published by IJMRR All rights reserved 68. Amrudha Romeo et al International Journal of Management Research Review. The principles of technical analysis derive from the observation of financial markets over. hundreds of years The oldest known hints of technical analysis appear in Joseph de la Vega s. accounts of the Dutch markets in the 17th century In Asia the oldest example of technical. analysis is thought to be a method developed by Homma Munehisa during early 18th century. which evolved into the use of candlestick techniques and it is today a main charting tool. Dow Theory is based on the collected writings of Dow Jones co founder and Editor Charles. Dow and inspired the use and development of modern technical analyse is from the end of. the 19th century Other pioneers of analysis techniques include Ralph Nelson Elliott and. William Delbert Gann who developed their respective techniques in the early 20th century. Many more technical tools and theories have been developed and enhanced in recent decades. with an increasing emphasis on computer assisted techniques. Technical analysts seek to identify price patterns and trends in financial markets and attempt. to exploit those patterns While technicians use various methods and tools the study of price. charts is primary Technicians especially search for archetypal patterns such as the well. known head and shoulders or double top reversal patterns study indicators such as moving. averages and look for form such as lines of support resistance channels and more obscure. formations such as flags pennants or balance days Technical analysts also extensively use. indicators which are typically mathematical transformations of price or volume These. indicators are used to help determine whether an asset is trending and if it is its price. direction Technicians also look for relationships between price volume and in the case of. futures open interest Examples include the relative strength index and MACD Moving. Average Convergence Divergence,Candlestick charts, A candlestick chart is a style of bar chart used primarily to describe price movements of.
a security derivative or currency for a designated span of time It is a combination of a line. chart and a bar chart in that each bar represents the range of price movement over a given. time interval It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to box plots but are unrelated. Candlestick charts are thought to have been developed in the 18th century by Munehisa. Homma Japanese rice trader of financial instruments They were introduced to the Western. world by Steve Nison in his book Japanese Candlestick Charting Techniques Candlesticks. contain the same data as a normal bar chart but highlight the relationship between opening. and closing prices The advantage of candlestick charts is the ability to highlight trend. weakness and reversal signals that may not be apparent on a normal bar chart Candlestick. Charts are an effective way of visualizing price movements There are two basic candlesticks. Bullish Candle When the close is higher than the open usually green or white. Bearish Candle When the close is lower than the open usually red or black. Given below is a model of candlestick, Copyright 2012 Published by IJMRR All rights reserved 69. Amrudha Romeo et al International Journal of Management Research Review. Fig 1 Model of Candlestick,Candlestick Patterns, The power of Candlestick Charts is with multiple candlesticks forming reversal and. continuation patterns Following are the different candlestick patterns used in technical. Bullish Engulfing Pattern,Bearish Engulfing Pattern. Dark Cloud Cover,Dragonfly Doji,Evening Star,Gravestone Doji. Hanging Man,Inverted Hammer,Morning Star,Piercing Pattern.
Shooting Star,Tweezer Tops and Bottoms,1 Bullish Engulfing Pattern. The Bullish Engulfing Candlestick Pattern is a bullish reversal pattern usually occurring at. the bottom of a downtrend The pattern consists of two Candlesticks. Smaller Bearish Candle,Larger Bullish Candle, Copyright 2012 Published by IJMRR All rights reserved 70. Amrudha Romeo et al International Journal of Management Research Review. Fig 2 Bullish Engulfing Pattern,2 Bearish Engulfing Pattern. The Bearish Engulfing Candlestick Pattern is a bearish reversal pattern usually occurring at. the top of an uptrend The pattern consists of two Candlesticks. Smaller Bullish Candle,Larger Bearish Candle,Fig 3 Model of bearish engulfing pattern. 3 Dark Cloud Cover, Dark Cloud Cover is a bearish candlestick reversal pattern similar to the Bearish Engulfing.
Pattern There are two components of a Dark Cloud Cover formation. Bullish Candle,Bearish Candle,Fig 4 Model of dark cloud cover. Copyright 2012 Published by IJMRR All rights reserved 71. Amrudha Romeo et al International Journal of Management Research Review. The Doji is a powerful Candlestick formation signifying indecision between bulls and bears. A Doji is quite often found at the bottom and top of trends and thus is considered as a sign of. possible reversal of price direction but the Doji can be viewed as a continuation pattern as. Fig 5 Model of Doji, Two powerful versions of the Doji formation are linked below. Dragonfly Doji, The Dragonfly Doji is a significant bullish reversal candlestick pattern that mainly occurs at. the bottom of downtrends,Fig 6 Model of dragonfly doji. Gravestone Doji, The Gravestone Doji is a significant bearish reversal candlestick pattern that mainly occurs at.
the top of uptrends,Fig 7 Model of gravestone doji. 5 Evening Star, The Evening Star Pattern is a bearish reversal pattern usually occurring at the top of an. uptrend The pattern consists of three candlesticks. Copyright 2012 Published by IJMRR All rights reserved 72. Amrudha Romeo et al International Journal of Management Research Review. Large Bullish Candle,Small Bullish or Bearish Candle. Large Bearish Candle,Fig 8 Model of evening star, The Hammer candlestick formation is a significant bullish reversal candlestick pattern that. mainly occurs at the bottom of downtrends,Fig 9 Model of hammer.
7 Hanging Man, The Hanging Man candlestick formation as one could predict from the name is a bearish. sign This pattern occurs mainly at the top of up trends and is a warning of a potential. reversal downward It is important to emphasize that the Hanging Man pattern is a warning of. potential price change not a signal in and of itself to go short. Fig 10 Model of hanging man, Copyright 2012 Published by IJMRR All rights reserved 73. Amrudha Romeo et al International Journal of Management Research Review. The Harami Pattern is considered either bullish or bearish based on the criteria below. Bearish Harami A bearish Harami occurs when there is a large bullish green candle on. Day 1 followed by a smaller bearish or bullish candle on Day 2 The most important aspect of. the bearish Harami is that prices gapped down on Day 2 and were unable to move higher. back to the close of Day 1 This is a sign that uncertainty is entering the market. Bullish Harami A bullish Harami occurs when there is a large bearish red candle on Day. 1 followed by a smaller bearish or bullish candle on Day 2 Again the most important aspect. of the bullish Harami is that prices gapped up on Day 2 and price was held up and unable to. move lower back to the bearish close of Day 1 The chart below of the Nifty shows an. example of both a bullish and bearish Harami candlestick pattern. 9 Inverted Hammer, The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and. is a warning of a potential reversal upward It is important to note that the Inverted pattern is. a warning of potential price change not a signal in and of itself to buy. Fig 11 Model of inverted hammer,10 Morning Star, The Morning Star Pattern is a bullish reversal pattern usually occurring at the bottom of a. Fig 12 Model of morning star, Copyright 2012 Published by IJMRR All rights reserved 74.
Amrudha Romeo et al International Journal of Management Research Review. 11 Piercing Line Pattern, The Piercing Pattern is a bullish candlestick reversal pattern similar to the Bullish Engulfing. Pattern There are two components of a Piercing Pattern formation. Bearish Candle,Bullish Candle,Fig 13 Model of piercing pattern. 12 Shooting Star, The Shooting Star candlestick formation is a significant bearish reversal candlestick pattern. that mainly occurs at the top of uptrends,Fig 14 Model of shooting star. 13 Tops and Bottoms, The Tweezer Top formation is a bearish reversal pattern seen at the top of up trends and the.
Tweezer Bottom formation is a bullish reversal pattern seen at the bottom of downtrends. Fig 15 Model of tweezers, Copyright 2012 Published by IJMRR All rights reserved 75. Amrudha Romeo et al International Journal of Management Research Review. Sometimes Tweezer Tops or Bottoms have three candlesticks. A bearish Tweezer Top occurs during an uptrend when bulls take prices higher often closing. the day off near the highs a bullish sign However on the second day how traders feel i e. their sentiment reverses completely The market opens and goes straight down often. eliminating the entire gains of Day 1 The reverse a bullish Tweezer Bottomoccurs during a. downtrend when bears continue to take prices lower usually closing the day near the lows a. bearish sign Nevertheless Day 2 is completely opposite because prices open and go. nowhere but upwards This bullish advance on Day 2 sometimes eliminates all losses from. the previous day,14 Windows Gaps, Windows as they are called in Japanese Candlestick Charting or Gaps as they are called in. the west are an important concept in technical analysis Whenever there is a gap current. open is not the same as prior closing price that means that no price and no volume. transacted hands between the gap,Fig 16 Model of windows. A Gap Up occurs when the open of Day 2 is greater than the close of Day 1 Contrast aGap. Down occurs when the open of Day 2 is less than the close of Day one There is much. psychology behind gaps Gaps can act as,Resistance Once . world by Steve Nison in his book Japanese Candlestick Charting Techniques Candlesticks contain the same data as a normal bar chart but highlight the relationship between opening and closing prices The advantage of candlestick charts is the ability to highlight trend weakness and reversal signals that may not be apparent on a normal bar chart

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