Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

Structure of Candlestick Charts
Candlestick charts are based on the same market data as regular bar
charts but present that data in a different way. The components of
candlestick charts are the opening price level, the closing price level,
the high price, and the low price of any data compression rate, be it
weekly, daily or intraday data. Figure 3.12 shows the composition of a
candlestick.
The relationship between the open price level and the close price
level forms the body of the candlestick chart. If the close is below the
opening, the body is black. If the close is above the opening, the body
is white. The opening and closing price of every data compression—
weekly, daily, or intraday—is, therefore, important for analysts who
use candlestick charts.
The price moves above and below the candlestick body are called
the “shadow.” Depending on how large the distance is between high
and low of a price bar to the body of the candlestick, the shadows can
be long or short.
Figure 3.12
Constituents of candlesticks.
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BASIC PRINCIPLES OF TRADING STRATEGIES
In Figure 3.13, we compare a bar chart and a candlestick chart
based on the same open, high, low, and close data.
Analysis of Selected Candlestick Formations
Most candlestick formations identify either a slowdown in a market
trend or a trend reversal. It is important to understand that there is
a close relationship between reversal candlestick patterns and rever-
sal patterns in the chart analysis. For example, a key-reversal day in
the chart analysis can also be shown in the candlestick analysis by
using a bullish belt-hold or a bearish belt-hold.
Traders like working with candlestick charts because they show
investor behavior in a different, but simple, price picture that is easy
to combine with other trading tools. Candlestick charts can be ana-
lyzed without any time lag, and investor behavior can be examined just
by looking at the relationship between the open, high, low, and close
at every price bar.
The following candlestick chart patterns are seen often and com-
bine well with the Fibonacci trading tools. The interested reader will
f ind many books that describe candlestick patterns in detail.
Hammer and Hanging Man
A candlestick chart pattern is called a hammer if it has a long shadow
and a small body (black or white) that is very close to the high of the
day. At the end of a downtrend, the hammer is considered a bullish
reversal signal.