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

CANDLESTICK CHART PATTERNS
Candlestick chart patterns visualize accelerations and slowdown in
trends—or indicate trend reversals.
Candlestick charts work with the same OHLC (opening, high,
low, close) data as regular bar charts. The only difference is that a
key-reversal-day on a bar chart, for example, can be easier to identify
by looking for a hammer or a doji candlestick formation.
Candlestick charts are popular because they identify the mo-
mentum in a price move on every price bar by comparing the open-
ing price with the closing price and showing black and white
candlesticks, depending on whether the opening is higher or lower
than the closing price.
Candlestick charts are very good trading tools by themselves, but
they also combine well with other trading tools.
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APPLICATIONS OF TRADING STRATEGIES
Basics of Working with Candlestick Chart Patterns
Working with candlesticks means that there is no time lag in the analy-
sis compared with technical analysis tools (e.g., moving averages).
Candlesticks show everyday investor behavior expressed through
the relationship of open, high, low, and close of the day (or week,
month, etc.).
The following candlestick chart patterns occur frequently and
combine well with Fibonacci trading tools. Our goal is to be practice-
oriented—to show what works, is easy to understand, and is useful for
all traders. The few candlestick patterns we show here represent prob-
ably 80 percent of all valid patterns in real-time everyday trading and
can be easily integrated with other strategies.
Generating Trading Signals Based on Candlestick Patterns
Hammer and Hanging Man (Inverted Hammer)
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 (see Figure 4.23).
The hammer often shows up at the end of a downtrend. After we
identify a hammer, we buy next day at the high of the previous day.
The stop-loss is below the low of the previous day.
The corresponding candlestick chart pattern of a hanging man is
a hammer at the end of an uptrend. We sell on the occurrence of this