2010 Ilia-Bermous Candlepatterns PDF
2010 Ilia-Bermous Candlepatterns PDF
2010 Ilia-Bermous Candlepatterns PDF
Candlestick Patterns
Ilia Bermous
24 November 2010
Content
1. Short Introduction
2. Key Reversal Patterns: Bullish Engulfing
3. Bullish Kicking Pattern
4. Examples of notional profitable trades and their analysis
5. Conclusions
Short Introduction
¾ Human psychology => always to be right
¾ Can we find candlestick patterns with high probability
profitable trades based on
o Strong reversal (today we will consider for “long” trades only)
o Increase in trading volumes
o etc. => other characteristics will be analysed through examples of
recent notional profitable trades)
NOTE: only candlesticks and trading volumes are used
to make trading decisions to enter stocks
Candlestick basics
Key Reversal Patterns
T.N.Bulkowski “Encyclopedia of chart Patterns”
Bullish Engulfing
Downtrend => Open below last close & close above previous high
Downtrend reversal (Engulfing, Bullish)
¾ Pattern characteristics
– A bullish engulfing pattern is a two‐candle bottom
reversal pattern that signals the end of a downtrend.
– It may reverse into an uptrend or change to a sideways
trend, in either case it signals a trend change.
– This pattern occurs when there is a downtrend
underway and should appear when a bottom has been
reached.
Pattern characteristics (cont #2)
Bonuses
1. if volume is heavy (above the average) on second candle
2. if first candle real body is small in comparison to the
second candle real body
3. if second candle engulfs more than one candle
4. if second candle High/Low engulfs first candles High/Low
Statistics on the pattern performance from
T.N. Bulkowski “Encyclopedia of candlestick charts”, p.317‐
325
¾ Bull market: bullish reversal 63% of the time (ranking 22)
¾ Bear market: bullish reversal 62% of the time (ranking 25)
¾ Frequency: 12th out of 103
¾ The best‐performing engulfing candles appear in a bear market
Example #1
Example #2
Bullish Kicking Pattern
Type: Reversal
Relevance: Bullish
Prior Trend: N/A
Reliability: High
Confirmation: Needed
No. of candles: 2
Recognition Criteria
¾ Direction is not important.
¾ The pattern begins with a tall black candle
¾ The next day price gaps higher and opens at the
low and closes at the high
¾ The both candles do not have any shadows or they
have only very small shadows
¾ Confirmation of the reversal on the third day
should be sought. This confirmation may be in the
form of a white candlestick, a large gap up or a
higher close on the third day.
Behaviour and Rank
T.N. Bulkowski “Encyclopedia of candlestick charts”, p.452
¾ Bull market: Bullish reversal 53% of the time (rank 44)
¾ Bear market: Bullish reversal 50% of the time (rank 48)
¾ Frequency: 100th out of 103
¾ Overall performance over time: 96th out of 103
Main goals of my presentation
¾ Based on a reversal signal my idea was to find
candlestick pattern setups with high probability
profitable trades
¾ During preparation for my presentation in mid
August‐ beg October 2010 23 cases with a reversal
signal were found, some of them will be discussed in
today’s presentation
o In 21 cases (out of 23) profit between 10%‐100% was
achievable within from several days to several weeks
Main goals of my presentation (cont
#2)
¾ Based on the provided examples to make conclusions
on what are the main characteristics of the
considered setups
¾ Looking at the illustrated candle patterns to
memorise the pattern set ups to be used in your
future trading
BullCharts Scan Criteria
Notional trade #1
Pattern characteristics
¾ Not filled gap up after a black candle
¾ ~1.5 weeks narrow consolidation on small trading
volumes before the move
¾ Significant volume increase during the move up
¾ Relatively short candle body on the move up
¾ Move up is within ~10% from the consolidation
range
o Dilemma: is it better to use a tight stop and bigger size, or
a wider stop and smaller size?
Notional Trade #2
Pattern characteristics
¾ Gap up after a black candle
¾ Several weeks of a narrow consolidation on small
volumes before the move up
¾ Significant volume increase in the gapped up
candle
¾ Move up within ~10%
Notional Trade #3
Pattern characteristics
¾ Gap up after a black candle
¾ 2 weeks consolidation forming a descending
triangle formation
¾ Trading volume was not spectacular but the move
up was confirmed by the next rising candle with a
significant volume increase
Notional Trade #4
Pattern characteristics
¾ Gap up after a black candle
¾ ~4 weeks of a narrow consolidation on small
volumes before the move up
¾ Significant volume increase in the gapped up
candle
¾ Move up is with a relatively short white body and
short shadows
Notional trade #5
Patterns characteristics
¾ Gap up at the opening after a black candle
¾ For cheap stocks (price <10c) allow 10‐15% difference
between the purchased price and support level
¾ Black candles preceding the move up have relatively small
bodies
¾ Over 3 week narrow consolidation on small trading
volumes in the first case
¾ Pattern repetition in a second case
Notional Trade #6
Pattern characteristics
¾ Gap up after a black candle
¾ ~1 week consolidation before the move up
¾ Significant volume increase in the gapped up
candle
¾ Move up is with a relatively short white body and
short shadows
Notional trade #7
Pattern Characteristics
¾ Gap up at the opening
¾ ~3 weeks narrow consolidation before the move up
¾ Usually pay attention to announcements related director on
market purchases with at least $300K‐$500K for middle cap
stocks
¾ My scan having criteria of gapping up with a volume increase
in comparison with the previous day missed this case (the
actual volume difference was ~10%)
¾ With a negative sentiment on the market on 15 October the
trade could be made by using a CommSec buy gain setup at
$1.90+ with a stop set at $1.78‐$1.80
Notional trade #8
Pattern Characteristics
¾ Gap up at the opening, not filled with a doji formation on
relatively short shadows
o This stock was picked up using my trading volume increase scan
¾ 1 month narrow consolidation before the move up
¾ Breaking local downtrend (I like this kind of descending
triangle formations with at least 3‐4 daily candles)
¾ Significant trading volume increase
¾ Buy next day with a stop loss at 64‐65c => having stop loss
close to the purchase price => gain/loss ratio is relatively large
for this scenario with proper money management
Volume Increase Scan
Notional trade #9
Pattern Characteristics
¾ The first 2 gaps are of my favourite with small bodies, gaps
on the opening and breaking descending triangle formations
¾ 1‐2 week consolidation with decreasing trading volumes
before the move up
¾ Significant trading volume increase in the gapping up candle
with a relatively small body and shadows
¾ Gaps are followed all the way in trading this stock
¾ The green formations are tradable setups with Darryl Moley
strategy
Notional trade #10
Pattern Characteristics
¾ Gap up at the opening
¾ ~2 weeks narrow consolidation before the move up
¾ Significant volume increase
¾ Doji candle (no body) in the move up
¾ Price move is <10% from the support level
Conclusions
1. Pattern recognition: black candle (day 1) followed by white
candle (day 2) with a gap between opening price on day 2 and
closing price on day 1
Gap can be with white, black or doji candle; on day 2
Preferable to have a relatively small body and not long shadows
bonus: black candle with a relatively small body and short
shadows is followed by the opening price higher than the
opening price day before
Conclusions (cont #2)
2. Pattern appearance:
a) at least after 1‐2 week consolidation on relatively small
volumes or
b) descending triangle candlestick formation with at least 3‐4
candles in it with decreasing trading volumes
3. Trading volumes on a break: at least 2‐3 times higher in
comparison with the average trading volumes during the
consolidation stage
4. Price move on “day 2” should be under 10‐15% from the
support level, otherwise need to wait for some consolidation
for the entry.
Conclusions (cont #3)
5. Always worthwhile to check whether the stock has had similar
patterns in the nearest past during the move up
Books
1. Steve Nison – Japanese Candlestick Charting Techniques
2. Louise Bedford ‐ Secret of Candlestick Charting
3. Louise Bedford ‐ Trading Secrets
4. Stan Weinstein's Secrets For Profiting in Bull and Bear Markets
5. Marcel Link ‐ High Probability Trading
6.T.N. Bulkowski ‐ Encyclopedia of candlestick charts