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Better Than Candlestick Patterns - Part Five

This article discusses analyzing candlestick charts on a bar-by-bar basis to monitor sentiment throughout price action and confirm or alter premises about market trends. It provides examples of analyzing pullbacks and areas of support/resistance to determine whether sentiment confirms a premise of continuation or reversal. Analyzing individual candle patterns in context of recent price action can reveal whether bulls or bears are dominating to signal potential trade entries or changes in premises. Mastering this technique requires extensive practice watching price unfold bar-by-bar.

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169 views6 pages

Better Than Candlestick Patterns - Part Five

This article discusses analyzing candlestick charts on a bar-by-bar basis to monitor sentiment throughout price action and confirm or alter premises about market trends. It provides examples of analyzing pullbacks and areas of support/resistance to determine whether sentiment confirms a premise of continuation or reversal. Analyzing individual candle patterns in context of recent price action can reveal whether bulls or bears are dominating to signal potential trade entries or changes in premises. Mastering this technique requires extensive practice watching price unfold bar-by-bar.

Uploaded by

aran singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Better than Candlestick Patterns

– Part Five
ByLance Beggs August 20, 2010

(Previous articles in this series: part 1; part 2; part 3; part 4)

So far, we’ve discussed:

A simple technique for classifying (or naming) candles and


gaining a feel for short-term candle sentiment.

The importance of context – examining where the current


pattern is occurring within the market structure in order to
determine the technical and psychological impact of that
pattern (how the pattern is interacting with key structural areas
and the implications for future market bias).

How to apply this to our analysis, bar by bar, through asking


whether or not this new information confirms our premise.

Let’s wrap up this series of articles with a couple of examples.


:
In the example above, the early UK session rallied but was unable to
continue higher. The break below the green support line lead to a
change of premise. A bearish bias now exists and price is expected
to trend lower to the next support area. Any pullback (bullish swings)
should confirm weakness. Trend extensions (bearish swings) should
confirm strength.

Price bar A is a high close range candle, commencing a pullback. As


mentioned, our premise is for weakness in any pullback.

Weakness shows in candle B (low close bull candle) through the


upper tail rejection, as it does through candles C to F which all
display variations of range candles. There is no bullish or strong-
bullish sentiment displayed throughout this pullback. Our premise is
intact throughout the pullback, confirming a higher likelihood of
trend continuation than reversal.

If our sentiment analysis was being used to identify entry signals as


well, a stop entry order (sell) could be placed below the low of the
pullback candles.
:
Strength continues in the bearish direction from candle G, once
again confirming our premise of trend continuation downwards.

Candle H (mid close range candle) shows a pause in the downswing.


Candle I is a high close bull candle. While considered bullish on its
own it actually demonstrates a very weak bullish push when taken in
the context of preceding price action. Candle I regained only a small
portion of the previous large red candle. The pullback is still showing
weakness, which continues through range candles J to M, before
again resuming a stronger downwards extension.

Bar by bar analysis of sentiment has confirmed weakness in each


pullback, confirming our premise for continuation of the trend.

This next chart (above) shows a downtrend coming into an area of


higher timeframe support.

Due to the strength of the move towards support my premise was for
a break of the support level, which then fails and reverses into an
uptrend.
:
Candle N (mid close range candle) shows the first pause in the
downswing. This short-term neutral sentiment is expected coming
into support, showing an increase in bullish orderflow. The premise is
still intact, for a continuation lower followed by a breakout failure.
Candle O (high close range candle) provides no new information.
Candle P does however. While a high close range candle displays
bullish-neutral sentiment in the short timeframe, considering the
context we see we have now rejected a test of support on two
occasions. My premise changes tentatively – expecting a test of
support which is unable to breach the level, unless I see some
evidence of bearish strength.

Candles Q, R and S (all range candles) fail to provide any evidence of


bearish strength. The premise remains – a test of support before
rallying upwards.

The rally commences on candle T which shows a high close bull


candle closing above the highs of the last six candles. This is strong
confirmation of bullish sentiment coming off support. Had our bar by
bar analysis been used to identify trade entries, this could be our
trigger.

Now, in both of the above examples, you’ll see that we only looked at
price action in areas of setups. Our new method of bar-by-bar
sentiment analysis not only confirmed our premise but also provided
entry triggers (if you wish to use it in that manner). So far, there’s not
a lot here that can’t be achieved by normal candlestick analysis.
After all, both of the above setup areas can be traded through the
usual candlestick pattern methods. For example, candles B, C and D
in the first pullback of chart one show great shooting star candles &
gravestone doji patterns, which could be used to trigger the move
down. Likewise with the doji and hammer in candle N and P above,
which could trigger the move upwards from support in chart two.
:
However, as discussed in the previous articles, the real benefit of bar
by bar sentiment analysis is that it allows monitoring of sentiment
throughout ALL price action, in order to confirm or alter our premise.

So, let’s see how we can use this sentiment analysis method
elsewhere, away from setup areas.

In the above chart we have a premise of continuation of our trend to


the area of resistance shown via the red dashed line. A resistance
area is expected to hold unless the price action shows evidence of
strength on the move into resistance.

Conduct your own analysis of sentiment, bar by bar, from candle U to


candle V. You’ll note that price following each bull candle was unable
to carry through to close on new highs, forming a range candle on
each occurrence. Bulls are not dominating the bears on this rally.
There is no sign of strength sufficient to break through resistance.
We would therefore be seeking trade opportunity in accordance with
this premise – at a test of the resistance area.

Three short examples will be insufficient to ensure mastery of this


:
form of bar by bar analysis. Experience should be gained through
watching price, initially stepping bar by bar through historical charts,
and later through watching price bar by bar with live data. The use of
a replay function, if available, will speed learning through faster
playback.

Watch price as each bar unfolds…

Determine Candle Pattern Sentiment

Consider the Context

Does it Support Your Premise?

Repeat

Practice will allow you to gain a valuable analysis skill. One which
allows you to remain in sync with the flow of sentiment, feeling the
shifting balance of power between the bulls and the bears, and
ensure you’re ready to strike when you see opportunity in one of
your setup areas.

Lance Beggs
:

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