If candlestick is having longer tail on one side, it depicts buying or selling pressure more from one side. So here also we require to confirm the trend.
Sometimes candlestick may give false signals which also should be verified.
All these conditions can be reaffirmed by coupling candlestick with modern indicators. If candlestick coupled with Indicators it can give more accurate buy & sell signal (entry & exit).
So we will couple candlestick with one indicator at a time & see how buy & sell signals are created.
Spining top coupled with stochastic -
This is more frequently occurring & reliable trend-changer candlestick when stochastic is overbought (80 or above) & oversold (20 or below) condition.
All the examples studied here are from real Indian stock market. It doesn't matter which stock market is, idea remains same everywhere.
The stochastic used in all the examples is 14-day stochastic.
The above graph is of Titan company dec-2018.
Observe the graph. Look at the vertical line. The stochastic is in overbought condition.look above in the price chart. Spining top is just above when stochastic is overbought.
If stochastic is in overbought region & spining top (trend-changer candlestick) is appearing at the same time it indicates trend change. It indicates the uptrend has come to an end or if not trend is going to correct at least for one candle. Hence the next candle should be black(red).
Spining top may be red or green & appear at both the ends.
If the candle opens above the previous close & stochastic is 80 or above the possibility that the next candle is going to be red is more.
The next candle to vertical line appearing red. It confirms when stochastic is overbought & spining top appears the next candle may be red.
But again, observe the same candle, it is a spining top. But it opens below the previous close & red. Next to this candle a small green candle.
Try to understand what is trendchanger candle. It has nothing to do with ongoing trend.
Observe so many candlestick charts as possible & you will get this idea perfect.
The above chart ofAxis bank june-2014 spining top before stochastic line(red) approaching 20.The signal line just reached the oversold region & spining top, trendchanger candle appeared. Look at the vertical line. The candle is red spining top, stochastic near to 20& see the next candle. It is green proving trend change.
Don't trade in overbought or oversold condition -
In the above chart, the stochastic remained in overbought conditions over a longer period & then a spining top appeared. But it could not reverse the trend. See the next to vertical line it is strongly bullish. Here our theory failed. So it is advised not to trade by this method in prolonged overbought & oversold condition.
Wait for stochastic to freshly enter into oversold or overbought region. If trendchanger candle appears at the same time, it is the time to take trade.
Don't trade in between overbought or oversold condition (20-80) -
Candlestick act as trendchanger candle under certain conditions & that condition is overbought or oversold condition.
If anybody expect trend change everywhere (within range 20-80),it is not possible all the time.Trendchanger candle appearing in between the range may or may not appear as trendchager depending on certain conditions like market abrupt rise or fall or any good or bad news about the stock etc. So it is advised not to trade in between the range 20-80.
If we observe the above chart the red spining top appearing in between the trend. The next candle is green but just like doji & trend continues upward.
See to the right of vertical line. When stochastic becomes oversold the red spining top appears above in the price chart & see the next candle. It is red.
Inverted hammer coupled with stochastic -
This is the ideal chart of inverted hammer showing trend change. The chart above is of Pfizer ltd. Mar-2019.
The stochastic & signal line both falling to oversold level. When both the lines intersects each other just above 20-level,inverted hammer is formed in the price chart.
See the vertical line. The intersection of signal line (white line) & stochastic line (red line) near oversold region & inverted hammer occurring above in the price chart. See the next candle, it is green proving trend change.
If you look right to vertical line, when stochastic becomes overbought & again signal line & stochastic line intersect spining top occurred. After this trendchanger candle a prominent red candle occurred.
Shooting star coupled with stochastic
Apollo tyre chart at jan-2020 is shown above.
It shows the stage of overbought for some candles. If you closely observe when stochastic falling back from 80 ,at the same time shooting star appeared in the price chart. Look at the next candle,right side to vertical line, it is red candle.
Here signal line & stochastic line looking overlapping to each other but the trendchanger candle (shooting star) tells in advance the preceding trend is going to reverse in next candle.
Dragonfly doji coupled with stochastic -
Actually it is the candle showing bullish reversal. The candle appearing next to it may be small but green.
The chart of shown above has dragonfly doji in price chart at vertical line.
Stochastic line is above signal line but near 20.The signal line below stochastic line indicates downtrend.
At this stage dragonfly doji appears & predicts trend reversal in advance even when signal line is below the stochastic line.
The next candle to vertical line is small but green.
If dragonfly doji appears at or nearby 20,it indicates a bullish trend reversal is going to happen.
So friends, what should be the strategy for trading? Any guess?
I am going to tell my strategy at the end of next article.
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