Getting Started in Chart Patterns (Thomas N. Bulkowski)

Technical Analysis (Charles Kirkpatrick, Julie Dahldust)

Selected by the Market Technicians Association as the principle textbook for its prestigious chartered Market Technician (CMT) program, this book systematically and objectively introduces the entire discipline.

Readers learn to use tested sentiment, momentum indicators, seasonal effects, flow of funds, and many other indicators.

Drawing on key research, the authors reveal which chart patterns and indicators remain the most reliable, demonstrate how to test a system, and show how to use technical analysis to mitigate risk.

"Whether you are a novice or experienced professional, we are confident that you will find this book helpful. For the student new to technical analysis, this book will provide you with the basic knowledge and building blocks to begin a life long study of technical analysis."

"For the more experienced technician, you will find this book to be an indispensable guide, helping you to organize your knowledge, question your assumptions and beliefs, and implement new techniques."

--

CH.1 Introduction to Technical Analysis 

Technical analysis is used in 2 ways: predictive and reactive

CH.2 The Basic Principle of Technical Analysis -The Trend

...

Investing with Volume Analysis (Buff Dormeier, CMT)

According to Dormeier, volume:

validates price, liberates liquidity, substantiates information, reveals convictions, expresses interest and enthusiasm, denotes the disparity of opinions, is the fuel of the market, exposes the truth, volume is the cause, gives rise to velocity, leads price, and interprets price.

Volume also allows you to: uncover trends sooner, validated, interpret, project price, and assess the strength and weakness in both supply and demand.

--

Indicators developed by Dormeier:

-volume weighted moving averages (VWMAs) / VW-MACD

-the volume price confirmation indicator (VPCI)

- VPCI stochastics

-the anti volume stop loss (AVSL)

-the trend thrust indicator (TTI)

-capital weighted volume indexes

--

Pointers from Domeier:

"Fundamental analyst are concerned with how volume is reflected in the price, but can't say "when" to buy."

"Technical analysts study 4 major areas: sentiment, cycles, price, and volume."

"The price chart represents the actions and behavioral patterns of investors -the market's testimony. Price testifies to what investor believe and how strongly they believe it. However, if price is the market's testimony, volume is the market's polygraph."

"If fewer and fewer investors are willing to participate as the stock price continues to rise, then volume contradicts the price movement  In this way, volume substantiates price by measuring the force and extent of investor convictions. When volume increases, it confirms price movements; when volume decreases, it contradicts price movements." 

"Price goes up because demand has surpasses available supply. When available supply outweighs demand, the price must go back down. Volume is the scale weighing these forces of supply & demand that produces price."

"Volume provides valuable information in 2 ways: by indicating price change before it happens, and help technicians interpret the meaning of price change as it happens."

"Volume leads prices, especially when volume reaches high levels. It also accelerates returns."

"Volume interprets price. Prices down't rise because there are more buyers than sellers, or vice versa, but more demand than supply."

"Price and volume are jointly determined through the agreement to trade. B=S=T (buyer's volume = seller's volume = total volume."

"Price is determined by "the net of demand less supply. This is how rising/falling channels are formed."

"Think of volume as the force that drives the market. Force has been defined as a power exerted against support or resistance. To a technician this definition of force is quite revealing."

"an uptrend is simply a supply line that rises during the course of time. A downtrend is simply a falling resistance line. A downtrend is a line of resistance that with time falls even lower. A downtrend indicates that demand is overrun by supply."

--

CH. 4 Volume Analysis

Terminology

-Market Volume: The number of shares exchanged between buyers and sellers during a given period of time, typically a day.

Total Volume: Describes the entire volume of all issues trades on an exchange, such as the NYSE.

Index Volume: The cumulative sum of the volume traded in all of the components of an index, such as the Dow or the S&P 500.

Total Trades: How many transactions occurred within the trading session.

Dollar Volume: The value of all the shares traded over the course of the trading session.

Float: The number of shares owned by the public available for exchange.

Average Volume: Computer as a moving average, which will smooth the peaks and valleys to show a more representative view of typical volume over a predefined period of time. Average volume enables decreasing relative to the past. In short, is the mall fuller this Saturday compared to every Saturday in the past year-or relatively empty?

--



"Volume analysis analyzes volume data to determine the strength of supply and demand by examining the intrinsic relationship between price and volume."

"Volume data is informational in this setting because prices alone do not fully reveal the magnitude of private signals and their precision." 

"Benjamin Graham, the father of value investing and mentor of Warren Buffett, often called the market a "voting machine." If so, then volume is the ballot box. Volume is a literal illustration of the power behind the forces of supply and demand."

--



Volume Validates Price

"The more shares exchange at a given price, the more that volume confirms price. More traders "vote," in the parlance of Graham (above), for that price at that point in time. If fewer investors participate at a given price point, more doubt is casts on the validity of that price."

"Let's say you are looking to buy an item on eBay and found just one seller. How much confidence would you have that the listed price is fair and reasonable? Probably not much. However,  if you found an item listed by a multitude of retailers with tens of thousands of transactions occurring at a similar price, you would reasonably conclude that the price is a good representation of the item's value."

"The more people participating in a price movement  the more the price movement is validated. For the technical trader, volume dictates the quality of the price."



Volume Liberates Liquidity

"Another point from the eBay example; assume that there was only one seller and no buyers  In that case, what is the probability of being able to exchange quickly the item back into cash at about the same price?"

"If volume is low, the odds of selling quickly at a good price are not very good. In the high-volume scenario, though, where many transaction occur in a narrow range of prices, the opposite is true: You can sell it for cash immediately and likely at the same price you bought it."



Volume Substantiates Information

"Volume validates price, but it also contributes to forming price. As new information is disseminated to the public, value reveals the flow of this information. By observing the change in value as information is released, a trader can tell how quickly new facts are absorbed by market participants. In this way, volume substantiates the importance of new information. As volume rises it equates to more emphasis being placed on new information by investors. Similarly, news or information that does not greatly impact volume indicates that the information has little significance to the market."



Volume Reveals Convictions

"The volume of shares traded often reveals the market's true conviction. Let's say you hear that renowned investor has bought a certain stock. Upon learning this, you buy 1,000 shares of the same stock. Later on, though, you learn that the famous investor bought just 100 shares. This should change your view of the security considerably  You expect a wealthy investor to buy 1 million shares -if he or she acted on conviction."



Volume Expresses Interest and Enthusiasm

"Market volume is money searching for a place to reside. Rising volume reveals that investors believe there is a greater interest and enthusiasm  whether on the buying or selling side of a given market. Falling volume shows fewer investors see opportunities, so they stay on the sidelines."



Volume Denotes the Disparity of Opinions

"Trading activity expressed as volume is the empirical evidence that these diverging (longs/shorts) are at work, with each side betting on its own beliefs. The greater the disparity of opinion, the greater  return each side expects to realize from an investment. Thus, a wide divergence in these beliefs shows up as higher volume as the bulls and bears take positions to attempt to profit."



Volume is the Fuel of the Market

"The fuel of the market is provided by new supply (selling) and demand (buying). Volume is a measure of the total supply and demand produced by market participants. In the words of Billy Williams, "Volume is literally the fuel for stock values. Like the space shuttle when it is launched into space, the majority of fuel is spent just to get into orbit. This explosive force of energy to propel the space shuttle into space or new heights requires an above average reserve of the fuel, but then the space shuttle can then use only a small portion of the remaining fuel reserve to carry out the rest of its mission." -volume is to stocks what rocket fuel is to the space shuttle."



Volume Exposes the Truth

"If price is truth, volume keeps price honest. Institutions try to hid their movements, but can't. One way to hide a big trade is to sell at the "offer" or buy at the "bid," the publicly available price of the moment. But volume analysis sees through that trick. If a trade goes through, it must be reported. A significant increase in volume is a clear sign that a big institution is at the table -even if price movement is subdued."



Volume is the Cause

"---the gap between the number of shares offered by sellers versus those bidded on by buyers is the cause of price change."



Volume Gives Rise to Velocity

"Market volume is a quantity that, when increased, tends to produce an acceleration of price direction. Charles Dow, the founder of The Wall Street Journal and namesake of the Dow Jones averages, believed that a high volume indicated a more accurate price and that, in turn, volume actually led price. In short, Dow felt that a substantial increase in volume often preceded significant price movements. Since that simple proclamation more than a century ago, the concept has been validated by a multitude of research studies."

--

CH. 6 Decoding Price with Volume

"The market communicates to us using price and volume. Volume is more important, because it allows us to discern the meaning of price."

"If volume is expanding, then price change demonstrates that the market has the strenth to continue its current course. If volume contracts during price change, a weakening market is expressed, which indicates that investors do not have the will to continue."

--

CH.7 The 4 Phases of Volume Analysis

Phase 1: Strong Demand

"When volume tends to increase during advances, it is a bullish indication." -Harold M. Gartley

Phase 2: Weak Demand

"When volume tends to decrease during price advances, it is bearish." -Harold Gartley

Phase 3: Strong Supply

"When volume tends to increase during price declines, it is a bearish indication." -Harold Gartley

Phase 4: Weak Supply

"When volume tends to decrease during price declines, it is bullish." -Harold Gartley

--

CH.9 Measuring Volume Information

- High-volume movements confirm the trend.

- Low-volume movements contradict the trend.

- Volume declines in consolidation patterns.

- Volume spikes at the onset of a new price trend.

All of these principle assume an analyst can differentiate between normal, low, and high volume. By reading the tape and chart, indications of the tensions between supply and demand can be observed with the naked eye and a trained mind. However, a quantifiable measurement exhibiting those tensions is a more useful tool for analysis. There is a time to get out or tape measure  and likewise, there is a time to turn our general volume principles into indicators with numerical values.

--

Volume indicators are important in 2 ways:

1) They lead price: When indicators make new highs/lows while stock price does not change, volume indicates which direction price will go.

2) They confirm price: Volume should rise in the direction of the trend. If volume falls as a trend matures, the volume divergence is warning the trend may be coming to an end.

--

CH. 10-17 Seven Types of Volume Indicators

1. Pure volume: A volume indicator without any price data

2. Volume accumulation based on interday price change: Volume accumulation based on the price change from daily close to daily close

3. Volume accumulation based on intraday price change: Volume accumulation based on intraday price movements.

4. Volume-price range indicators: Volume analysis based on the price's intraday range

5. Price accumulation based on volume: Price accumulation based upon volume change.

6. Tick volume: Intraday accumulation of trades by each tick of the tape.

7. Volume-adjusted price indicators: Volume-weighted price based on participation

--

1. Pure Volume

Volume
Volume Moving Averages
Volume Oscillators
Volume Bands
Volume Accumulation
Volume at Price
Price: Volume/Crocker Charts

--

2. Volume Accumulation Based on Interday  Price Change

On-Balance Volume

Volume Price Trend

Volume Zone Oscillator

--

3. Volume Accumulation Based on Intraday Price Change

Intraday Intensity Index/Accumulation Distribution

Williams' Variable Accumulation Distribution

Williams' Accumulation Distribution

3.a. Intraday Volume Accumulation Oscillators

Chaikin's Money Flow
Twiggs' Money Flow

--

4. Volume-Price Range Indicators

Market Facilitation Index
Equivolume charts
Ease of Movement

--

5. Price Accumulation Based on Volume

Positive & Negative Volume Indexes

--

6. Tick-Based Volume Indicators

Volume-Weighted Average Price
Money Flow/Tick Volume

--

7. Volume-Adjusted (weighted) Price Indicators

The Money Flow Index
Volume-Weighted Moving Averages
VW-MACD
Trend Thrust Indicator

--

Day Trade Online (Christopher A. Farrell)

   Another must read for the would-be trader. Christopher Farrell draws upon years of experience as a NYSE trade floor specialist by revealing how specialists make money, how to mimic them, and how to keep on the right side of every trade. 

Farrell will teach you how NYSE specialists have been profiting for years by exploiting the bid-ask price,  naive public market-orders, taking the opposite side of bad trades, and manipulating the supply-demand picture to their advantage -"keeping the general public's interest in mind" -all within the means of regulatory. 

According to Farrell, specialists, equipped with better tools, better timing, and better information, -never loose, by trading only when the odds are in their favor.

In Farrell's world, the exchange is a place where common investors and trade floor specialists duke-it-out for profit. A place in order to win, you must first understand the house rules, their strategy, and how to spot them in a trade so you never have to bet against the house.

Here are just a few things Farrell taught me:

Did you know that specialists are required to place your order before theirs? 

-They are, and that's how you can exploit the bid/ask price, too. Just don't let specialists become of aware of your presence, cautions Ferreall, or they'll "pick you off."

Did you know there was a way to find out where specialists are lurking in the stock? 

-It's called the "open book." Due to recent regulations, NYSE specialists are required to record price, volume, and time. You can look up a particular stocks "open book" activity on either the NYSE or the NASDAQ.

Did you know limit orders are a form of negation and can be used as such?

-It can. Instead of paying on the ask price next time, set your order at the bid. 

Trading Station Update

Options for the Beginner and Beyond (Edward Olmstead)

   Okay, so if you're an options trader, or trade options on the side, YOU NEED THIS BOOK IN YOUR TOOLBELT. 

The Arthur, Edward Olmstead, is a very accomplished individual with the brains to prove it. Olmstead is a professor of applied mathematics at McCormick School of Engineering and Applied Sciences at Northwestern University. 

His book is dry and straight to the point. He does a really job of explaining Options fundamentals. Like, what a call option is versus a put option, what it means to buy these types of options and sell them as well. Olmstead is a master of mathematics and handles numbers very well. Through countless examples, Olmstead goes to great length to show you just how each option behaves according to price action, including whether it is smarter to sell an option versus exercising them, how to use/create risk graphs, time decay, vertical spreads (such as bull or bear credit/debit spreads), back spreads, advanced calendar spreads, iron condors, double diagonals, backspreads, butterflies --you name it.

For anyone hoping to become a decent options traders, THIS BOOK IS A MUST READ.

A picture of Olmstead

3 Step Method to Spotting Trend Reversals (from swing-trade-stocks.com)

The three steps are:

1. A trendline is broken.
2. There is a retest and failure.
3. Price falls below the prior low

These three steps define a stock that has moved from an uptrend to a downtrend. Learn these three steps and you will never trade on the wrong side of the trend again.

Let's take these one at a time:

Step 1. A trendline is broken

This chart shows that the trendline has been broken. The trend has not changed yet. Stocks will often break a trendline and then continue to move in the direction of the prevailing trend. At this point we are concerned about the trend - but we do not know if the trend will change.

Step 2. There is a retest and failure

We know that a stock in an uptrend makes higher highs and higher lows. When a stock fails to do this, we should be begin to question the trend. This stock has now tested that prior high - and failed. So, this stock is no longer making higher highs. But, it is not making lower lows either!

So far, there is no confirmation that the trend has changed.

Step 3. Price falls below the prior low

This stock has now fallen below the previous swing low. We now have confirmation that the trend has changed. Why? Because this stock is now making lower highs and lower lows. And that is the definition of a downtrend!

This trend change example shows a stock moving from an uptrend to a downtrend. What about a stock that moves from a downtrend to an uptrend?

It's reversed:

It's official. This stock is now in an uptrend because it is making higher highs and higher lows.

How does this help you as a swing trader?

First, you want to be cautious of swing trading stocks after a trendline break. You can still trade them but watch carefully to see what happens next. If there is a retest and failure, the trend might change. If the trend does change, then you might consider trading it in the opposite direction.

Second, you want to trade stocks that are at the beginning of the trend because these stocks have the most potential for explosive moves.

How do you find these stocks?

You can use a moving average crossover scan to help you find stocks that are at the beginning of a trend. Here is an example:

The 10 period moving average has just crossed down through the 30 period moving average. This stockhas the potential to change from an uptrend to a downtrend. But, we won't have confirmation until we see if it falls below that prior low (rule 3).

Using Trader Vic's 3-step method will help you find winning trades and avoid losing ones.

Memorize it, and you will be able to spot trend changes instantly just by glancing at a stock chart.

Master it, and you'll be able to jump onto a trend...long before the crowd does.

The 5 Most Important Economic Indicators

   Most everyone is trying to get a handle on what's happening with the economy lately. The best way to do that is by looking at economic indicators, a compilation of statistics provided by various government agencies, such as the Census Bureau, the Bureau of Economic Analysis and the Bureau of Labor Statistics.

Economists and investors pore over this data like tea leaves, looking for signs of an economic recovery or slowdown, as the case may be.

The average person may be put off by the statistics, but below we demystify this esoteric information to make it more accessible. We focus on those indicators that measure what consumers are doing. After all, consumer spending accounts for 70 percent of all economic activity. It's the biggest chunk of gross domestic product, or GDP, which is the value of all goods and services produced in the U.S. That means it's watched very carefully.

1. Jobs numbers + employment (first friday of month)

2. Retail sales (second week of month)

3. Personal income and outlays

4. Consumer price index

5. New-home sales

The personal income and outlays report is released about a month following the month surveyed, usually on the last day of the month or the first business day of the next month.

This report measures consumers' income and how much they are saving -- plus, how much they're spending and where they're spending it.

Negative changes in income can indicate that consumers are, or soon will be, spending less. When consumers don't spend, the economy suffers.

In general, high levels of income lead to strong spending, but other trends may be in play. The report can show increases in income with less spending or increases in spending with decreases in income -- obviously a bad sign.

The report tracks spending in some general areas, such as durable goods, nondurable goods and services.

The inclusion of services makes this an important report to follow. Services include such things as hair cuts, airline tickets and financial services.

"Depending on the month, services make up two-thirds of overall consumer spending, so it is a pretty big component," says Bernard Baumohl, author of "The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities."

The personal income and outlays report does come out later than other indicators, so it doesn't generate as much interest as reports released earlier in the reporting cycle, such as the retail sales report.

Retail sales

The retail sales report is released about two weeks after the month surveyed ends.

It measures all the retail sales for the month -- but not only to consumers. The report does include some nonconsumer elements.

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"Building supply stores sell primarily to contractors, not to consumers. Office superstores sell primarily to small business (and) some consumers, but in the retail sales data report they are fully included," says Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

In comparison, the personal income and outlays report includes only consumer spending. The two reports are generally consistent with each other and corroborate findings.

"From an economist's perspective, the consumer spending data is really a better measure of what consumers are buying. But on the other hand, (the personal income and outlays report) comes out two weeks later for the same period. It's just not as high profile an indicator," Hoyt says.

Though the retail sales report does reveal whether consumers are spending or whether that spending is dropping off, the report is subject to large revisions.

Consumer Price Index

The Consumer Price Index, or CPI, is released every month, usually two or three weeks after the month surveyed.

Economists focus on two CPI numbers. One is the overall CPI and the other is the core CPI, which is the overall number minus vital products such as oil and food products, which are excluded because of their price volatility.

"The Consumer Price Index is basically an attempt to measure consumer prices. It is a fixed basket of goods and, at least on a conceptual level, they go and measure the price of those goods and see how it changes," Hoyt says.

The CPI is used as a measure of inflation.

"If you're getting only a 5 percent increase in your pay in a year and because of inflation the prices of the goods that you buy went up 5 percent, you're really not making any more money," says Baumohl.

"Your purchasing power hasn't changed at all," he says.

New-home sales

The new-residential-sales report is released three or four weeks following the month surveyed.

New home sales have a bigger impact on GDP than do existing home sales, even though sales of new homes make up only 15 percent of the entire housing industry -- even less than that for 2008. New home sales accounted for less than 10 percent of all sales last year, according to data from the National Association of Realtors' existing home sales report and the new residential sales report released by the U.S. Census Bureau.

"There is a lot more spending (by business) that goes on ... when you construct a new home rather than selling an existing home, where you simply switch titles. We get much more of a bang for the buck," Baumohl says.

"The new-housing market makes up about 5 percent of the GDP. That doesn't sound like much, but we're talking about all of the components that go into building a home: copper, wood, gravel (and) workers, all that together makes up 5 percent," he says.

When you consider all the buying that people do before they move into their new homes -- furniture, appliances and electronics, for instance -- all of that spending activity increases the new-home market to about 25 percent of the GDP according to author Baumohl.

Employment situation

A big daddy of economic reports is the employment report. It is released on the first Friday of the month following the month surveyed.

The employment report actually comprises a couple of different surveys. One is the household survey in which households are called and asked questions about their employment status.

"They ask them whether or not they are employed or whether or not they are in the work force. That means: Do they have a job or are they looking? (Are they) a student or someone who is retired -- or are they someone who has just given up looking for a job?" Hoyt says.

"From that data you derive the unemployment rate," he says.

The unemployment rate doesn't always tell the whole picture. Not included in the headline number are those unemployed workers who have given up trying to find a job and those who are working part time because they can't find a full-time position.

The other component is the establishment survey which asks businesses how many people are on their payrolls.

Though the household survey provides the headline-grabbing unemployment rate, investors and economists look toward the establishment survey to get a more comprehensive view of the economy and industry.

"The headline that economists focus on the most is the overall nonfarm payroll. It's derived from the establishment survey," says Rick MacDonald, director of investment research and analysis at Action Economics.

"Every month, the Bureau of Labor Statistics gets a report from employers and they actually say how many people were added or subtracted from their payroll," he says.

The number can be broken down from the total to various industries.

Beyond the sound-bite-ready headline number and nonfarm payrolls statistic, there are pages and pages of numbers. According to Baumohl, the real value lies in these data.

For instance, temporary employment agency statistics are buried within the employment report.

"They will turn up almost instantly once the economy recovers, long before anyone knows if the economy is recovering or not. Usually it is the temporary employment agencies that start to see an immediate increase in hiring," Baumohl says.

For anyone with an interest in the economy or investing, getting to know some of the economic reports can be illuminating.

"Frankly if you are an investor and you make the effort, chances (are) you will make the right decision more than 50 percent of the time," says Baumohl. "And if you make the right choices more than 50 percent of the time, then you're doing it correctly."

My 7-Star Winning Trading Strategy (the JG-7)

   Picking a winning stock is crucial to winning. My 7 star stock picking strategy offers a layered approach to picking a stock. As you shop for stocks, apply the 7 criteria. For each of the criteria met while analyzing stock metrics, apply a star. Obviously, the more stars the merrier!

1)    Is daily volume up over positive price change?

2)    Is OBV trending upward?
(fairly straight rising diagonal line?)

3)    Has volume moved above 20 day MA?

4)    Does SAR indicate positive price positioning?

5)   Is daily volume at least 200k+?

6)   Is stock gaining on or beating daily average volume?

7)   Is stock trending upward?
If in consolidation/sideways pattern,
has price history moved below/above current price at least twice?

Rationale:

It’s an obvious indication a stock is gaining momentum when its share price rises. Using this basic criteria for finding stock candidates should help narrow the playing field straight out the door.

Volume is without question the most valuable indicator of a stock’s performance. Volume alone, however, says little about the direction of a stock’s price. If volume increase or decreases, it says nothing about how much of that volume was derived from buying or selling. OBV, however, subtracts buying from selling to give you an idea as to whether or not the stock is being bought or sold.  OBV is an invaluable indicator, showing you the direction of price.

If volume breaks through recent moving averages, it’s a good indication there is much interest in the stock. Be sure to assess whether or not the moving average was broken based on positive price movement. If price moves down on high-than-usual volume, that’s a sign the stock is failing.

Watch the SAR closely, studying recent price performance in conjunction with trend continuations/reversals to gauge whether or not the stock is aligning for a positive/negative alignment.

If a stock price was moved below or above the current price at least 2 times in history, it is a good indicator that the stock and underlying sentiment towards the stock is resilient. History has a way of repeating itself.

Ensuring the stock has traded on or above at least 200k shares a day covers the fluency of your entrance/exit of a stock, reduces volatility, and rapid price decreases.

Never trade into a down-trend. Look for stocks poised with an upward bias. This seems simple enough, but way too easy to forget!

The 100 Best Exchange Traded ETFs You Can Buy 2012. (Peter Sander, Scott Bobo)

  The very fact one of the author's last name is "Bobo" should have been a warning, but optimist me took the bait anyway. While I can't say much of this book in terms of good financial advice (nor literary prose), it did give what it thought were a list of the best 100 ETF choices based on some pretty reasonable criteria, nice text-book introduction to ETFs, including transparent rationale. Be advised, though, the authors rationale for their ETF picks seemed to be geared only towards those who wish to go long on their positions, create a foundational investment for their portfolio, and hedge against risk.

I'd still recommend to anyone wanting to use ETFs more opportunistically, or anyone else wanting to get into ETFs to just cut to the chase by visiting the ETF Database:  http://etfdb.com/

The ETF database offers quick accessible information on ETFs including; definitions, functions, aim, and performance metrics.

Where I Work When I'm Not At Work

A BEGINNER'S GUIDE TO SHORT TERM TRADING, 2nd Ed. (Toni Turner)

   This book was a nice trip back to the basics. Solid practice and solid theory behind a lot of Turner's trading advice. I actually wish I had read this book when I was starting out (but I guess they didn't have it back then). Had I, I may have just skipped using OHLC/bar charts altogether. Toni loves candlesticks sand shares her favorite patterns in this book, and that's what I'm going to put here. A few patterns, backed by graphs in the book to hit-them-home. -Enjoy!

SINGLE CANDLE PATTERNS

DOJI

-bears & bulls in deadlock.

-reveals indecision

-usually indicates a shift, or reversal

HAMMER

-may signify downtrend is coming to an end

HANGING MAN

-could signal uptrend is over, but need to verify with following candle

TWO STICK CANDLE PATTERNS

BULLISH ENGULFING PATTERN

BEARISH ENGULFING PATTERN

DARK CLOUD COVER

-appears at top of uptrend

-opens above close of first, then closes low deep in first candle

-indicates a storm is brewing

-opens below, then closes at least half over previous candle

-the greater the second pierces the first, the greater the chance it's a strong reversal

THREE STICK CANDLE PATTERNS

MORNING STAR

EVENING STAR

MORNING DOJI STAR

EVENING DOJI STAR

-Star patterns represent strong and valuable reversal warnings.

-Knowing how to identify strong reversal patterns in the making not only alerts us to potential setups for entries; they also offer efficient profit-taking signals. Because if you are long a stock, and you see a reversal pattern forming that indicates the stock may make a U-turn soon, you can grab your gains quickly, while buyers are keeping the price aloft.

-to qualify for "star" billing, the candlestick should appear at the top (or bottom) of an uptrend (or downtrend), have a short real body, and gap away (open higher in uptrend, or lower in downtrend) from the previous candlestick.

-The co-stars: in the context of an uptrend, the first real body should be long and clear. The third real body should be long and dark, penetrating the real body of the first candle. In a downtrend, the first real body is long and dark; the star appears next. Finally the first real body moves up, well into the first dark real body.

-The Japanese call the first star and evening star and the second a morning star. When the star emerges as a doji, it's an even more powerful warning that a reversal may be impending.

PATTERNS OF INDECISION

NOTES OF CANDLESTICK PATTERNS

-Traditionally, the doji opens and closes at the same price. But if you spot a "near-doji," where the prices are within a few decimal points of each other, it's still a significant signal.

-A doji that appears in a sideways consolidation move, accompanied by other doji and short real bodies, is not a powerful beacon of change. These candles must appear at the top or bottom of a price pattern to emit a strong reversal signal.

-Doji can be viewed as more powerful at stock/market tops, rather than bottoms. This holds especially true when preceded by a long clear candle, such as in the doji evening star pattern. Think: Long, clear real body equals strong bullish opinion. Then, a doji develops. Doji equals indecision by market players to pay a higher price. Result? Possible pullback or profit-taking may soon follow.

-Doji than confirm trend tops or bottoms many times turn into support or resistance areas.

-When a stock in a an uptrend pulls back to support and then forms a doji, it indicates the stock may be ready to turn and resume its uptrend. The same is true of a stock in a downtrend; a rebound to resistance, followed by the formation of a doji, may indicate the stock will drop back to the downside. Notice the operative word here is may. Always wait for the next candle to confirm price direction. 

EXAMPLES