Stocks & Commodities V. 20:2 (65-69): Candlesticks Vs.
Bar Charts by Rudy Teseo
CANDLESTICK CORNER
Candlesticks
VS
Bar Charts
When you look at your charts,
do you understand everything
they’re telling you?
by Rudy Teseo
M ost books and articles on
candlestick charting point out that
any patterns occurring in bar
charts (cup with handle, head and shoulder,
triangle, and so forth) are also identifiable in
candlestick charts. The reverse is also true:
Any pattern that can be identified in
candlestick charts can be seen in bar charts
(Figure 1). However, traditional technical
analysis references do not illustrate nor
High High
Close Open
Open Close
Low Low
BULLISH BEARISH
Figure 1: Candlesticks vs. bars.
Copyright © Technical Analysis Inc. [Link]
Stocks & Commodities V. 20:2 (65-69): Candlesticks Vs. Bar Charts by Rudy Teseo
CANDLESTICK/ OHLC CONVERSION
BULLISH ENGULFING PATTERN
At first glance it may look like an outside day, but that is misleading.
In a bar chart outside day, the range of the second day exceeds the
range of the first day. In the candle pattern, only the range of the
open/close is relevant. This is a very bullish pattern and often needs
no confirmation. It follows a downtrend and signifies the beginning of
a reversal.
BEARISH ENGULFING PATTERN
This is the bearish counterpart of the bullish engulfing pattern.
Occurring in an uptrend, it forecasts a bearish reversal.
BULLISH MORNING STAR
This is another bullish reversal pattern. Following a downtrend, the
star (second day) indicates a potential bottom; therefore, a bullish
reversal. If the star is a doji (see below), this becomes a more signifi-
cant pattern. The third-day open bar confirms the reversal. A gap
before and after the star is a more bullish pattern.
BEARISH EVENING STAR
This is the bearish counterpart of the morning star. Following an
uptrend, it forecasts a bearish reversal. The same comment applies if
the second day is a doji and if there are gaps.
BULLISH PIERCING LINE
Another bullish reversal pattern. The second day opens lower than
the previous day’s low but closes above the midpoint of the previous
day’s open/close range. This is one of the few patterns that uses the
high/low range rather than the close/open range.
BEARISH DARK CLOUD COVER
This is the bearish counterpart of the piercing line. The second day
opens above the previous day’s high but closes below the midpoint of
the previous day’s open/close range. This pattern also uses the high/
low range.
DOJI
This pattern is the same in both systems. It denotes indecision — a
possible turning point. The stock opens, then may have a wide or
narrow range above or below the open, then closes at the open price.
It can, therefore, be bullish or bearish, depending on whether it occurs
in an uptrend (bearish) or a downtrend (bullish). A double doji (two
adjacent dojis) implies a very forceful breakout following the indecision.
Figure 2: Table of bar/candlestick conversion.
Copyright © Technical Analysis Inc. [Link]
Stocks & Commodities V. 20:2 (65-69): Candlesticks Vs. Bar Charts by Rudy Teseo
Hanging Bearish
Man
Engulfing A rose is a rose is
Doji
a rose, and a bullish
Evening
Star harami is a bullish
Bullish Morning
A
Engulfing Star harami, whether
Doji you’re looking at a
Doji
candlestick chart or
C D
a bar chart.
B
explain candlestick patterns,
although they go into great detail
on bar pattern analysis.
Mind you, I’m not trying to talk
you into switching entirely to
candlesticks. But I would like to
Figure
gure 3: Candlesticks with patterns labeled. suggest that a limited study of
selected candlesticks and their
Hanging
Bearish corresponding bar charts will make
Engulfing
Man you aware of patterns that you’ve
Doji seen but not attached any importance
Evening to. A rose is a rose is a rose, and a
Star
A Bullish
Morning
bullish harami† is a bullish harami,
Engulfing
Star whether you’re looking at a
Doji candlestick chart or a bar chart. But
Doji
since standard bar chart–oriented
D texts do not illustrate or explain these
C
B patterns, it’s unlikely you would
recognize them.
As a bar chart user, you are
familiar with key reversals, inside
and outside days, isolated highs and
lows, and many other common
patterns touted in general technical
analysis books and magazine
Figure 4: Bar chart version. Can you see the similarities? articles. But there are other, equally
important patterns you should
consider adding to your repertoire.
(I’m speaking here of patterns made
up of two, three, or four individual
bars — not flags, pennants, triangles,
and the like.)
ACTION IN GRAPHIC FORM
A candlestick is merely a different
form of graphic representation of the
day’s stock price action.
Candlesticks and bars both portray
the open-high-low-close (OHLC) of
the stock’s price, as can be seen in
the sidebar, “Candlestick/O HLC
conversion.” One of the most
significant reversal candlestick
patterns is the doji. It looks the same
Figure 5: Try it.
Copyright © Technical Analysis Inc. [Link]
Stocks & Commodities V. 20:2 (65-69): Candlesticks Vs. Bar Charts by Rudy Teseo
Try to forecast A Bearish
Engulfing
what’s about to Dark
Cloud
happen. Would you D
buy? Would you sell? C
Evening
in both systems because it is merely a Star
cross, meaning the open and close of the
day were the same. This is an indication
of indecision and, therefore, a forewarning
B
of a possible reversal of the current trend.
Morning
You’ve probably seen it many times Star
without realizing its significance, since it
isn’t usually covered in your traditional
textbook on technical analysis.
Figure 2 shows the corresponding bar Figure 6: How did you do?
patterns of several candlesticks. The brief
analysis explains what each pattern is
A Bearish
trying to tell us. There are approximately Engulfing
65 recognized candlestick patterns, Dark
roughly 75% reversal patterns and 25% Cloud
continuation patterns. I’ve only shown the D
most popular here, those that are always C
included in magazine articles or book Evening
appendices (as a rule merely introductions Star
to the candlestick method). Make a copy
of Figure 2 and refer to it as you analyze
your charts. See if these new patterns tell
you a different story than you would have B
Morning
come up with if you had ignored them. If Star
you find this exercise worthwhile, see the
suggested readings for complete
coverage of all the candlestick patterns.
To illustrate that candlestick patterns
Figure 7: Did you find candlestick charts easier to use than bar charts?
exist even if you’re looking at bar patterns,
Figure 3 displays a candlestick chart with
the patterns identified. Figure 4 is the same chart, but with and then slowly move it to the right, exposing the bars one by
bars replacing the candlesticks. At Figure 3 point A, a bearish one to simulate daily updating. Try to forecast what’s about to
engulfing pattern emerges immediately after a hanging man, happen. Would you buy? Would you sell? When you’re
which is another bearish reversal. A minor downturn follows. finished, refer to Figures 6 and 7 to see how you did.
At point B, a bullish engulfing pattern signals a possible upturn, There is one danger if you follow these suggestions: you
which then occurs. Shortly into the upturn we find an evening may become a candlestick convert.
star at point C, which is followed by a downturn. The next
pattern, at point D, is a morning star where the star is a doji Rudy Teseo is a retired communications and computer con-
and, as expected, another upturn is soon under way. sultant. He has also taught courses in investing, technical
After studying Figures 2 and 4, see if you can identify any analysis, and options trading.
of these candlestick patterns in Figure 5.
Of course, the patterns will not look exactly like those in SUGGESTED READING
Figure 2 because of the different ranges of the bars in Figure Morris, Gregory L. [1995]. Candlestick Charting
4. However, the relationship of the open and close ticks will Explained: Timeless Techniques For Trading Stocks And
be the same, and that is what defines patterns. Perhaps the Futures, McGraw-Hill.
up and down movement of the price bars will give you a Nison, Steve [1991]. Japanese Candlestick Charting
clue as to the type of pattern you would expect to find. To Techniques, New York Institute of Finance/Simon &
test yourself, place a sheet of opaque paper over the graph Schuster.
S&C
Copyright © Technical Analysis Inc. [Link]
Article copyright 2012 by Technical Analysis Inc. Reprinted from the February 2012 issue with permission
from Stocks & Commodities Magazine.
The statements and opinions expressed in this article are those of the author. Fidelity Investments
cannot guarantee the accuracy or completeness of any statements or data.
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