Average Directional Index (ADX) About: The Average Directional Index (ADX), Minus Directional Indicator (-DI) and Directional Indicator (+DI) represent a group of directional movement indicators that ..
As mentioned earlier, one of the key assumptions in technical analysis is that we rely on the fact that history tends to repeats itself. This probably is one of the most important assumptions in Technical Analysis.
It would make sense to explore this assumption in greater detail at this juncture as candlestick patterns are heavily dependent on it.
Assume today, the 7th of July 2014 few things are happening in a particular stock. Let us call this factor:
With these factors playing in the background, let us assume that on the next day (8th July 2014) the fall in stock gets arrested and the stock rallies towards a positive close. So, as an outcome of the 3 factors, the stock went up on the 6th day.
Time passes and let’s says after a few months, the same set of factors is observed for 5 consecutive trading sessions. What would you expect for the 6th day?
According to the assumption – History tends to repeat itself. However, we need to make an addendum to this assumption. When a set of factors that have panned out in the past tends to repeat itself in the future, we expect the same outcome to occur, as was observed in the past, provided the factors are the same.
Therefore, based on this assumption, we can expect the stock price to go up on the 6th trading session even this time around.
The candlesticks are used to identify trading patterns. Patterns, in turn, help the technical analyst to set up a trade. The patterns are formed by grouping two or more candles in a certain sequence. However, sometimes powerful trading signals can be identified by just a single candlestick pattern.
Hence, candlesticks can be broken down into single candlestick pattern and multiple candlestick patterns.
Under the single candlestick pattern, we will be learning the following…
Multiple candlestick patterns are a combination of multiple candles. Under the multiple candlestick patterns, we will learn the following:
Of course, you must be wondering what these names mean. As I had mentioned in the previous chapter, some of the patterns retain the original Japanese name.
Candlestick patterns help the trader develop a complete point of view. Each pattern comes with an in-built risk mechanism. Candlesticks give an insight into both entry and stop-loss price.
Before we jump in and start learning about the patterns, there are few more assumptions that we need to keep in mind. These assumptions are specific to candlesticks. Do pay a lot of attention to these assumptions as we will keep referring back to these assumptions quite often later.
At this stage, these assumptions may not be obvious to you. I will explain them in greater detail as and when we proceed. However, do keep these assumptions in the back of your mind:
In the next chapter, we will begin by learning about single candlestick patterns.
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