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Terms of the Trade


CANDLESTICK TERMS

REAL BODY


The real body is the 2-dimensional rectangle made by the difference between the open and close of the trading day. The real body will be white on days that the stock closes higher than it opens, and black on days that it closes lower than it opens.


UPPER AND LOWER SHADOWS


The upper shadow is the vertical line drawn from the top of the candlestick's real body to the day's high. The lower shadow is the vertical line drawn from the bottom of the candlestick's real body to the day's low.


SPECIAL CANDLESTICKS

LONG DAY


A candlestick that has a long day is one in which there has been a big difference in opening and closing price compared with typical trading days in the previous five to ten days.


SHORT DAY


A candlestick that has a short day is one in which there has been a small difference in opening and closing price compared with typical trading days in the previous five to ten days.


MARUBOZU


A marubozu candlestick is one that exhibits no (or very little) upper or lower shadow. For a white candlestick this means that its open is equal to its low, and its close is equal to its high. For a black candlestick it means that its open is equal to its high, and its close is equal to its low.


SPINNING TOP


A spinning top is candlestick with a small real body and long upper and lower shadows.


DOJI


A doji is the most extreme case of a spinning top. It occurs when the real body exists as a line (when the day's open and close are the same). A long legged doji has long upper and lower shadows. A gravestone doji has a long upper shadow and no lower shadow. A dragonfly doji has no upper shadow and a long lower shadow. And a four price doji has no upper or lower shadows (the open, high, low, and close are the same).


STAR


A star is a small real body that gaps above or below a long candlestick occurring the previous day.


UMBRELLA and INVERTED UMBRELLA


An umbrella is similar to a dragonfly doji: a small real body with no upper shadow and a long lower shadow. An inverted umbrella is similar to a gravestone doji: a small real body with a long upper shadow and no lower shadow.



ANALYSIS TERMS

INDICATOR


An indicator is a group of candlesticks (as many as five or as few as one) that meet a set of predetermined criteria. These criteria may include prior trend, real body and/or shadow length, long and short days, opening and closing gaps, etc. Associated with each indicator are a trend (bullish or bearish) and a pattern (reversal or continuation) that should ensue for the short-term.


TREND


The term trend is used to sum up the general movement of a stock's value over a period of time. If a stock's price is generally increasing over a short period of time it is said to be in a bullish trend. If a stock's price is generally decreasing over a short period of time it is said to be in a bearish trend.

In candlestick charting the previous trend is used as a criteria for identifying most indicators. The method we employ is the Three Line Break graph; a technique that is well-suited to candlestick charting.


PATTERN


When an indicator is identified, a pattern is associated with it. This pattern could be a Continuation pattern, meaning that if a stock is in a bullish trend it should continue to stay bullish, or if a stock is in a bearish trend it should continue to stay bearish. If the pattern is a Reversal pattern, it means that if a stock is currently bullish it likely to turn bearish, or if it is bearish it is likely to turn bullish


RELIABILITY


Reliability is a term we use to loosely classify how adequate indicators are at determining the short-term future of an investment. Some indicators are, of course, more decisive than others (the indicators that take a three or more days develop or those that have strong candlesticks, such as stars or marubozus tend to have a higher rate of success). We have segregated indicators by High, Moderate, and Low reliability's based on their success rates on historical market data.

 

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