Karma Trades

What is it?

It's a momentum indicator that tracks the relationship between volume and price. It is often considered a leading indicator because it shows when a stock is being accumulated or distributed, foreshadowing major price moves. Again, volume precedes price.

How is it calculated?

The indicator has a three step calculation:

How to use it?

This indicator is mainly used to confirm trends or spot potencial trend weakness & reversal when there is a divergence with the price trend.

























Unlike the OBV, the Accum/Dist Line takes into account each individual period, giving it a different value based on if it cloed near its highs or near its lows. This means that a slightly red hammer day, won't affect the line the same way as a long red candle would, thus allowing to track the volume more accuratetly than the OBV.

What is it?

The On Balance Volume indicator or OBV, is an indicator that focuses on the importance of volume and how it can affect a give prince and asset's momentum. OBV is based on the idea tha volume precedes price, so if a security is seein an increasing OBV it is a signal that volume is increasing during the upward price moves; when it decreases, it means the opposite, volume is increasing on the down days. 

How is it calculated?

The OBV is simply a running total of positive and negative volume during any given period.

If the closing price is above the prior close price then: 
Current OBV = Previous OBV + Current Volume

If the closing price is below the prior close price then: 
Current OBV = Previous OBV  -  Current Volume

If the closing prices equals the prior close price then:
Current OBV = Previous OBV (no change)

How to use it?

The value of the OBV line is not important, what it's important is the characteristics of the line. Firstly, the most important is the trend, this will help us find out in which direction the volume is flowing.
























If we are following a trend, we would like to see the OBV moving in the same direction of the trend. That means that the trend is being supported by volume.


Another use of the OBV is to look for divergencies. When the OBV stops going higher or even begins to trend downwards while a security price is still going up, that is s sign that the existing trend is weakening and may reverse.



An example of a bullish divergence. Notice how the OBV started to trend up before the price did.


The on-balance volume measure is one of the least complex volume indicators that try to measure price and volume together. While there are more complex indicators, it is the ease of understanding and use that make this volume indicator so popular.

What is it?

How is it calculated?

%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100
%D = 3-day SMA of %K

Lowest Low = lowest low for the look-back period
Highest High = highest high for the look-back period
%K is multiplied by 100 to move the decimal point two places

How to use it?

Just like the RSI, the stochastic oscilator can also be used to identify oversold and overbought market conditions.When the stochastic is above 80, it is considered to be overbought; when it is below 20, it is considered to be oversold.

Variants

There are 2 main variants of the stochastic oscillator: The Fast & Slow Stochastic.
 
Fast Stochastic Oscillator: This is the basic formula explained above.

• Fast %K = %K basic calculation
• Fast %D = 3-period SMA of Fast %K

Slow Stochastic Oscillator: This form of the stochastic is used to further smooth both the %K and %D lines, reducing the number of false signals.

• Slow %K = Fast %K smoothed with 3-period SMA
• Slow %D = 3-period SMA of Slow %K

Comparisons and Contrasts with the RSI

While they are similar and also have similar goals, the way that each of these momentum indicators are calculated makes them better suited for different situations.

The RSI takes the last "n" periods and divides the gross positive changes per period by the gross negative changes. This means that the more often prices move higher in that "n" period span and the greater those changes become, the higher the RSI value.

A Stochastic is the measurement of the placement of a current price within a recent trading range. The theory is that as prices rise, closes tend to occur nearer to the high end of their recent range. When prices trend higher and closes begin to sag within the range it signals internal market weakness.

Simply stated, the Relative Strength Index yields the most meaningful results in trending markets while Stochastics work best in flat or choppy markets. The RSI, as mentioned, helps determine when a price has moved too far too fast. This implies a trending market. Stochastics help determine when a price has moved to the top or bottom of a trading range, which implies a non-trending (flat or choppy) market.

What is it?

Volume is a very simple indicator but also a very powerful one if used correctly. It is a measure of how many shares of contracts of any given financial asset has been trader in a given period of time.

How is it calculated?

Volume is just a count for al the shares that were traded that day. If a buyer of a stock purchases 100 shares from a seller, then the volume for that period increases by 100 shares based on that transaction.

How to use it?

Volume is usually seen as an histogram at the bottom of a price chart. Each bar represents the volume of each period.

Volume is used to measure the worth of a market move. If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move.

Volume in Trends 

In a rising market volume should be also increasing. This means that the market is finding new buyers to sustain the trend. Increasing price and decreasing volume show lack of interest and this is a warning of a potential reversal. 





















This can be hard to wrap your mind around, but the simple fact is that a price drop (or rise) on little volume is not a strong signal. A price drop (or rise) on large volume is a stronger signal that something in the stock has fundamentally changed.


Exhaustion Moves and Volume

In a rising or falling market we can see exhaustion moves. These are generally sharp moves in price combined with also a sharp increase in volume. Exhaustion moves usually signal the potencial end of a trend.





















Participants who waited and are afraid of missing more of the move pile in at market tops, exhausting the number of buyers. At a market bottom, falling prices eventually force out large numbers of traders, resulting in volatility and increased volume.

Volume and Price Reversals

After a long price move higher or lower, if price begins to range with little price movement and heavy volume, often it indicates a reversal.


Volume and Breakouts Vs. False Breakouts

On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout indicates lack of interest and a higher probability for a false breakout.



Volume Indicators
 
There are many volume-based indicators that add other perpectives about how to interpret volume. I'll cover those in further posts.

What is it?

The Relative Strenght Index or RSI is a momentum indicator that compares the magnitude of recent gains to recent losses in order to determine overbought and oversold conditions.

How is it calculated?

RSI = 100 - 100/(1 + RS*)
*Where RS = Average of x days' up closes / Average of x days' down closes.

How to use it:

The RSI is an oscilator and as such, it has upper and lower limits.
When th RSI goes above 70 it is considered overbought, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise when it goes below 30 it is considered oversold and therefore it's likely to be undervalued.





















One important thing to consider is that just because a stock is oversold or overbought it means that it is a buy or a sell respectively. Any asset can stay oversold or overbought for extended periods of time. It is much better to either buy when the stock is coming out of oversold and sell when it's coming out of overbought.

Treat the RSI just as what it is, an indicator. While an oversold stock is more likely to bounce, it doesn't mean that it HAS to do it soon. Likewise an overbought stock doesn't always has to pullback soon.

One thing you need to realize, is that by choosing to become a trader, you have just choosed to try another career; and as in any other career you will have to get good education in order to succeed.
Many times, traders (me included) begun by checking out some stock tips, random strategies and random tips that they found on the internet, or worse, by getting involved in a promoted, pumped & dumped stock.

When I had the realization that stock trading is very much a career on its own, I decided to focus on learning:

• Learn all about technical analysis: Support&Resistance, Trendlines, Indicators, etc. 
• Learn at least the basic of fundamental analysis.
• Learn strategies from real succesful traders.
• Learn about trade & money management.
• Learn about emotional control. Trust me, you will need it.

Finally, discover what trading style suits you best. You like fast action and are quite impacient? Try out daytrading; Do you prefer playing stocks that take a couple of days to move? maybe swing trading is for you; You are incredibly pacient and recon the opportunities of big wins on the long term? Well, then you could do really well with position trading.

Of course, after education there is the second part that is practice. But as I said, as in any other career, begin by getting quality education and then test yourself and improve your skills upon what you have already learned.

To finish, I would like to share with you this 2 videos from ClayTrader. He regularly makes "Stock Trading Quick Tips" videos regularly and this 2 relate to education with very clear examples. Enjoy!

Candlesticks are a great method to plot a chart, but there's another way to plot those candles.
It is called the Heikin Ashi Technique. This charting method uses the same principles of traditional candlesticks, but it changes the open,high,low and closing values of the candlestick.

New Values:

Close = (Open+High+Low+Close)/4 = Average price of the current bar
Open = [Open (previous bar) + Close (previous bar)]/2 = Midpoint of the previous bar
High  = Max (High,Open,Close) = Highest value in the set
Low   = Min (Low,Open, Close) = Lowest value in the set

Heikin Ashi means "Average Bar" in Japanese. But what's the point of using a candlestick that has averaged values? Well most profits (and losses) are generated when markets are trending, so predicting trends correctly can be extremely helpful. The Heikin-Ashi techniqueis one of many techniques that, used in conjunction with candlestick charts, can improve the isolation of trends and to predict future prices.

Constructing the Chart

The Heikin-Ashi chart is constructed like a regular candlestick chart (except with the new values above). The time series is defined by the user--depending on the type of chart desired (daily, hourly, etc.). The down days are represented by filled bars, while the up days are represented by empty bars. Finally, all of the same candlestick patterns apply.

Patterns

Just as with traditional candlesticks, each candle tells a story. With Hikin Ashi charts, the patterns can be reduced to three:

• Hollow candles with no lower "shadows" indicate a strong uptrend: let your profits ride!
• Hollow candles signify an uptrend: you might want to add to your long position, and exit short positions.
• One candle with a small body surrounded by upper and lower shadows indicates a trend change: risk-loving traders might buy or sell here, while others will wait for confirmation before going short or long.
• Filled candles indicate a downtrend: you might want to add to your short position, and exit long positions.
• Filled candles with no higher shadows identify a strong downtrend: stay short until there's a change in trend.

 

How does a Heikin Ashi chart look like?

This is a normal candlestick chart: 

As you can see, the Heikin Ashi chart shows its "easier" to read. You can easily see the strong days and you can clearly spot the trend. This is the strenght of the Heikin Ashi candles, they cut all the market noise and show you the prevailing trend.

But not everything is perfect with these candles, as their opening and closing values are averaged, they are lagging behind the actual price, this means that they should be used more like and indicator than an actual way to read price action.

Despite the lag, which is based on just one period, HA Candles when used along with other technical analysis such as Support/Resistance or even moving averages can present a clearer picture to the trader, as compared to the traditional candlesticks. And in its defense, while it might seem easier to take a signal off the doji or a hammer candle pattern, Heikin Ashi, due to its lagging nature can in fact confirm a trend reversal.

Conclusions

Heikin Ashi, rather than being a "better" way to plot price action, it is best used as an indicator. This indicator is best used on trending markets, like ETFs, Forex, Commodities, and not on choppy charts, like a stock trading in a tight range or during a consolidation.

Pros

• Makes reading a chart easier.
• Better detection of trends and trend shifts.
• Beginner friendly.
• Eliminates market noise.
• Very useful on trending markets.
• When combined with other techniques and indicators, becomes a great tool for traders.

Cons

• Lagging in  nature.
• Don't show true price action.
• Doesn't show gaps.
• Not very useful on choppy markets. 

While Heikin Ashi candlesticks is not the ‘Holy Grail’ of trading, using these candlesticks can offer beginners a great way to observe the markets and perhaps get more meaning out of the price action as compared to using the traditional candlesticks. Every indicator’s edge is usually offset by one or more factors and Heikin Ashi candlesticks are no exception. While giving the trader the edge of eliminating market noise, the HA Candles tend to lag in nature. As always, reading the signals from HA Candlesticks and confirming the same with other technical indicators is always a good practice.

If you want an example of a Heikin Ashi Swing Trading Strategy, check this out:  Heikin Ashi Swing Trading

Note: This post is taken directly from StockCharts's ChartSchool.


There's many other patterns that I didn't mention and, while they are not as popular or importan, I believe it is useful to have an idea of what each pattern may signal. So here's a list of over 30 patterns and a small descriptión of what they mean. Enjoy!

Abandoned Baby: A rare reversal pattern characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day.

Dark Cloud Cover: A bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day.

Doji: Doji form when a security's open and close are virtually equal. The length of the upper and lower shadows can vary, and the resulting candlestick looks like, either, a cross, inverted cross, or plus sign. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.

Downside Tasuki Gap: A continuation pattern with a long, black body followed by another black body that has gapped below the first one. The third day is white and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap.

Dragonfly Doji: A Doji where the open and close price are at the high of the day. Like other Doji days, this one normally appears at market turning points.

Engulfing Pattern: A reversal pattern that can be bearish or bullish, depending upon whether it appears at the end of an uptrend (bearish engulfing pattern) or a downtrend (bullish engulfing pattern). The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body.

Evening Doji Star: A three day bearish reversal pattern similar to the Evening Star. The uptrend continues with a large white body. The next day opens higher, trades in a small range, then closes at its open (Doji). The next day closes below the midpoint of the body of the first day.

Evening Star: A bearish reversal pattern that continues an uptrend with a long white body day followed by a gapped up small body day, then a down close with the close below the midpoint of the first day.

Falling Three Methods: A bearish continuation pattern. A long black body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new low.

Gravestone Doji: A doji line that develops when the Doji is at, or very near, the low of the day.

Hammer: Hammer candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during a decline, then it is called a Hammer.

Hanging Man: Hanging Man candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during an advance, then it is called a Hanging Man.

Harami: A two day pattern that has a small body day completely contained within the range of the previous body, and is the opposite color.

Harami Cross: A two day pattern similar to the Harami. The difference is that the last day is a Doji.

Inverted Hammer: A one day bullish reversal pattern. In a downtrend, the open is lower, then it trades higher, but closes near its open, therefore looking like an inverted lollipop.

Long Day: A long day represents a large price move from open to close, where the length of the candle body is long.

Long-Legged Doji: This candlestick has long upper and lower shadows with the Doji in the middle of the day's trading range, clearly reflecting the indecision of traders.

Long Shadows: Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the first part of the session, bidding prices higher. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the first part of the session, driving prices lower.

Marubozu: A candlestick with no shadow extending from the body at either the open, the close or at both. The name means close-cropped or close-cut in Japanese, though other interpretations refer to it as Bald or Shaven Head.

Morning Doji Star: A three day bullish reversal pattern that is very similar to the Morning Star. The first day is in a downtrend with a long black body. The next day opens lower with a Doji that has a small trading range. The last day closes above the midpoint of the first day.

Morning Star: A three day bullish reversal pattern consisting of three candlesticks - a long-bodied black candle extending the current downtrend, a short middle candle that gapped down on the open, and a long-bodied white candle that gapped up on the open and closed above the midpoint of the body of the first day.

Piercing Line: A bullish two day reversal pattern. The first day, in a downtrend, is a long black day. The next day opens at a new low, then closes above the midpoint of the body of the first day.

Rising Three Methods: A bullish continuation pattern in which a long white body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new high.

Shooting Star: A single day pattern that can appear in an uptrend. It opens higher, trades much higher, then closes near its open. It looks just like the Inverted Hammer except that it is bearish.

Short Day: A short day represents a small price move from open to close, where the length of the candle body is short.
Spinning Top: Candlestick lines that have small bodies with upper and lower shadows that exceed the length of the body. Spinning tops signal indecision.

Stars: A candlestick that gaps away from the previous candlestick is said to be in star position. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from previous price action.

Stick Sandwich: A bullish reversal pattern with two black bodies surrounding a white body. The closing prices of the two black bodies must be equal. A support price is apparent and the opportunity for prices to reverse is quite good.

Three Black Crows: A bearish reversal pattern consisting of three consecutive long black bodies where each day closes at or near its low and opens within the body of the previous day.

Three White Soldiers: A bullish reversal pattern consisting of three consecutive long white bodies. Each should open within the previous body and the close should be near the high of the day.

Upside Gap Two Crows: A three day bearish pattern that only happens in an uptrend. The first day is a long white body followed by a gapped open with the small black body remaining gapped above the first day. The third day is also a black day whose body is larger than the second day and engulfs it. The close of the last day is still above the first long white day.

Upside Tasuki Gap:A continuation pattern with a long white body followed by another white body that has gapped above the first one. The third day is black and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap.

Just as there are Bullish Reversal Patterns,  there are Bearish Reversal Patterns that will signal the end of a bullish trend and a shift in momentum. These patterns are very similar to those on the bullish side, just that they are inverted. These patterns are:

Shooting Star

The shooting star pattern is the bearish counterpart of the hammer. It is composed by a small body and a long upper shadow. This pattern usually appears at the end of a bullish trend and just as in the hammer, the longer the upper shadow the more bearish the pattern becomes.

What's happening when a Shooting Star pattern appears?
At first, there's strong buying pressure but as the stock keeps rising, it meets resistance and that means selling. As more people continiue to sell durint the day, the stock pullbacks harder and ends up closing near it's open or even lower.

Just as with the hammer, you should wait for some bearish confirmation before being sure that the trend has reversed.



After an advance that was punctuated by a long white candlestick, Chevron (CHV) formed a shooting star candlestick above 90 (red oval). The bearish reversal pattern was confirmed with a gap down the following day

Bearish Engulfing