Introduction

1.1 Background
Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time. One of them is candlestick chart. By the grace of Almighty Allah I have been assigned to prepare a project paper on ‘Making Effective Decision in Stock Market through Candlestick Chart Analysis’.
I believe that I have tried all the way to follow the previous studies retaining my originality in writing the report. Any analytical criticism and creative suggestion on this concern will receive my heartiest welcome.

1.2 Origin of the report

Each professional degree needs practical knowledge of the respective field of discipline to be fruitful. Our MBA program also has a Project Report program, relating to the exchange of theoretical knowledge into the real life practical situation. The report entitled “Making Effective Decision in Stock Market through Candlestick Chart Analysis”.

During the project paper program, I was under the supervision and guidance of Md. Hafizur Rahman Khan, Lecturer, Department of Business Administration, Leading University, Sylhet, Bangladesh.

1.3 Objectives

(i) Main Objective: The main objective of this study is to prepare an Project Paper on the specified topic working with some organizations data implementing the knowledge that have been gathered over the past few years at Leading University, Sylhet, Bangladesh.

(ii) Specific Objectives:

• To gather knowledge about candlestick chart and how it formed.

• To provide well-organized buy or sell decision by analyzing candlestick chart.

1.4 Methodology

This report is a descriptive one, based on a unique topic which was administered by secondary data. Candlestick chart analysis is not well-introduced in Bangladesh in making trade decision so primary data are not available which can be use to prepare this report. This study covered only secondary data.

Sources of Secondary Data: Going through different internet based documents, PDF files, and websites and by others are the sources of secondary data.

1.5 Limitations of the Report

• Due to lack of practical experience and lack of professional knowledge about candlestick chart analysis, some errors might be occurred during the study. Therefore maximum efforts have given to avoid mistakes. • In Bangladesh candlestick chart analysis is not used uniformly, so getting desire information become a problem. • Time was limited because its take plenty of time to become expert in candlestick charts analysis and making useful decision.

Overview of Candlestick Chart

2.1 Technical Analysis
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past price and volume. Technical analysis do not attempt to measure a securities’ intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Technical analysis uses a wide variety of charts one of them is candlestick chart.

2.2 Candlestick Chart
The candlestick techniques we use today originated in the style of technical charting used by the Japanese for over 100 years before the West developed the bar and point-and-figure analysis systems. In the 1700s, a Japanese man named Homma, a trader in the futures market, discovered that, although there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders. He understood that when emotions played into the equation, a vast difference between the value and the price of rice occurred. This difference between the value and the price is as applicable to stocks today as it was to rice in Japan centuries ago. The principles established by Homma are the basis for the candlestick chart analysis, which is used to measure market emotions surrounding a stock.
[R-1]

2.2.1 History

The Japanese began using technical analysis to trade rice in the 17th century. While this early version of technical analysis was different from the US version initiated by Charles Dow around 1900, many of the guiding principles were very similar: • The "what" (price action) is more important than the "why" (news, earnings, and so on). • All known information is reflected in the price. • Buyers and sellers move markets based on expectations and emotions (fear and greed). • Markets fluctuate.
According to Steve Nison, candlestick charting first appeared sometime after 1850. Much of the credit for candlestick development and charting goes to a legendary rice trader named Homma from the town of Sakata. It is likely that his original ideas were modified and refined over many years of trading eventually resulting in the system of candlestick charting that we use today. [R-2]

2.2.2 Formation of Candlestick

In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called "the body" (also referred to as "the real body"). The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body represents the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.
[pic]
Figure 1.1: Candlestick Formation.
Compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price action. Immediately a trader can compare the relationship between the open and close as well as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure. [R-3]

2.2.3 Candlestick Patterns

Long versus Short Bodies

Generally speaking, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.
[pic]
Long white candlesticks show strong buying pressure. The longer the white candlestick is, the further the close is above the open. This indicates that prices advanced significantly from open to close and buyers were aggressive. While long white candlesticks are generally bullish, much depends on their position within the broader technical picture. After extended declines, long white candlesticks can mark a potential turning point or support level. If buying gets too aggressive after a long advance, it can lead to excessive bullishness.
Long black candlesticks show strong selling pressure. The longer the black candlestick is, the further the close is below the open. This indicates that prices declined significantly from the open and sellers were aggressive. After a long advance, a long black candlestick can foreshadow a turning point or mark a future resistance level. After a long decline a long black candlestick can indicate panic or capitulation.
[pic]
Even more potent long candlesticks are the Marubozu brothers, Black and White. Marubozu do not have upper or lower shadows and the high and low are represented by the open or close. A White Marubozu forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. Black Marubozu form when the open equals the high and the close equals the low. This indicates that sellers controlled the price action from the first trade to the last trade.

Long versus Short Shadows

The upper and lower shadows on candlesticks can provide valuable information about the trading session. Upper shadows represent the session high and lower shadows the session low. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. Candlesticks with long shadows show that prices extended well past the open and close.
[pic]
Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session, and bid prices higher. However, sellers later forced prices down from their highs, and the weak close created a long upper shadow. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.
[pic]
Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning tops. One long shadow represents a reversal of sorts; spinning tops represent indecision. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand and the result was a standoff. After a long advance or long white candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend. After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.

Doji

Doji are important candlesticks that provide information on their own and as components of in a number of important patterns. 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 a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word "Doji" refers to both the singular and plural form.
[pic]
Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. 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. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing.
[pic]
Different securities have different criteria for determining the robustness of a doji. A $20 stock could form a doji with a 1/8 point difference between open and close, while a $200 stock might form one with a 1 1/4 point difference. Determining the robustness of the doji will depend on the price, recent volatility, and previous candlesticks. Relative to previous candlesticks, the doji should have a very small body that appears as a thin line. Steven Nison notes that a doji that forms among other candlesticks with small real bodies would not be considered important. However, a doji that forms among candlesticks with long real bodies would be deemed significant.

Doji and Trend

The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.
[pic]
After an advance or long white candlestick, a doji signals that buying pressure may be diminishing and the uptrend could be nearing an end. Whereas a security can decline simply from a lack of buyers, continued buying pressure is required to sustain an uptrend. Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick's open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star.
[pic]
After a decline or long black candlestick, a doji indicates that selling pressure may be diminishing and the downtrend could be nearing an end. Even though the bears are starting to lose control of the decline, further strength is required to confirm any reversal. Bullish confirmation could come from a gap up, long white candlestick or advance above the long black candlestick's open. After a long black candlestick and doji, traders should be on the alert for a potential morning doji star.

Long-Legged Doji

[pic]
Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market. Long-legged doji indicate that prices traded well above and below the session's opening level, but closed virtually even with the open. After a whole lot of yelling and screaming, the end result showed little change from the initial open.

Dragon Fly and Gravestone Doji

[pic]
Dragon Fly Doji
Dragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a "T" with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.
The reversal implications of a dragon fly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragon fly doji could signal a potential bullish reversal or bottom. After a long uptrend, long white candlestick or at resistance, the long lower shadow could foreshadow a potential bearish reversal or top. Bearish or bullish confirmation is required for both situations.

Gravestone Doji

Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside down "T" with a long upper shadow and no lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.
As with the dragon fly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.
Before turning to the single and multiple candlestick patterns, there are a few general guidelines to cover. [R-2]

2.2.4 Candlesticks Cheat Sheet
Here’s a quick reference cheat sheet for single, dual, and triple candlestick formations to easily identify what kind of pattern we are looking at whenever we are trading.

Numbers of Name Bullish or What it look Bars Bearish? like?

Table 1.1: Single Candlestick Formations

Numbers of Name Bullish or What it look Bars Bearish? like?

Table 1.2: Dual Candlestick Formations

Numbers of Name Bullish or What it look Bars Bearish? like?
Table 1.1: Triple candlestick formations [R-2]
2.3 Advantages of Candlestick Chart • Candlesticks are easy to interpret, and are a good place for beginners to start figuring out chart analysis. • Candlesticks are easy to use, your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help in studying, it might help with trading as well. • Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means. • Candlesticks are good at identifying marketing turning points – reversals from an uptrend to a downtrend or a downtrend to an uptrend. • Watching the financial news stations will always provide a multitude of opinions on where the market or a stock price is going. Using Japanese Candlestick signals will circumvent all that noise.
[R-3]

2.4 Disadvantage of Candlestick Chart
The patterns presented up are some of the most easy to understand and remember but even these can give a newbie a bad headache. Just like almost any tool, Japanese candlestick formations must be used alongside other indications of price direction and with a strong fundamental awareness. Just because candlesticks hint at a reversal or continuation, it doesn’t mean it will happen for sure. We must always consider market conditions and what price action is telling us. In Bangladesh perspective, candlestick chart analysis is very hardly used. Most investors in Bangladesh do not make any game trade plan when it comes to their investment. They do trade maximum time based on rumors. So, it’s become difficult to get proper decision based on this chart analysis.

Making Decision by Using Candlestick Chart

Before taking decision we should know that If the candlestick is an upward candlestick (often colored green), the closing price is shown by the top of the wide part of the candlestick. Conversely, if the candlestick is a downward candlestick (often colored red), the closing price is shown by the bottom of the wide part of the candlestick. The closing price is the last price that was traded during the time frame represented by the candlestick.

3.1 Candlestick Chart of AB Bank (Last 3 months)

Source: StockBangladesh.com

Comment: From the chart we see an upper trend in January which indicates a bullish market. But after February 5 price of shares fall which indicates bearish market. Means sellers are aggressive. This is the time for buyers to make a move and started buying shares and pushing the price upside; this causes the stock to move up which we can see from March 13. The sellers were only willing to sell at higher prices and we can assume that this high price can fall at any time. The volume shows only the number of securities exchanged during a given period.

Decision: Selling the stock.

3.2 Candlestick Chart of Southeast Bank (Last 3 months)

Source: StockBangladesh.com

Comment: From the chart we see an upper trend in January and February which indicates a bullish market. But after February 20 price of shares fall which indicates bearish market. Means sellers are aggressive. Still there is no a potential upward trend. This is the time for buyers to make a move. The buyers were only willing to buy at lower prices. If you are already owner of this bank shares so this is not the right time to sell out. The volume shows only the number of securities exchanged during a given period.

Decision: Buying the stock.

3.3 Candlestick Chart of Prime Bank (Last 3 months)

Source: StockBangladesh.com

Comment: From the chart we see an upper trend from January 16 which indicates a bullish market. But from January 26 to February 20 prices of shares fall rapidly which indicates bearish market. Means sellers are aggressive. But after February 23 we can see an upper trend. From the chart the long upper tail (March 27) indicates buyer is pushing the price up and the price of shares will go up. The volume shows only the number of securities exchanged during a given period.

Decision: Buying the stock.

3.4 Candlestick Chart of Dhaka Bank (Last 3 months)

Source: StockBangladesh.com

Comment: From the chart we see a volatile price trend of this banks stock from January to March 3. But from March 4 an upper trend can be spot which indicates a bullish market. Means buyers are aggressive. This is the time for sellers to make a move. The sellers were only willing to sell at higher prices. After observing previous day’s candles it’s quite difficult to assume the trend of this company stock. Now price of the stock is moving up gradually but will not stay up for long time. The volume shows only the number of securities exchanged during a given period.

Decision: Selling the stock.

3.5 Candlestick Chart of EXIM Bank (Last 3 months)

Source: StockBangladesh.com

Comment: From the chart we see a downward trend which indicates a bearish market. Means sellers are aggressive. Very few days are there where the price of the stock goes up. It’s crystal clear in the chart that the price goes up for a very short period of time. We can see a Gravestone Doji in March 25; it is considered a reversal signal. So the price can be assumed to go up. The volume shows only the number of securities exchanged during a given period.

Decision: Buying the stock.

Findings

4.1 Findings

• In Bangladesh perspective, candlestick chart analysis is hardly used. Most investors in Bangladesh do not make any game trade plan when it comes to their investment. They do trade maximum time based on rumors. • The utilization of Candlestick signals makes analyzing the direction of the markets and stock price trends relatively easy. • The one basic factor built into Japanese Candlestick signals is that they are formed by the cumulative knowledge of all of the investor input, the buying and selling, of a trading entity or trading entities, during a certain time period. • No matter what you hear elsewhere, the candlestick signals tell you exactly what the investor sentiment is doing. • Candlestick charts can look quite confusing, very complex and sometimes difficult system to understand. But is one of the essential elements to master for day traders. • Quickly recognizing these trends real time is much more difficult than looking at a chart after the fact and picking out the signals.

Recommendation & Conclusion

5.1 Recommendation

• Most investors in Bangladesh do not have a game plan when it comes to their investment. They buy/sell when somebody tells them about a good stock to buy/sell. It should be avoided. • People awareness should be increased. Investors in Bangladesh should be conscious about trading and learn how to study stock market through technical analysis, indicators and others instead of rumors. • What we mean by this is that humans tend to make emotional responses to situations and will move a mass based on nothing other than good news, bad news, fear, greed, or other emotions. These responses affect the markets and the movements are often indicated by unique patterns that appear on the candlestick chart. • You should always look to short a stock after consecutive up days. And, you should look to buy a stock after consecutive down days. This is counter intuitive for new traders because they tend to associate a stock going down as "bad" (meaning sell) and a stock going up as "good" (meaning buy). In fact, it is just the opposite. • Just because candlesticks hint at a reversal or continuation, it doesn’t mean it will happen for sure. You must always consider market conditions and what price action is telling you. • This is not rocket science. This is being able to visually analyze what the candlestick signals are telling us. Sometimes, only candlestick chart analysis is not enough to get proper trade decision, it also needs to use financial indicators to support trade decisions.

5.2 Conclusion

Candlesticks are graphical representations of price movements for a given period of time. These charts are a visual aid for decision making in stock, foreign exchange, commodity, and option trading. The one basic factor built into Japanese Candlestick signals is that they are formed by the cumulative knowledge of all of the investor input, the buying and selling, of a trading entity or trading entities, during a certain time period. No matter what you hear elsewhere, the candlestick signals tell you exactly what the investor sentiment is doing. This charting technique has become very popular among traders. The goal of one who is analyzing candlestick charts is to find a recognizable pattern and to act upon it. One reason is that the charts reflect only short-term outlooks.

Candlestick charting is a very complex and sometimes difficult system to understand. But the utilization of candlestick signals makes analyzing the direction of the markets and stock price trends relatively easy. Just because candlesticks hint at a reversal or continuation, it doesn’t mean it will happen for sure. We must always consider market conditions and what price action is telling us. Investors in Bangladesh should be conscious about trading and should learn how to study market through technical analysis, indicators and others instead of rumors.

Reference 1. www.investopedia.com/articles/technical/02/121702.asp 2. http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_cand 3. http://en.wikipedia.org/wiki/Candlestick_pattern 4. StockBangladesh.com 5. http://www.stock-trkr.co.uk/some-benefits-using-candlestick-charts 6. http://buyshares.org/day-trading/ 7. http://www.traderstrainingzone.com/charts/candlestick-chart 8. https://www.candlestickforum.com/PPF/Parameters/12_219_/candlestick.asp

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Chapter One

Chapter Two

Chapter Three

Chapter Four

Chapter Five