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Introduction to Candlestick Patterns

Discussion in 'Candlestick Patterns' started by Kaitlin, Oct 23, 2015.

  1. Kaitlin

    Kaitlin Forum Member

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    Japanese candlesticks offer a better visual perspective to predict future market action than bars. Intaraday charts with clear Japanese candlestick patterns are invaluable for entry and exit strategies. Below is a comparison between a candlestick chart and a bar chart

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    upload_2015-10-23_9-15-6.png

    Comparison between candlesticks and bars

    upload_2015-10-23_9-16-8.png

    upload_2015-10-23_9-16-39.png

    Candlestick patterns are reliable on all timeframes. Some patterns such as morning stars, evening stars and haramis are rarely seen in intraday trading because they require a gap between the close of one candle and the opening and another. With electronic forex trading and fluid price movements, gaps rarely occur between intraday candlesticks. Gaps are found where the OPEN of the following candle does not equal the CLOSE of the preceding candle.

    upload_2015-10-23_9-17-4.png

    However, we can still use morning stars and evening stars without the gaps. This is where we use "poetic license" (where POETIC LICENSE is the justifiable departure from conventional rules of form). The examples we will show in the next section depict ideal Candlestick patterns, but in reality there we do not always get ideal patterns. For example, we define the following patterns as the same.

    upload_2015-10-23_9-17-19.png

    Departure from the ideal formation is often caused by sudden price movements as the chart is updating from one time period to the next. Ideally the close of the previous candle should line up exactly with the open of the following candle.

    Using candlestick signals creates tremendous profit making advantages because it allows a trader to make a quick decision. Combined with chart patterns and suitable indicators, we have found candlestick patterns provide reliable entry and exit points.
     
    Last edited by a moderator: Oct 23, 2015
  2. Kaitlin

    Kaitlin Forum Member

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    Doji

    The doji is a reversal signal. The opening and closing prices are at or near the same price. The lack of a real body means the bulls and the bears are fighting and the balance of power may be shifting. The doji is a warning sign of a pending reversal. Proceed with caution. The doji needs a confirmation candlestick before you act on it, and when found with in other candle patterns the doji candle adds strength and reliability to the formation. If there is a doji in an uptrend, we need a close below the close of the doji as confirmation that the trend has changed.

    upload_2015-10-23_9-18-34.png


    Dragonfly Doji (Bullish)


    This doji is sometimes seen at the bottom of a move. The open and close prices are the same. The long wick (shadow) below indicates a reversal.

    This pattern is more bullish than a hammer.

    upload_2015-10-23_9-18-51.png

    Gravestone Doji (Bearish)

    The gravestone doji is often seen at tops. The open and close prices are the same. There is a tall wick (shadow). This pattern is more bearish than a shooting star. Technically, it should not have a body.

    upload_2015-10-23_9-19-7.png

    Spinning Top

    The spinning top can be a very good reversal signal and can be any colour. The smaller the real body, the less the direction the market has.

    upload_2015-10-23_9-19-20.png

    Bullish Engulfing Pattern

    The market must be in a clearly definable downtrend, not in sideways consolidation.

    The first candle is the colour of the short term trend (down) or a doji. The second candle is the colour of the reversal (up). The second candle body engulfs the previous body. Ignore the wicks (shadows). An even stronger signal occurs when a candle body engulfs the bodies of 2 or 3 previous candles.

    Bearish Engulfing pattern

    The market must be in a clearly definable trend. The first candle is the colour of the short term trend (up) or a doji. The second candle is the colour of the reversal (down). The second candle body engulfs the previous candle body. Ignore the wicks (shadows). The size of the candle body being engulfed does not matter. A stronger signal occurs when 2 or more candle bodies are engulfed by one candle body.

    upload_2015-10-23_9-19-38.png

    Tweezer Bottom

    Two or more candlesticks with matching bottoms. They can be composed of real bodies, wicks (shadows) and/or dojis.

    Tweezer Top

    Two or more candlesticks with matching tops. They can be composed of real bodies, wicks (shadows) and/or dojis. These occur on consecutive or nearby candles.

    upload_2015-10-23_9-19-56.png

    Tweezers Top and Bottom candlestick patterns are good reversal signals. The wicks or bodies must be at the same level. Look for the 2 types of tweezer bottoms and 2 types of tweezer tops.

    upload_2015-10-23_9-20-10.png


    Morning Star Bullish reversal sign

    A morning star is a bullish three candle pattern. The first candle is a tall red real body, the second is small real body (red or green) that gaps below the first real body and the third is a tall green candle that closes at least 50% into the red body. However, if there is no gap because intraday forex candles don’t gap often, still count it as a morning star.

    upload_2015-10-23_9-20-25.png

    Evening Star Bearish Reversal signal

    A three candle pattern in an upward price swing. The first candle is a tall green real body. The second is a small real body (red or green) that gaps above the previous real body, and the third is a tall red candle that closes at least 50% into the first candle's real body.

    upload_2015-10-23_9-20-43.png

    Hammer Bullish after a significant downturn

    A reversal signal. The long lower shadow must be at least twice the length of the real body. The real body can be any colour. The hammer needs a confirmation candle before we can act on it. We need to see a close above the close.
    upload_2015-10-23_9-21-4.png
     
  3. Kaitlin

    Kaitlin Forum Member

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    Inverted Hammer Bullish at bottom of trend

    Wait for a bullish verification candle before acting

    upload_2015-10-23_9-22-41.png


    Shooting star Bearish at top of trend

    A shooting star can mark a top and is often retested. It is a reversal indicator after an uptrend (long upper shadow is bearish as higher prices are rejected.)


    Shooting Star (Shooting Star is the top candle) (Inverted Hammer)

    upload_2015-10-23_9-33-35.png

    Sometimes a pattern with four candlesticks occurs. They consist of an extra candle such as a doji or spinning top. When this occurs the pattern gets added strength and is more reliable. Also where a hammer occurs in conjunction with a spinning top or doji, the result is stronger and more reliable.

    upload_2015-10-23_9-34-2.png


    Bullish and Bearish Rejection Patterns

    The Bullish and Bearish Rejection patterns are reversal patterns and occur in conjunction with support and resistance lines. When the currency pair attempts to breach the support or resistance line and fails it has been rejected at that level and reverses.

    upload_2015-10-23_9-34-19.png

    There are many more combinations of Candlestick patterns. We have only selected a few that work well for us and limited the number to keep things simple.
     
  4. GOSHI

    GOSHI Active Member Trader

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    Candlestick charts are most commonly used for trading and are also getting very popular due to their ease of use.
     

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