4. Hammer and Hanging Man:
Hammer is kind of candlestick that can be seen at the bottom of a downtrend. Hammer has no or a very small upper shadow. The hammer candlestick which is seen at the top of an uptrend is called Hanging Man.
Hammer and Hanging Man have three identifying features:
1. The body is in the upper third of the price range.2. The lower shadow is twice of the length of the body.
3. They have no or a very short upper shadow.
Like Doji, Hammer and Hanging man signal indecision and uncertainty and need confirmation.
5. Shooting Star:
It is an inverted hammer at the top of the uptrend. Its
color can be Bullish or Bearish. A Shooting Star at the bottom of a
downtrend, is called Inverted Hammer. Like Doji and Hammer, Shooting
Star and inverted Hammer need confirmation.
A gap between the Shooting Start or Inverted Hammer and
the next candlestick is one of the confirmations. A big Bearish
candlestick after the Shooting Start is another confirmation. Generally,
confirmation is something that confirms that the price has changed the
direction.
Combination of CandleSticks:
Candlesticks are important signals individually. However
combination of candlesticks can also generate very strong reversal
signals.
1. High Wave
A group of candlesticks that have small bodies and long
shadows are called High Wave. High Wave is a very strong reversal signal
at the top of an uptrend or bottom of a downtrend.
2. Engulfing Pattern
This pattern is a very strong reversal signal at the end
of a trends. Engulfing pattern is formed by two candlesticks with
different colors. The body of the second candlestick should completely
engulf the first one. The shadows may also be engulfed but it is not
necessary. The first candlestick can also be a Doji.
Engulfing pattern is stronger when the first candlestick
has a small and the second candlestick has a big body. Also when the
second candlestick engulfs more than one candlestick, the pattern is
stronger.
It is a Bearish reversal signal that can be formed at
the top of an uptrend by two candlesticks. The first one is Bullish and
the second one is Bearish. Dark Cloud Cover is formed when the second
candlestick is started above the high price of the first candlestick but
goes down and becomes finished above the open price of the first
candlestick.
Dark Cloud Cover can be considered as a stronger reversal signal when:
1. The closing price of the bearish candlestick is close to the opening price of the previous candlestick.
2. Both candlesticks are shaven (they have no shadow) and the bearish candlestick is opened at the close of the bullish candlestick and is closed at the open of the bullish candlestick.
3. When the bearish candlestick is opened above a strong resistance and then goes down.
2. Both candlesticks are shaven (they have no shadow) and the bearish candlestick is opened at the close of the bullish candlestick and is closed at the open of the bullish candlestick.
3. When the bearish candlestick is opened above a strong resistance and then goes down.
A Dark Cloud Cover that happens at the bottom of a downtrend is know is as Piercing Line.
When you see a Dark Cloud Cover at the top of an uptrend
or a Piercing Line at the bottom of a downtrend you have to wait for
the next candlestick.
If the next candlesticks after a Dark Cloud Cover is a
Bullish candlestick that keeps on going up and goes higher than the high
price of the second candlestick, then you should consider the Dark
Cloud Cover as a continuation signal.
But if the next candlesticks after a Dark Cloud Cover is
a Bearish candlestick that goes down and preferably lower than the
close price of the second candlestick, then the Dark Cloud Cover you
have is a reversal signal.
The same thing is correct about the Piercing Line:
If the next candlesticks after a Piercing Line is a
Bearish candlestick that goes down and goes lower than the close price
of the second candlestick, then the Piercing Line you have is a
continuation signal.
But if the next candlesticks after a Piercing Line is a
Bullish candlestick that keeps on going up and preferably goes higher
than the high price of the second candlestick in the Piercing Line, then
the Piercing Line you have is a reversal signal.
4. Harami
Harami means pregnant in Japanese. Harami pattern is
formed by two candlesticks. One big (the mother) and one small (the
baby). The bigger one covers the whole or at least the real body of the
smaller one. Harami can be seen both at the top of an uptrend or at the
bottom of a downtrend. The small candle can be formed any where along
the length of the big candle but the important thing is that it should
be covered by the big candlestick.
The more difference between the size of two candlesticks, the more effective and potent the signal is.
Like the Dark Cloud Cover, Piercing Line and Harami can
work as reversal signals but they have to be confirmed by the next
candlesticks. These patterns can not be known as reliable and strong
reversal signals.
If you already have a position and you have some profit
in your hands, when you see any of the above patterns, you have to close
your trade or at least tighten your stop loss and wait for the market to go ahead.
If it changes the direction, you will be safe because
you already collected your profit or your stop loss will protect your
profit and if it keeps on moving to the same direction, you will make
more profit.
When the small candlestick in Harami pattern is a Doji, the pattern is called Harami Cross. A long body candlestick followed by a Doji which is covered by the long candlestick should not be ignored at all:
5. Morning and Evening Star and Abandoned Baby:
Morning star becomes formed by three candlesticks. This
pattern can be seen at the bottom of a downtrend. It is known as a
strong reversal signal.
1. The first candlestick should be a Bearish candlestick with a considerable body.
2. The second candlestick is a small candlestick that is formed lower than the first one. This candlestick can be Bearish or Bullish. In fact Morning star is the second candlestick but we have to have the first and the second candlesticks for a Morning Star signal.
3. The third candlestick is a Bullish candlestick that is formed higher than the second one and its body covers a significant portion of the first candlestick.
2. The second candlestick is a small candlestick that is formed lower than the first one. This candlestick can be Bearish or Bullish. In fact Morning star is the second candlestick but we have to have the first and the second candlesticks for a Morning Star signal.
3. The third candlestick is a Bullish candlestick that is formed higher than the second one and its body covers a significant portion of the first candlestick.
This pattern is called Evening Star when formed at the top of an uptrend:
The effectiveness and potency of the Morning Star and
Evening Star patterns as reversal signals is dependent on some special
factors that have to be considered:
1. The distance (gap) between the morning or evening
star with the first and third candlesticks. The bigger gap, the stronger
signal.
2. The degree of the coverage of the first candlestick by the third one. The bigger coverage, the stronger signal.
3. The bigger trading volume in the third candlestick than the first one.
2. The degree of the coverage of the first candlestick by the third one. The bigger coverage, the stronger signal.
3. The bigger trading volume in the third candlestick than the first one.
Sometimes the Morning or Evening Star is a Doji candlestick. Again in this case, the most important thing is the gap between the first and third candlestick and the Doji.
Sometimes, the Morning or Evening Star is a very small
candlestick with small or no shadows. The gap is so big and even none of
the candlesticks shadows cover any part of the Morning or Evening Star. This pattern is called Abandoned Baby
which is a very strong reversal signal. Because of the high volatility,
this pattern is very rare in the forex market and can only be seen in
bigger time frames but it can be seen in the stock market in smaller
time frames like one hour.
Abandoned baby can be seen both at the top of an uptrend or bottom of a downtrend.
6. Tweezers
Tweezers is made up of two candlesticks that are next or
so close to each other. They have identical highs at the top of the
market or identical lows at the bottom of the market. The Tweezers
usually becomes formed by the candlesticks shadows but it can also be
made by the bodies of the shaven candlesticks. The two candlesticks that
form Tweezers can have small bodies like Doji and Hammer candlesticks.
Tweezers can not be considered as a strong reversal
signals and it needs confirmation but you have to be careful when you
see a Tweezers signal. You know what I mean by “be careful”.
Tweezers that are formed right under resistance lines or above the support lines and also under or above the Fibonacci levels
that act as resistance or support are important especially when they
are made up of two Doji candlesticks. The longer the shadows, the more
potent the Tweezers signal.
It is also possible that you see a few or even several
candlesticks between the two candlesticks that form the Tweezers
pattern. Even in this case you should not ignore the Tweezers as a
potential reversal signal.
When there are several candlesticks between the two that make the Tweezers pattern, they may form Double Tops or Double Bottoms patterns that show the levels of resistance or support.
OK!
You learned about the different kinds of Japanese candlesticks and the patterns they make. What next?
I think it is so easy to learn the different kinds of
candlesticks and the patterns they make. You can learn all of them in a
few hours but something that you have to focus on it more than learning
the names and their meanings is the psychological story that each
candlestick tells.
At the introduction of this article, I told you that
candlesticks are the psychological indicators of the market. They
reflect the feeling of the buyers and seller. They tell you if traders
are eager to buy or they have stopped buying and are waiting or they
have started selling like crazy.
This is the language of the candlesticks that you have to learn.
For example lets see how a Doji candlestick becomes
formed. As I already mentioned, Doji candlestick shows that the market
is in indecision. It means the price doesn’t know to go up or down.
Sometimes Buyers becomes stronger (buy more) and the price goes up and
sometimes seller becomes stronger (sell more) and the price goes down.
Finally, the candlestick is finished when the price is
exactly the same as the open price and a Doji candlestick becomes
formed. So none of the buyers and sellers could take the control of the
market. That’s why they say Doji means indecision and you have to wait
for the confirmation because it is not clear if the price will go up or
down.
If the next candlestick becomes completed as a
relatively big Bearish (red) candlestick, it means Bears (sellers)
succeeded to take the control and lower the price and if the next
candlestick become completed as a relatively big Bullish (green)
candlestick, it means Bulls succeeded to take the control and increased
the price.
So what does it mean if the next candlestick becomes formed as another Doji?
Yes, it means the market is still in the indecision status and none of the Bulls and Bears have been able to win yet.
So you have to learn to hear and understand the story that each candlestick tells you:
1. When you see a candlestick, first you should find the open, high, low and close prices.
2. Check the previous candlesticks and find out if the market has been Bullish (uptrend) or Bearish (downtrend).
3. Try to understand from the shape of the candlestick that if the buyers (Bulls) are stronger or sellers (Bears) or none of them (indecision).
4. Then try to guess the color of the next candlestick using the above information.
5. If there is any candlestick pattern, like High Wave, Harami and … try to interpret them and predict the direction of the market.
2. Check the previous candlesticks and find out if the market has been Bullish (uptrend) or Bearish (downtrend).
3. Try to understand from the shape of the candlestick that if the buyers (Bulls) are stronger or sellers (Bears) or none of them (indecision).
4. Then try to guess the color of the next candlestick using the above information.
5. If there is any candlestick pattern, like High Wave, Harami and … try to interpret them and predict the direction of the market.
Do Not decide about a forming candlestick. You
have to wait for the candlestick to be formed completely. The shape and
color of the candlesticks become changed several times during their
formation and so they should be analyzed only when they are fully
formed.
My bottom line advice for you is that if you can not
make any prediction and the market situation looks un-known and
unpredictable to you, DO NOT force yourself to make a prediction and take any position. You will be wrong in most cases and you will lose money. It doesn’t matter how long; just wait until you see a clear signal that makes sense to you.
Very, very Nice, A Great Didactical Article, Thanks a Lot.
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