Remember a basic principle:
candlestick charting techniques are a tool and not a system. For example, one
must view a candlestick pattern within the context of the surrounding technical
picture. Without doing so would be, as the Japanese proverbs says, “Like
leaning a ladder against the clouds”
With candle charts, one can use
candle charting techniques, or Western techniques, or a combination of both.
This union of Eastern and Western techniques provides traders with uniquely
effective tools to help enhance profits and decrease market risk exposure.
Here are 7
candlestick patterns every trader should know.
Engulfing
This pattern consists of two
candles and a bullish engulfing pattern is when a white real body engulfs
(hence the name) a small black real body during a downtrend. It doesn’t
mean a stronger rally on a candlestick chart but it does increase the likelihood
of that being excellent support and could be the start of an ascent. Be
careful. The dual bullish engulfing patterns have nothing to do with how
far the market will ascend. These additional support points are a great
advantage when candlestick trading.
Hammer
This pattern is an important
bottoming candlestick line. The hammer and the hanging man are both the same
line. That is a small real body (white or black) at the top of the
session’s range and a very long lower shadow with little or no upper shadow.
When this line appears during a downtrend it becomes a bullish hammer. For a
classic hammer, the lower shadow should be at least twice the height of the
real body
Hanging Man
This pattern is an important
top reversal. The hanging man and the hammer are both the same type of
candlestick line (i.e., a small real body (white or black), with little or no
upper shadow, at the top of the session’s range and a very long lower shadow).
But when this line appears during an uptrend, it becomes a bearish hanging man.
It signals the market has become vulnerable, but there should be bearish
confirmation the next session (i.e., a black candlestick session with a lower
close or a weaker opening) to signal a top. In principle, the hanging man’s
lower shadow should be two or three times the height of the real body.
Harami
The Harami pattern is a real small body that is contained within what the Japanese call an “unusually long black body or white real body.” “Harami” is an old Japanese word for pregnant. The Japanese nickname for the long candle is the “mother” candle and the small candle is the “baby” or “fetus.” The second candle of the Harami can be white or black. The Japanese will say that with a Harami the market is “losing its breath.” The sellers may be in control of this stock.
Piercing
The piercing pattern is
composed of two candles in a falling market where sellers are in
control. The first candle is a black real body day and the second is a
white real body day. This white candle opens lower, ideally under the
lower of the prior black day. Then prices rebound to push well into the
black candle’s real body which can set-up a powerful reversal.
Doji
The doji may be the most popular candlestick pattern. This is a
session in which the open and close are the same (or almost the same). There
are different varieties of doji lines (such as a gravestone or long-legged
doji) depending on where the opening and closing are in relation to the entire
range. Doji lines are among the most important individual candlestick lines.
They are also components of other important candlestick patterns.
Evening Star
This pattern is a major top
reversal pattern formed by three candlesticks. The first is a tall white real
body, the second is a small real body (white or black) which gaps higher to
form a star, and the third is a black candlestick which closes well into the
first session’s white real body.
