Candlestick Charts: Patterns Part 1
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Patterns Part 2 - Candlestick Chart Basics
Introduction
Candlesticks aren’t
just a pretty face. Sure you can fill them with bright colours
and make your chart look like a Christmas tree, but they were designed
to have much more substance than that. The following tutorial will
introduce some of the more basic and familiar patterns you are
likely to come across during your everyday trading.
The Doji
A Doji is formed
when the open and close of the candle are either very close or
exactly the same. This indicates that the bulls and bears are conflicting
and neither can gain the upper hand.
The length of the shadows/wick/tails are not important but the
longer they are the more volatility and indecision.
If a Doji appears after a long
hollow or long filled Candle it is said to offer an indication
that a trend may be about to come to an end, however further confirmation
is needed.
The Dragonfly Doji
The Dragonfly
is formed when the open and close are equal but a low has created
a long tail. This is caused when strong selling pressure forces
the market lower straight from the open but is fully reversed by
the bulls.
Depending on where this Candlestick appears it can mean a potential
reversal for both bulls and bears. If after a down trend or long
filled (bear) candle it can indicate a potential reversal with
buyers flocking into the market. The low of the tail will indicate
strong support and the greater the volume the more significant
the formation.
If a Dragonfly appears
at the top of a strong up trend or after a large hollow (bull)
candle it can signify the revival of some strong selling pressure
with further selling still possible.
The Gravestone Doji
The Gravestone Doji is basically the opposite
of the Dragonfly. It consists of an open and close at exactly the
same price with a long upper shadow. The shadow shows that strong
selling reversed the early buying of the period.
If a Gravestone is found at the top of an up trend or after a long
bull bar it is said to represent a potential reversal signal. The
top of the shadow represents significant resistance.
After a long bearish bar or during a downtrend it can signify the
presence of bulls that may prompt some buying pressure.
The Hammer and The Hanging Man
The Hammer and the Hanging man are exactly the
same in appearance but take their names from where they appear
on the chart. Both candles have small bodies (filled or hollow)
with long lower shadows. The upper shadows are tiny, if they exist
at all.
The Hammer is a bullish reversal pattern and occurs
after a downtrend or after a long filled candle. The long lower
shadow shows sellers taking the market to new lows before a strong
bull reversal. The low of the candle is seen as a support zone.
The strength of this support can often depend on the amount of
volume i.e. the greater the volume the stronger the support. You
may wish to split the candlestick into several smaller time frame
candles to get a better idea of where the greatest volume was present,
i.e. the ascent or decent.
The Hanging man also represents
a reversal pattern but this reversal is bearish. It takes its
name from the resemblance of a man hanging from the top of an
up trend. The theory is that bears have returned to the market
after an up move. Although they were unable to force the bulls
out of the market completely (hence the lower shadow), unless
the market can break its recent highs there is a good chance
of a reversal.
The Inverted Hammer and The Shooting Star
Just like the Hammer and the Hanging Man this
pair take their names from where they appear on the chart rather
than their different appearances. They are basically mirror images
of the previous pair, flipped 180 degrees vertically. Rather than
having a long lower shadow they have long upper wicks.
The Inverted Hammer is the cousin of the Hanging Man. It occurs
after a downtrend and signals the arrival of the bulls and a possible
market bottom. Unable to force a close at the highs the bulls are
likely to return to finish the job over the next few sessions.
A good confirmation for this pattern is a gap up on the next candle
or a strong bullish bar.
The Shooting Star is a caller of market tops.
It occurs at the top of an up trend when the market soars to new
highs but is unable to hold them. Strong selling pressure establishes
a resistance level at the high of the candle.
