Candlestick Pattern Reversals
A candlestick pattern is a pattern that occurs on a candlestick chart similar to a bar chart and it indicates price movements over time. These charts were developed in the 18th century by a Japanese rice trader as a tool to provide information regarding future demands of rice. The pattern is a preferable method because the visual representation of what is happening in the markets is better visually depicted on candlestick charts than on other types of charts. Japanese candlestick charts are able to display five data points as opposed to other more basic stock charts such as line and bar charts.
In today’s article we will discuss the five bullish candlestick reversal patterns as they relate to what is occurring in the markets. We will discuss the doji candlestick, the engulfing reversal pattern, the hammer reversal candlestick pattern, the piercing pattern, and the harami.
Doji – This is the first pattern that most traders learn about when studying Japanese candlestick charting. This signal represents indecision in the market and as a result, traders question the current trend. It will often cause reversals since the stock opens up, goes nowhere during the day and then closes right back up at or near the opening price.
Engulfing – When this bullish signal occurs, it means that the sellers are overwhelmed and the buyers are ready to jump back in and take control. The demand is greater than the supply, in other words. The name comes from the second day of trading stock when the second candle engulfs the body of the first candle, while closing near the top of the range.
Hammer Pattern – This candlestick pattern typically occurs after a group of stop loss orders are hit and it is then that traders show up to take hold of shares at a lower price. This signal indicates that the sellers tool control of the stock and pushed it lower than its opening price. Then at the end of the trading day, the buyers came back and closed the stock at the top of the range.
Piercing Pattern – This bottom reversal pattern has the potential to be very powerful when candlestick trading. With this pattern the sellers are in control on the first trading day. There is potential for traders to regretfully short their stock on the first day and miss the boat when prices may continue to decline even more. This is because on the second day the price gaps down but the bulls step in and dramatically turn prices around. This move almost completely negated the price decline that occurred the previous day.
Harami – This candlestick pattern should not be confused with the engulfing pattern, but it often is. On the first day the sellers are in control of their stock and then on the second day, there is only a narrow range candle that closes up for the day. Momentum often comes to a halt when this signal occurs.
When analyzing chart pattern reversals it is important to know that bearish patterns are the opposite of bullish patterns. Bearish patterns come after the rally and they signify possible reversals just like the bullish patterns do.
Continue your Japanese candlestick education and learn about bearish patterns and other important candlestick chart patterns as well!
Market Direction: The sideways movement of the market was going to continue until there was a definite break of the trend channel. After two months of indecisive trading, today showed a breach of the lower part of the trend channel.
Fortunately candlestick signals reveal where recent strength is coming into sectors. This has two benefits. First, obviously is directing funds to the high potential profit areas. Second, when the markets get a big tumble as seen in today's trading, the stocks that have exhibited strong buying will not be as severely affected to the downside. Usually strong buying interest will not reverse immediately if the market in general takes a big sudden downward move.
Candlestick signals provide an immense amount of information. This information can greatly improve an investor's returns whether in a market trending in the expected direction. It also protects investment funds when unforeseen reactions occur.
Seasonal Trading - September 11, Best Choice software will be demonstrating how their software program identifies the areas that will act well during specific times of the year. Adding Candlestick analysis makes for a powerful investment combination.
The Candlestick Forum Team
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