Monday, January 19, 2009

Seven Important Candlestick Reversal Pattern Pairs

Candlestick reversal patterns can be a boon to any trader's repertoire. Combining them with support/resistance lines and other indicators can increase a trader's edge substantially. Each set below contains both the bearish and bullish counterparts. These are ideal setups that require directional movement (i.e. nothing range bound). The more volume at the given point, the more strength each of these patterns portend.

Bearish and Bullish Harami -
Identified by a long bar followed by a very short one. Harami signal a loss of momentum and a possible reversal.

Dark Cloud Cover and Bullish Piercing Pattern - The dark cloud cover and bullish piercing patterns reveal weakness in the current trend and emerging strength in the opposition.

Shooting Star and Inverse Hammer - Both the shooting star and the inverse hammer have a small body with long upper wicks. THe shooting star shows the failed attempt of the bulls at maintaining control over higher price levels, while the inverted hammer is like a spring ready to pop.
Bearish and Bullish Engulfing Patterns -
In the bearish and bullish engulfing patterns, the opposing side's strength overwhelms previous advancement. These tend to be stronger than the dark cloud cover and the bullish piercing patterns. Make a note of the difference: in the engulfing pattern the second candle completely overtakes the first.

Hanging Man and Bullish Hammer - Both the hanging man and bullish hammer resemble the shooting star and inverted hammer, however they are flipped. The hanging man and bullish hammer display a struggle between the bears and the bulls. In the first, the bears are beginning to gain traction against prior bullish strength. In the second, any movement downward has been stalled, signalling a possible bullish reversion.

Southern and Northern Dojis - The southern and nothern dojis are some of the most watched patterns in the candlestick charting world. The both signal a parity between the bears and the bulls. At the moment a doji forms, and as with all these signals increased volume strengthens the pattern, momentum has been prevented from continuing. Sometimes this signals confusion, sometimes this signals a stronger opposition with increasing attrition of the side previously in control.
Morning and Evening Stars - The morning star and the evening star do not necessarily have a doji as pictured here. The top candlestick will be shorter and if it is a doji, signals increasing odds that a reversal will take place. These two patterns, though rare, give the highest odds of reversal. Strength goes in, it faces stiff resistance, after which control shifts hands.


The College Economist said...

Those candlesticks do come in handy. I like how Toni Turner explained them in her book. Using those candlestick patterns in conjunction with other indicators, like the MCAD and RSI, as well as a volume indicator have helped me a lot in the past.

How long have you been trading?


Complacent Panda said...

Been trading since late March '08--in and out until I started this site in August of '08.

Welcome to the site.

Benjamin Lee said...

Great write up on candlesticks. I would like to stress what you have mentioned, that volume at the reversal point is critical for the success of the candlestick patterns.

The College Economist said...

I have been trading for a couple years now. I trade a wide range of stocks and sometimes dip into the penny stocks with my main portfolio. I opened up my blog as a project to see if an account a typical college student could afford would be able to bring back some nice returns.

Are you a short-term/swing trader?


Complacent Panda said...

Thank you Benjamin. Yes, that does need emphasis!

The College Economist, sounds like a good idea. I'll definitely be interested with your conclusion.

I'm mostly a day trader. I am trying to stay away from the longer stuff, although I do swing trading sometimes (hard to day trade a stock market account when you don't have 25k).

Charlie G. said...

Hey CP, nice summary of all the reversals. Did you do the art work yourself or did you outsource it? Ha, ha.

I always wondered if these patterns had the same significance on a daily chart as compared to a five minute chart? I guess that's the same as asking if a moving average means more depending on the time frame.

Complacent Panda said...

Hahaha. Where I get my artists is a trade secret =P

On the daily chart they would have even more significance because the size of the reversal would likely be much bigger.

Remember to look for increased volume to confirm the signal.