|
 |
Candlestick patternsCandlesticks themselves can be used as indicators. There are three main indicators that can be quickly identified by the way they look. Those are: DOJI HAMMER SHOOTING STARS They are used frequently and are fairly significant indicators. Besides these, there are numerous other indicators with far less significance to them but I will still discuss some of them with you a little later right here. Let's start with the DOJI: A doji candlestick occurs when the open and close for a specific time period are the same, or very close to the same price. The doji has almost no body and can be quickly identified. There are variations of the doji, as you can see in the next example. I am always referring to the classic doji where the body is in the middle between the high and the low.
The importance of the doji lies in it being a significant reversal indicator. However it can also be used as a continuation indicator like I described in the continuation pattern. The key to the doji which makes it such a powerful reversal indicator is the uncertainty inherent in the pattern. The doji represents a period in which trading opened at a certain price, moved in one direction and then back to the opening price and often past that price, only to return once again to the opening price. It is very important to only use dojis after strong moves into support or resistance. In sideways markets their informative value is far less. The hammer candlestick The hammer is another reversal indicator. It looks like another candlestick pattern known as a hanging man. The difference is where they are found in a trend. Hammers occur at trend bottoms. The body of the hammer occurs at the top of the day’s range (assuming you are looking at a daily chart) and the majority of the day’s range is made up of a lower shadow. The perfect hammer has a shadow, which is twice the length of the body with no upper shadow. The smaller the body and the longer the shadow, the more significant it becomes as a bullish indicator. The images below are examples of what perfect hammers look like.
 Open Hammer................Closed Hammer It does not matter what color the candlestick is. It can be either an open or closed. The open ones are slightly more bullish. In forming this candlestick, it means the stock sold off sharply early in the day yet managed to rally back and close above the high of the open. After an open hammer occurs, often there will be a gap up the next day. I am using hammers for stocks that are in a solid uptrend but make a pullback into support. The pullback often ends with a hammer and is an excellent reversal indicator. I enter the stock once it trades above the high of the hammer . My stop is placed below the low of the hammer (for swingtrades) or below the current intraday low. I mostly use hammers on daily charts.
Shooting star candlesticks The shooting star candlestick is also a reversal signal. Shooting stars occur at trend tops and are therefore used to find short entry points. In essence, they are hammers turned upside down. The body of the shooting star occurs at the bottom of the day’s range and the majority of the day’s range is made up of an upper tail. In a perfect shooting star, this tail is twice the length of the body and the candlestick will have no lower shadow. The smaller the body and the longer the tail, the more significant it becomes as a bearish indicator.
It does not matter what color the candlestick is. It can either be an open or closed. The closed ones are slightly more bearish though. In forming a closed shooting star, it means that the stock rallied early in the day and managed to fall back and close below the tow of the open. Again, there will often be a gap down after a shooting star. The entry on this setup is just under the low of the shooting star in the period following the shooting star. The stop is placed just above the high of the shooting star or at an intra-day high.
Now let's look at some patterns I personally like:
Engulfing patterns
There is a bullish and bearish engulfing pattern. A bullish engulfing pattern is comprised of a large white real body which engulfs a small black real body in a downtrend. The bearish engulfing pattern occurs when selling pressure overwhelms buying pressure as reflected by a long black real body engulfing a small white real body in an uptrend
Dark cloud over
A bearish reversal signal. In an uptrend a long white ( or green) candlestick is followed by a black ( or red) one that opens above the prior white’s high. It then closes well into the white’s real body.
Piercing pattern
A bottom reversal signal. In a downtrend, a long black candlestick is followed by a gap lower during the next session. This session finishes as a strong white one which closes more than halfway into the prior black's real body. Compare to the on-neck line, the in-neck line, and the thrusting line.
Morning star
A major bottom reversal pattern formed by three candlesticks. The first is a long black real body, the second is a small real body ( white or black) which gaps lower to form a star, the third is a white one that closes well into the first session’s black real body.
Morning Doji star
The same as a morning star except the middle one is a doji instead of a small real body. Because there is a doji in this pattern it is considered more bullish than the regular morning star
Evening star .............................................................Evening doji star   
Yes you guessed it, it is the exact opposite of the morning star and the morning doji star. Of course there are many more formations and indicators but those are the main ones you should be able to spot instantaneously Ok, now let's go check out some more patterns starting with the Flags and pennants. 
|
|
