Candlestick Patterns Part 1
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 article 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. To view the diagrams that accompany this article please visit http://www.passion-trading.com/tutorials.technicalanalysis.candlestickpatternspart1.htm David Thorpe writes articles for http://www.passion-trading.com, a free educational resource for traders of all experience levels. Over the coming days, weeks and months more and more content will be added to the site which includes an article section and a dictionary. |
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