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Japanese Candlestick Patterns 102

A detailed list of dual, single and multi candlestick patterns

Candlestick Patterns

Japanese candlesticks are drawn with four price points – open, high, low and close price. In the previous article we have covered some basics of how to interpret candlesticks. In this article let us continue to understand what some multi-candlestick patterns mean.

Dual Candlestick Patterns

Engulfing Candles

Engulfing Candles

The bullish engulfing pattern signals a probable strong trend. A bearish candle is immediately followed by a larger bullish candle where the (green) bullish candle “engulfs” the bearish candle. This means buyers could soon start to dominate after a recent downtrend or a period of consolidation.

The bearish engulfing pattern is the opposite of the bullish pattern. Here the bullish (green) candle is immediately followed by a bearish (red) candle that completely “engulfs” it. This means that sellers overpowered the buyers and a strong down would appear.

Piercing Line

Piercing Line

Piercing pattern is developed when a long bullish candle follows a long bearish candle. The bullish candle must open lower than the low point of the bearish candle. It must also cross more than halfway of the bearish candle body. The green candle indicates a strong buying pressure that overcame the selling pressure of the previous candle.

Dark Cloud Cover

When during an uptrend a red candle shows higher after a green candle we have a dark cloud cover situation. Opening price of the red candle was higher than the closing price of the green candle. Yet, the closing price was lower than the opening price. It probably signals a strong selling pressure.

 

Tweezer Bottoms and Tops

The tweezers are dual candlestick reversal patterns. This type of candlestick pattern are usually be spotted after an extended uptrend or downtrend, indicating that a reversal will soon occur.

candlestick patterns

The first candlestick is the same as the overall trend. If price is moving up, then the first candle should be bullish. The second candlestick is opposite the overall trend. If price is moving up, then the second candle should be bearish.

The shadows of the candlesticks should be of equal length. Tweezer Tops should have the same highs, while Tweezer Bottoms should have the same lows.

Harami Position

The Harami (meaning “pregnant” in Japanese) Candlestick Pattern is considered a reversal pattern.

Harami Position

Bearish Harami: A bearish Harami occurs when there is a large bullish green candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. The most important aspect of the bearish Harami is that prices gapped down on Day 2 and were unable to move higher back to the close of Day 1. This is a sign that uncertainty could be entering the market.

Bullish Harami: A bullish Harami occurs when there is a large bearish red candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. Again, the most important aspect of the bullish Harami is that prices gapped up on Day 2 and price was held up and unable to move lower back to the bearish close of Day 1.

 

A buy signal could be triggered when the day after the bullish Harami occured, price rose higher, closing above the downward resistance trendline.

A sell signal could be triggered when the day after the bearish Harami occured, price fell even further down, closing below the upward support trendline.

A trendline break would possibly conform these signals.

 

Windows (Gaps)

Windows as they are called in Japanese Candlestick Charting, or Gaps, as they are called in the west, are an important concept in technical analysis. Whenever, there is a gap (current open is not the same as prior closing price), that means that no price and no volume transacted hands between the gap.

 

Gap Up occurs when the open of Day 2 is greater than the close of Day 1. Contrastly, a Gap Down occurs when the open of Day 2 is less than the close of Day 1.

Gaps can act as:

  • Resistance: Once price gaps downward, the gap can act as resistance.
  • Support: When prices gap upwards, the gap can act as support to prices in the future.

 

Gaps are important areas on a chart that can help a technical analysis trader better find areas of support or resistance.

Triple Candlestick Patterns

Evening and Morning Stars

The morning star and the evening star are triple candlestick patterns that you can usually find at the end of a trend. They are reversal patterns that can be recognized through three characteristics.

Evening and Morning Stars

We’ll use the Evening Star Pattern on the right as an example of what you may see:

The first candlestick is a bullish candle, which is part of a recent uptrend. The second candle has a small body, indicating that there could be some indecision in the market. This candle can be either bullish or bearish. The third candlestick acts as a confirmation that a reversal is in place, as the candle closes beyond the midpoint of the first candle.

The morning star pattern is a bullish candlestick pattern which indicates a possibility of bullish reversal after a downtrend. This pattern is formed by three candlesticks. The first candle is a long bearish candle which indicates a heavy sell pressure. The second candle gaps down from the first candle and it remains bullish or bearish in the end. This second candle indicates that the selling pressure has become weaker. The third candlestick is a long bullish candle which indicates the strength has returned to a strong buying pressure.

Abandoned Baby

An bullish abandoned baby pattern is a morning doji star with a window between the doji and the red and green candle, resulting in an island reversal.

An bearish abandoned baby pattern is an evening doji star with a window between the doji and the green and red candle, resulting in an island reversal.

Three White Soldiers and Black Crows

Three White Soldiers and Black Crows

The three white soldiers pattern is formed when three long bullish candles follow a DOWNTREND, signaling a reversal has occurred.This type of triple candlestick pattern is considered as one of the most potent bullish signals, especially when it occurs after an extended downtrend and a short period of consolidation.

The first of the three soldiers is called the reversal candle. It either ends the downtrend or implies that the period of consolidation that followed the downtrend is over.

  • For the pattern to be considered valid, the second candlestick should be bigger than the previous candle’s body.
  • Also, the second candlestick should close near its high, leaving a small or non-existent upper wick.
  • The last candlestick should be at least the same size as the second candle and have a small or no shadow.

The three black crows pattern is just the opposite of the three white soldiers. It is formed when three bearish candles follow a strong UPTREND, indicating that a reversal is in the works.

  • The second candle’s body should be bigger than the first candle and should close at or very near its low.
  • The third candle should be the same size or larger than the second candle’s body with a very short or no lower shadow.

Three Inside Up and Down

Three Inside Up and Down

The three inside up candlestick formation is a trend-reversal pattern that is found at the bottom of a DOWNTREND. This triple candlestick pattern indicates that the downtrend is possibly over and that a new uptrend has started.

The formation needs to have the following characteristics:

  • The first candle should be found at the top of an uptrend and is characterized by a long bullish candlestick.
  • The second candle should make it up all the way down the midpoint of the first candle.
  • The third candlestick needs to close below the first candle’s low to confirm that sellers have overpowered the strength of the uptrend.

 

Three River Bottom

This is a bottom reversal pattern. During a downtrend, there is a bigger red candle on the first day of this pattern. The second day starts with a higher opening price; then makes a new lower low and closes the day below the opening price. The third day opens lower and forms a small green body with a closing price below the closing price of the second day.

Multi-candlestick Patterns

Fry Pan Bottom

The fry pan bottom is formed with a number of smaller candles. After this bottoming pattern, the price usually makes an up-move with a rising window. A fry pan bottom is a powerful bottom reversal pattern.

Bearish Dumpling Top

The bearish dumpling top is formed with a number of smaller candles. After this top formation pattern, the price usually makes a down-move with a falling window. A bearish dumpling top is a powerful top reversal pattern.

So, we have seen some of the popular Candlestick Patterns. We will add in more patterns and keep this

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