Candlesticks do not reflect the sequence of events between the open and close, only the relationship between the open and the close. The high and the low are obvious and indisputable, but candlesticks (and bar charts) cannot tell us which came first.

 

 What Candlesticks Don't Tell You

candle3 highlow

With a long white candlestick, the assumption is that prices advanced most of the session. However, based on the high/low sequence, the session could have been more volatile. The example above depicts two possible high/low sequences that would form the same candlestick. The first sequence shows two small moves and one large move: a small decline off the open to form the low, a sharp advance to form the high, and a small decline to form the close. The second sequence shows three rather sharp moves: a sharp advance off the open to form the high, a sharp decline to form the low, and a sharp advance to form the close. The first sequence portrays strong, sustained buying pressure, and would be considered more bullish. The second sequence reflects more volatility and some selling pressure. These are just two examples, and there are hundreds of potential combinations that could result in the same candlestick. Candlesticks still offer valuable information on the relative positions of the open, high, low and close. However, the trading activity that forms a particular candlestick can vary.

Prior Trend

In his book, Candlestick Charting Explained, Greg Morris notes that for a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend. The direction of the trend can be determined using trend lines, moving averages, peak/trough analysis or other aspects of technical analysis. A downtrend might exist as long as the security was trading below its down trend line, below its previous reaction high or below a specific moving average. The length and duration will depend on individual preferences. However, because candlesticks are short-term in nature, it is usually best to consider the last 1-4 weeks of price action.

Candlestick Positioning

candle3 starposition

candle3 haramipositionStar Position

A candlestick that gaps away from the previous candlestick is said to be in star position. The first candlestick usually has a large real body, but not always, and the second candlestick in star position has a small real body. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from previous price action. The two candlesticks can be any combination of white and black. Doji, hammers, shooting stars and spinning tops have small real bodies, and can form in the star position. Later we will examine 2- and 3-candlestick patterns that utilize the star position.

Harami Position

A candlestick that forms within the real body of the previous candlestick is in Harami position. Harami means pregnant in Japanese and the second candlestick is nestled inside the first. The first candlestick usually has a large real body and the second a smaller real body than the first. The shadows (high/low) of the second candlestick do not have to be contained within the first, though it's preferable if they are. Doji and spinning tops have small real bodies, and can form in the harami position as well. Later we will examine candlestick patterns that utilize the harami position.

Long Shadow Reversals

There are two pairs of single candlestick reversal patterns made up of a small real body, one long shadow and one short or non-existent shadow. Generally, the long shadow should be at least twice the length of the real body, which can be either black or white. The location of the long shadow and preceding price action determine the classification.

The first pair, Hammer and Hanging Man, consists of identical candlesticks with small bodies and long lower shadows. The second pair, Shooting Star and Inverted Hammer, also contains identical candlesticks, except, in this case, they have small bodies and long upper shadows. Only preceding price action and further confirmation determine the bullish or bearish nature of these candlesticks. The Hammer and Inverted Hammer form after a decline and are bullish reversal patterns, while the Shooting Star and Hanging Man form after an advance and are bearish reversal patterns.

Hammer and Hanging Man

The Hammer and Hanging Man look exactly alike, but have different implications based on the preceding price action. Both have small real bodies (black or white), long lower shadows and short or non-existent upper shadows. As with most single and double candlestick formations, the Hammer and Hanging Man require confirmation before action.

candle4 hammerhanging1

The Hammer is a bullish reversal pattern that forms after a decline. In addition to a potential trend reversal, hammers can mark bottoms or support levels. After a decline, hammers signal a bullish revival. The low of the long lower shadow implies that sellers drove prices lower during the session. However, the strong finish indicates that buyers regained their footing to end the session on a strong note. While this may seem enough to act on, hammers require further bullish confirmation. The low of the hammer shows that plenty of sellers remain. Further buying pressure, and preferably on expanding volume, is needed before acting. Such confirmation could come from a gap up or long white candlestick. Hammers are similar to selling climaxes, and heavy volume can serve to reinforce the validity of the reversal.

The Hanging Man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a Hanging Man signals that selling pressure is starting to increase. The low of the long lower shadow confirms that sellers pushed prices lower during the session. Even though the bulls regained their footing and drove prices higher by the finish, the appearance of selling pressure raises the yellow flag. As with the Hammer, a Hanging Man requires bearish confirmation before action. Such confirmation can come as a gap down or long black candlestick on heavy volume.

 

 

 

 

candle4 hammerhanging2

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star look exactly alike, but have different implications based on previous price action. Both candlesticks have small real bodies (black or white), long upper shadows and small or nonexistent lower shadows. These candlesticks mark potential trend reversals, but require confirmation before action.

candle4 invertedshooting1

The Shooting Star is a bearish reversal pattern that forms after an advance and in the star position, hence its name. A Shooting Star can mark a potential trend reversal or resistance level. The candlestick forms when prices gap higher on the open, advance during the session and close well off their highs. The resulting candlestick has a long upper shadow and small black or white body. After a large advance (the upper shadow), the ability of the bears to force prices down raises the yellow flag. To indicate a substantial reversal, the upper shadow should relatively long and at least 2 times the length of the body. Bearish confirmation is required after the Shooting Star and can take the form of a gap down or long black candlestick on heavy volume.

 

The Inverted Hammer looks exactly like a Shooting Star, but forms after a decline or downtrend. Inverted Hammers represent a potential trend reversal or support levels. After a decline, the long upper shadow indicates buying pressure during the session. However, the bulls were not able to sustain this buying pressure and prices closed well off of their highs to create the long upper shadow. Because of this failure, bullish confirmation is required before action. An Inverted Hammer followed by a gap up or long white candlestick with heavy volume could act as bullish confirmation.

What is Candle Stick and how to read

Log in to comment
What is Google Possum Update?

What is Google Possum Update?

You’ve probably noticed a huge change in local search results lately. In what has been called the “biggest change to Google’s local search ranking algorithm since 2014,” Google has really shaken up the local pack and finder.

Readmore..

What is Quantitative Analysis?

What is Quantitative Analysis?

Quantitative analysis allows traders to remove emotion from the investing process. Quantitative analysis is an approach that focuses on statistics or probabilities over gut feelings.

Readmore..

Video Converter review

Video Converter review

Ultimate Video Converter converts content to a range of formats and to suit a range of popular devices including iPod, iPhone, iPad, Android, Sony PSP and MP3. All popular video formats are supported such as 3GP, AVI, WMV, MP4, MOV both in Standard and HD resolutions.

Readmore..

The World-wide Harmonized Test Procedure for Light Duty Vehicles

The World-wide Harmonized Test Procedure for Light Duty Vehicles

In order to assess vehicle performances in terms of criteria compounds, CO2 emissions and fuel/energy consumption,laboratory tests are mainly carried out. During these tests a vehicle is driven on a chassis dynamometer (which simulates the resistances the vehicle encounters during its motion) to follow a predefined test-cycle. In addition, all the conditions to run a test must strictly adhere to…

Readmore..

Iphone Application Development Using the Software Development KIT (SDK)

Iphone Application Development Using the Software Development KIT (SDK)

Today, iPhone users around the world are experiencing leverages of rich and amazing features of the latest release: iPhone SDK for iPhone Application Development. Anyone associated with iPhone Apps Development has distinctly heard of this word many times but what about the others? The article covers an in-depth discussion on iPhone SDK and its various components.Today, iPhone users around the…

Readmore..

Neuro Linguistic Programming

Neuro Linguistic Programming

Neuro Linguistic Programming (NLP), can be described as, “the approach that is aimed at the connection between neurological processes (Neuro), language (Linguistic) and behavioural patterns that have been acquired through experience (Programming)”. NLP is a powerful and effective method to quickly obtain an understanding of the motives and motivations of our actions. Neuro Linguistic ProgrammingNeuro Linguistic Programming (NLP), can be…

Readmore..

Solar Panel Orientation and Positioning

Solar Panel Orientation and Positioning

Solar power offers many advantages in the generation of electricity. It has zero raw fuel costs, unlimited supply and no environmental issues such as transport, storage, or pollution. Solar power is available everywhere, even on the moon. But to get the most out of a solar panel or solar array, it has to be pointed or “orientated” directly at the…

Readmore..

What are the benefits of Mind Mapping while studying?

What are the benefits of Mind Mapping while studying?

Mind Maps appeal to your senses with their visual elements – images, branch colours and curved branches all add emphasis and ensure that you will remember your notes! By noting down only key words, you save vital time while studying. Also, when you go on to write essays or study for exams from your Mind Maps, you will recall the…

Readmore..

What Is The Google Panda Update?

What Is The Google Panda Update?

Google’s Panda Update is a search filter introduced in February 2011 meant to stop sites with poor quality content from working their way into Google’s top search results. Panda is updated from time-to-time. When this happens, sites previously hit may escape, if they’ve made the right changes. Panda may also catch sites that escaped before. A refresh also means “false…

Readmore..