Candlesticks you NEED to know!

The candlestick techniques were the second most important invention by the Japanese, right after the sushi. It is one of the most popular methods to analyse price movement to use due to it’s accuracy. Here’s the definition of a candlestick chart for you!

A candlestick chart (also called Japanese candlestick chart) is a style of financial chart used to describe price movements of a security, derivative, or currency. Each "candlestick" typically shows one day but may also be used in 15min intervals

As I mentioned in an earlier post “Technician or Fundamentalist”, candlesticks are able to forecast the direction of future price movements in the near future by assessing the psychology of investors. (Would be great if they had one for our spouse’s moods right?)

Reversal candlestick patterns are used to identify a potential price movement towards the opposite of it’s current direction. There are probably more patterns in the world than there are Justin Bieber fans, but I am going to show you the most essential and accurate ones.

Here are 4 of the most important Bullish reversal candle stick patterns. The criteria has to be met to confirm a reversal signal.

One White Soldier

Criteria:
1. Currently on a downtrend
2. Both must be long candles
3. White Candle must Open above the Close of the Black Candle.
4. White Candle must Close above the Open of the Black Candle.
Explanation:
When the Open is higher than the previous day’s Close, it could be due to after-market factors such as news. Favourable news may have been released, resulting in a bullish reaction and increase in prices.

Morning Star

Criteria:
1. Currently on a downtrend
2. Long Black candle followed by a Spinning Top (candlestick with long shadows and small body) followed by a Long White candle
3. Spinning top must Close below Black candle
4. White candle must Open above Spinning top
Explanation:
The spinning top shows the indecisiveness of the investors. The Bulls brought it up to a high before the Bears gained momentum to bring the prices down to the low. Subsequently, the Bulls took over and brought it back up to close near it’s opening price. Hence indicating a power struggle between the Bulls and Bears, a potential reversal of the downtrend is signalled.

Hammer

Criteria:
1. Currently on downtrend
2. Shadow at least twice the size of the body on ONE end
3. No or short shadow on the other end
Explanation:
The Bears sold to the lowest point in the day causing a long shadow before the Bulls rallied and closed the day very near the Open, resulting in a small body. The body can be white or black, a white body would show that the close>open, representing an even stronger reversal signal.

Bullish Engulfing

Criteria:
1. Currently on downtrend
2. The Black Candle should not be a Doji/Spinning top
3. The White Candle must completely cover the Black Candle (Preferably the shadows too)
Explanation:
The bigger the white candle, the stronger the signal. The sudden increase in the white candle shows a massive increase in demand by the Bulls for the stock, possibly due to external news.

In conclusion, these reversal patterns have to be accompanied with relatively strong volumes to authenticate the signal. Often enough, the erratic behaviour of the stocks may give off false signals to the ill-advised investor. It takes the studious investor to identify the reversal signal, but the discerning one can tell if it is a legitimate one. The pattern is the criminal while volume is the evidence. You are found guilty, I hereby sentence you to a lifetime of profits and financial independence! Stock markets, Take this felon away!

For Honour and Glory,

CDOInvestor

For more posts:
The Big WHY
Technician or Fundamentalist?