Thank you, for helping us keep this platform clean. The editors will have a look at it as soon as possible. Self publishing. Share Embed Flag. TAGS trading chart occurs doji candlestick trader bullish engulfing prices reversal candlesticks forex mmcis tradingportalen. You also want an ePaper? While candlestick charts dates back to Japan in the 's, this form of charting did not become popular in the western world until the early 's.
Since that time, they have become the default mode of charting for serious technical analysts replacing the open-high-low-close bar chart. There has been a great deal of cogent information published on candlestick charting both in book form and on the worldwide web.
Many of the works, however, are encyclopedic in nature. There are perhaps individual candlesticks and candle patterns that are presented, a daunting amount of information for a trader to learn. In this book I have selected 21 candles that I believe every trader should know by name.
These are the candles that in my experience occur most frequently and have the greatest relevance for making trading decisions. Just as knowing the name of a person helps you immediately recognize them on a crowded street, so being able to name the candlestick allows you to pick it out of a chart pattern. Being able to name it allows you to appreciate its technical implications and increases the accuracy of your predictions.
In my trading, I try to integrate candlestick analysis, moving averages, Bollinger bands, price patterns such as triangles and indicators such as stochastics or CCI to reach decisions. I find the more information which is integrated, the more likely the decision is to be correct.
In this book, I have chosen to combine moving averages, Bollinger bands and two indicators, stochastics, and CCI on various charts. As we discuss individual candlesticks or candle patterns, I integrate these tools into the discussion. Hopefully, you will not only learn how to recognize candles from this book, but also appreciate how you can combine them with the traditional tools of technical analysis. In this book my focus is on Minor trend reversals, the kind of reversal of most interest to a trader.
The Minor trend typically lasts 5 to 15 days although on occasion, I have seen it stretch out to about 30 trading days. These same candle principles work equally as well, however, on 5 minute or weekly charts. It is simply a matter of adapting this information to the time frame you are trading in. You haven't come across this wording before, since it is my own terminology.
An anticipatory indicator gives a signal in advance of much other market action -- in other words it is a leading indicator of market activity. Momentum indicators such as CCI or stochastics are also anticipatory since usually momentum precedes price. Typically, however, even rapidly moving momentum indicators such as CCI lag the candle signal by a day or two.
When you receive a candle signal followed by a momentum signal such as stochastics which communicates the same message, it is likely that in combination they are accurately predicting what will happen with a stock. On the other hand, the break of a trendline or a moving average crossover is what I call a "confirming" signal. It usually occurs days later than the peak or bottom of price and much after the candlestick and indicator signal.
Depending on your trading style, you can act on the anticipatory signal. However, if you prefer to be cautious and wait for more evidence, candlesticks anticipate a change in trend and put you on the alert that a reversal may be imminent. If you have seen candles on the web, but have not studied them in some detail, then you'll now be given the background you need to use candles. Candles may be created for any "period" of chart—monthly, weekly, hourly, or even one minute.
When I discuss candles in this book, I will use daily chart examples, but be aware that you can create candle charts for virtually any period. BAR VS. See if you can spot any differences in the "data series. That's because there isn't any. Both the bar chart and the candlestick chart contain exactly the same information, only it's presented to the trader in different form. Both the bar chart and the candle chart contain the same data: the high for the period the day , the low, the open and the close.
In a candlestick chart, however, the names are changed. The difference between the open and the close is called the real body. The amount the stock went higher beyond the real body is called the upper shadow. The amount it went lower is called the lower shadow. If the candle is clear or white it means the opening was lower than the high and the stock went up.
If the candle is colored then the stock went down. It is generally acknowledged that the opening of the trading day is dominated by amateurs. The close, on the other hand, is dominated by professional traders. The low of the day, one might say, is set by the pessimists -- they believed the market was going lower and sold at the bottom.
The high of the day is set by the optimists. They were willing to pay top price but were incorrect in their analysis, at least in the short term. Individual candlesticks may be understood by combining this concept with the candle chart. I will use only two examples, but you might want to experiment with this idea yourself. It is a day on which the amateurs are also the pessimists. They sell early and their shares are gobbled up by eager buyers. By the end of the day the optimists and professionals close the stock sharply higher.
This bullish candle frequently predicts a higher open on the next day. This candle is the opposite of the one just described. Depicted here is a day when the amateurs are the optimists. They buy at the top of the day, only to watch prices steadily decline. By the end of trading, prices have declined sharply and the professional pessimists are in control of the market. The opening the next day is often lower. Candles can be made more sense of by reasoning them out in this way.
Particularly when you see a candle with a large real body, ask yourself who won the battle of the day, the optimists or the pessimists, the amateurs or the professionals. This question will often provide you with an important clue to subsequent trading action. Candlestick charts are much more "visually immediate" than bar charts. Once you get used to the candle chart, it is much easier to see what has happened for a specific period be it a day, a week an hour or one minute.
With a bar chart you need to mentally fill in the price action. You need to say to yourself, "The left tick says that's where it opened, the right tick where it closed. Now I see. It was an up day. You can spend your energy on analysis, not figuring out what happened with the price.
With candles you can spot trends more quickly by looking for whether the candles are clear or colored. Within a period of trend, you can easily tell what a stock did in a specific period. The candle makes it easier to spot "large range" days. A large candlestick suggests something "dramatic" happened on that trading day. A small range day suggests there may be relative consensus on the share price. When I spot a large range day, I check the volume for that day as well. Was volume unusual? If so, it is very likely that the large range day may set the tone for many days afterward.
Most important, candles are vital for spotting reversals. These reversals are usually short term --precisely the kind the trader is looking for. When traditional technical analysis talks about reversals, usually it is referring to formations that occur over long periods of time. Typical reversal patterns are the double top and head and shoulders.
By definition, these involve smart money distributing their shares to naive traders and normally occur over weeks or even months. Candlesticks , however, are able to accurately pick up on the changes in trend which occur at the end of each short term swing in the market.
If you pay meticulous attention to them, they often warn you of impending changes. I define overbought as a market which has gone up too far too fast. Most of the buyers are in and the sellers are eager to nail down profits. An oversold market, on the other hand, is one in which the sellers have been in control for several days or weeks.
Prices have gone down too far too fast. Most of the traders who want to sell have done so and there are bargains -- at least in the short term -- to be had. However, one of the best is stochastics, which essentially measures the stock's price in relation to its range usually over the past 14 periods.
CCI typically agrees with stochastics and is useful for providing confirmation of its signal. I also almost always put a Bollinger Band on charts I analyze. John Bollinger created this tool to include 19 out of every 20 closing prices within the bands.
Therefore, a close outside the band is significant. A close outside the upper band usually say the stock is overbought. When it is outside the lower band it is oversold. When both stochastics, CCI and the Bollinger bands agree a stock or index is overbought or oversold, I take their alignment very seriously.
There is a good chance a reversal is overdue. A significant candlestick tells me more exactly when the reversal might be here. When a stock is moving up, the buyers are in control. There is more demand than supply. Purchasers are eager to acquire the stock and will pay up, hitting the ask price to do so. When a stock is declining, the reverse is true. Sellers are fearful and will not dicker over a few cents, being more likely to accept the bid.
Candlesticks graphically show the balance between supply and demand. The general principle is even if you see a key reversal candlestick, you should wait at least part of one more day before acting. If for example, you spot a candle called a doji, seek verification from the action of the next trading day. If there is a down gap and prices begin to decline then it is prudent to take your position.
To conclude this section, we will focus on only four! Think how much more accurately you could have traded the market if you knew these candles names and implications as well as had recognized them when they occurred.
The good news is these are reversal signatures and are apt to occur again. Your ability to recognize them could lead to large trading gains. First, I will explain the candlesticks, then apply this theory to analysis of the graph. The candles are pointed out on the Dow chart below. The bullish engulfing is most significant when it occurs after a prolonged downtrend. The stock or index has been selling off sharply. On the day of the bullish engulfing, prices will often start the day by falling.
However, strong buying interest comes in and turns the market around. The bullish engulfing is named because this candle surrounds or engulfs the previous one. When I discuss this candle with college students enrolled in my stock market course, I call it "Pac-Man" because like the video game character, it "eats" the candle before it. The bullish engulfing represents a reversal of supply and demand.
Whereas supply has previously far outstripped demand, now the buyers are far more eager than the sellers. Perhaps at a market bottom, this is just shortcovering at first, but it is the catalyst which creates a buying stampede. When analyzing the bullish engulfing, always check its size.
The larger the candle, the more significant the possible reversal. A bullish engulfing which consumes several of the previous candles, speaks of a powerful shift in the market. This hammer marks a reversal off a bottom or off an important support level. On the day of the hammer, prices decline. They hit bottom and then rebound sharply making up all the ground — and sometimes more — compared to where the sell-off started.
The candle shows that the buyers have seized control. A bullish candlestick on the following day confirms this analysis. If you were to learn only one candle by name, this would have to be the one. A "common" doji, as I call it, is shaped like a cross. A doji has no real body. What it says is that there is a stalemate between supply and demand. It is a time when the optimist and pessimist, amateur and professional are all in agreement.
This market equilibrium argues against a strong uptrend or downtrend continuing, so a doji often marks a reversal day. A doji in an overbought or oversold market is therefore often very significant. The opening of the next day should be watched carefully to see if the market carries through on the reversal.
Note, a candle with a very small real body often can be interpreted as a doji. The gravestone doji occurs far less frequently than the common one, but gives even a clearer signal. The stock, or in this case the index, can not sustain the probe to new high ground. It opens and closes at the exact same level creating the appearance of a tombstone.
I have placed only one moving average on the chart, the day. A day moving average describes the Intermediate trend and when it moves sideways like it does here, you can also be sure it describes a market in a sideways consolidation pattern. Despite the sideways movement, there were many good trading opportunities, both long and short.
The first came in early March when the Dow peaked just below All round numbers represent key support and resistance in the major averages and this top was no exception. The candle formed was a gravestone doji. Note the long upper shadow and the absence of a real body.
This combination signalled that the bulls did not have the strength to push the Dow through the mark. Over the next month the Dow retreated nearly points, finally bottoming right at The late April bottom at is marked by a bullish engulfing candle. Immediately before the bullish engulfing note the three very large back candles which saw the Dow drop nearly points in three days.
That left it substantially oversold as shown by the stochastics indicator which reveals an oversold reading when it goes below 20 above 80 is overbought. An oversold market can be described as one which has gone down too far, too fast. The bullish engulfing candle was very large, adding to its significance.
It implied that with the Dow able to hold , the shorts were covering, buying interest had emerged at this level, or both. While the Dow didn't soar higher in the coming day, neither did it drop below again. By early May it rallied back to resistance near Note how a horizontal line can be drawn across the chart to mark this resistance level and how its role as both support and resistance alternated during the six-month period.
The Minor uptrend brought the Dow back to Trader s looking for the Dow to stall at this level did not have long to wait. Here's a small test of what you've learned so far. Can you name the candlestick which helped mark the peak at this time. If you said a gravestone doji, you get high marks. The gravestone doji candle led to another small down wave in the Dow.
This was part of a secondary bottom that saw the index bottom well above , closer in fact to Note there is a candle you have seen before—the bullish engulfing. From the Dow advanced over the next month to a peak just below For almost a month, in what must have seemed like an eternity for traders, the Dow vacillated in an excruciatingly narrow range between and When it finally got beyond resistance at , it formed three dojilike candles in a row.
The candles are doji-like since they have very small real bodies. These dojis showed that the bulls and bears were at a stalemate. After a lengthy uptrend they indicated that the bulls lacked the buying power to move the market higher. Not surprisingly a strong sell-off ensued. The decline ended well above this time finding a bottom at The candle which formed here can be interpreted as a hammer, despite the very small upper shadow. The hammer candle occurred after the Dow had found support near for several days.
On the day of the hammer, a dramatic news event sent prices sharply lower in the morning, but then the selling pressure dried up. By late afternoon, prices had turned positive as can be seen from the small white real body. The hammer led to a subsequent rally which lifted the Dow several hundred points in two trading days taking it right back into the to range of resistance it had been in the month previous. Candles are your personal sentry providing you with consistent early warnings of impending trend change.
They provide the earliest signal I know of that the patterns in the market are about to reverse. All in all, there are about candles patterns the trader can become familiar with. Of these, 21 candles recur frequently enough and are significant enough that the trader should be able to spot them by name. Know ing their names allows you to spot them more easily and assess their implications. When faced with the need for a quick decision during the heat of trading, the trader who can name these 21 candles has a distinct advantage over one who can't.
It is vital for trading success, I argued, to recognize candlesticks and assess their implications. Candles are vital to trading because they identify possible reversals in trend. Failure to spot these key candles can lead to costly trading errors. Why should you be able to identify these candles? Because they can make you money! Here then are the 21 candlesticks I find most useful in my own trading. On a daily chart, the doji often marks the beginning of a minor or intermediate trend reversal.
Fail to recognize the doji's implications and you run the risk of buying at the top or staying far too late in a trade and leaving substantial profits on the table. There are four types of dojis -- common, long-legged, dragonfly and gravestone. All dojis are marked by the fact that prices opened and closed at the same level.
If prices close very close to the same level so that no real body is visible or the real body is very small , then that candle can be interpreted as a doji. After a long uptrend, the appearance of a doji can be an ominous warning sign that the trend has peaked or is close to peaking. A doji represents an equilibrium between supply and demand, a tug of war that neither the bulls nor bears are winning.
In the case of an uptrend, the bulls have by definition won previous battles since prices have moved higher. Now, the outcome of the latest skirmish is in doubt. After a long downtrend, the opposite is true. The bears have been victorious in previous battles, forcing prices down.
Now the bulls have found courage to buy and the tide may be ready to turn. What I call a "common" doji has a relatively small trading range. It reflects indecision. Here's an example of a common doji: A "long-legged" doji is a far more dramatic candle. It says that prices moved far higher on the day, but then profit taking kicked in. Typically, a very large upper shadow is left. A close below the midpoint of the candle shows a lot of weakness. Here's an example of a long-legged doji: When the long-legged doji occurs outside an upper Bollinger band after a sustained uptrend, my experience says you should be extremely vigilant for the possibility of a reversal.
A subsequent sell signal given by an indicator such as stochastics is typically a very reliable warning that a correction will occur. A "gravestone doji," as the name implies, is probably the most ominous candle of all. On that day, prices rallied, but could not stand the "altitude" they achieved. By the end of the day they came back and closed at the same level.
Here's an example of a gravestone doji: Finally, a "dragonfly" doji depicts a day on which prices opened at a high, sold off, and then returned to the opening price. In my experience, dragonflies are fairly infrequent. When they do occur, however, they often resolve bullishly provided the stock is not already overbought as shown by Bollinger bands and indicators such as stochastics.
Here's an example of a dragonfly doji: When assessing a doji, always take careful notice of where the doji occurs. If the security you're examining is still in the early stages of an uptrend or downtrend, then it is unlikely that the doji will mark a top. If you notice a short-term bullish moving average crossover, such as the four-day moving average heading above the nine-day, then it is likely that the doji marks a pause, and not a peak.
Similarly, if the doji occurs in the middle of a Bollinger band, then it is likely to signify a pause rather than a reversal of the trend. As significant as the doji is, one should not take action on the doji alone. Always wait for the next candlestick to take trading action.
That does not necessarily mean, however, that you need to wait the entire next day. A large gap down, after a doji that climaxed a sustained uptrend, should normally provide a safe shorting opportunity. The best entry time for a short trade would be early in the day after the doji. The Disk Drive Index consists of 11 stocks in the computer storage and hard drive businesses.
This index's performance therefore usually correlates highly with the Nasdaq Composite. Note on this day, the four-day moving average penetrated the nine-The 4-day moving average day and both began to slope upward.
That pattern suggested an uptrend was beginning. The four-day moving average going above the nine is a bullish moving average crossover. While I wouldn't trade on this very short-term signal in isolation, it provides a useful confirmation that the immediate trend is up. The next day, a common doji appeared labeled "1". While a doji should always be noted, this one was early in the trend.
The previously described "rule of two" also says to wait another day before taking trading action. The following day was positive. Two days later a dragonfly doji appeared "2" with prices closing at their highs. Again, a dragonfly doji often resolves positively as did this candle.
Three days after that "3" a second dragonfly doji occurred. This one was more worrisome since it came after a substantial advance and was close to the top of a Bollinger band. However, the uptrend continued. Whereas during the core of the uptrend, there had been several large white candles indicating bullish enthusiasm, now the real bodies of thecandles turned small showing caution on the part of buyers. Always observe the size of the candles in your analysis. In mid-June, two consecutive dojis "4" appeared on the chart.
The first was a common doji; the second closer to a long-legged variety. For those traders in a long position, extreme vigilance was now warranted. The index was stalling; the bulls and bear were stalemated. On the second day, the candle turned dark showing selling pressure. Note also that the four-day moving average penetrated down through the nine-day, the first time this had happened since the uptrend began in early May.
However, the trader who failed to heed the dojis' warning surrendered a large portion of his or her profits. Dojis should not be assessed mechanically. However, after a strong trend in either direction they often mark major turning points. Always recognize the doji when it occurs, and be prepared the next trading day to take appropriate action. Candlestick names are typically very colorful and this one is no exception.
If you are a bull, the gravestone doji should sound ominous and one should always be prepared to take rapid action on its appearance. When it occurs after a prolonged uptrend, and the upper shadow penetrates through the upper Bollinger band, the candle takes on added significance. To review, a gravestone doji occurs on a day when prices open and close at the same level. During the session, however, prices move sharply higher, but the bulls can not sustain the advance.
This trading action leaves a long upper shadow on the chart. If the gravestone doji does not serve as a key reversal day, it certainly will mark a resistance area that will normally stall an advance for several sessions. In either case, the trader is often prudent to nail down profits after its appearance. The chart of airline stock AMR Corp. AMR is a classic example of why it's vital to recognize the gravestone doji by name.
Notice, how a large part of the upper shadow pierced through the Bollinger band. But traders did not like the altitude that AMR was flying at and stock closed unchanged for the day. The session created a long-legged doji, a warning that the bulls were not able to maintain control. Trader s who required additional evidence that a reversal had occurred did not need to wait long. Notice, how the four daymoving average crossed below the nine day.
A trendline break also occurs shortly after this crossover, suggesting AMR's flight path is now lower. Trader s who ignored these signals, paid a high price. This was one round trip that would have been avoided through assessing the implications of the gravestone doji. Not far behind in value are hammer and hangman.
It is easy to get these two candlesticks confused since they look identical. Both the hangman and hammer have a very long shadow and a very small real body. Typically, they have no upper shadow or at the very most, an extremely small one. To be an "official" hammer or hangman, the lower shadow must be at least twice the height of the real body.
The larger the lower shadow, the more significant the candle becomes. How can you tell the two candles apart? The hangman candle, so named because it looks like a person who has been executed with legs swinging beneath, always occurs after an extended uptrend.
The hangman occurs because traders, seeing a sell-off in the shares, rush in to snap up the stock at bargain prices. To their dismay they subsequently find they could have bought the stock at much cheaper levels. The hangman looks like this: On the other hand, the hammer puts in its appearance after a prolonged downtrend.
On the day of the hammer candle, there is strong selling, often beginning at the opening bell. As the day goes on, however, the market recovers and closes near the unchanged mark, or in some cases even higher.
In these cases, the market is potentially "hammering" out a bottom. Here is an example of a hammer candle: As with all candles, the "rule of two" applies. That is to say, a single candle may give a strong message, but one should always wait for confirmation from another indicator before taking any trading action. It may not be necessary to wait an entire trading day for this confirmation. When it comes to the hangman, for example, confirmation may be a gap down the next day.
With the hammer, a gap opening with gathering strength as the day wears on may be all that is necessary to initiate a trade from the long side. I will start with the hammer. In my experience, when a hammer candle appears in the chart of one of the major averages, it is always a signal worth noting. This is particularly true when it has come after a steady and prolonged sell-off. From March to late May, Nasdaq was in a steep downtrend having declined from almost 21 00 to just below Note that the thick line had a downward slope throughout the period of the chart and that it was under the thin line which was the day moving average.
The hammer candle occurred on the final day of April. On this day, the Composite breached intraday, but the bears did not have the power to close it under that psychological support level. Instead, the Composite closed slightly positively on the day, hence the small white head at the top of the candle.
In itself, the hammer gave a powerful, warning that Nasdaq was reversing course. The alert trader might take a long position in a leading Nasdaq stock or an ETF such as the QQQQ on the next trading day when the Composite bullishly followed through on the previous day's action. On the second trading day after the hammer, the four-day moving average crossed above the nine-day and both began to slope higher, another bullish sign. Shortly thereafter, the Price Relative broke out above its own moving average and for several weeks Nasdaq became the market leader instead of the laggard.
Additional technical confirmation of the hammer came from the behavior of the stochastics oscillator. Stochastics compares the behavior of price relative to itself. It is a rapidly moving indicator which gives timely buy and sell signals. In this case, stochastics demonstrated bullish momentum divergence as marked on the chart.
Bullish divergence occurs when price goes lower, but the stochastics oscillator rises. The day after the hammer, stochastics gave its first buy signal in roughly two weeks. From that time onward, throughout the entire month of May, Nasdaq was off to the races. The Composite rallied roughly points, from below to nearly 21 The hammer candle was the technical signal that it was time to be long not short Nasdaq. The candle opposite of the hammer is called hangman. When I have taught candlesticks in college stock market classes, students have easily become confused between the two.
This is because they look exactly alike. The key difference is where they occur in a chart. The hammer occurs after a long decline when the market is oversold. In contrast, hangman puts in its appearance near the end of an uptrend when the market is overbought. There are times when a hangman candle can look a great deal like the dragonfly doji.
As shown in the chart below, the hammer candle occurred outside the Bollinger band, a sign the stock was very overbought. I have also placed the CCI indicator on the chart. Note that when the hammer candle occurred, CCI was well over and was beginning to trend downward. Stochastics gave the same message as it gave a sell signal after having reached overbought levels.
The hammer was indeed the profit-taking signal in FRX. The trendline was broken the next trading day. When a candlestick, indicator and trendline all give the same message, it is time to listen to these messages. While FRX went sideways rather than sharply down after the hammer, a position in the stock was dead money.
The engulfing candle must completely "consume" the real body of the previous candle. Because stocks have fewer gaps than commodities, an engulfing candle may violate this rule very slightly by being just above or below the top or bottom of the previous candle. In most cases, you should interpret this as an engulfing pattern.
If you or your children are in the age group to remember the early video game Pac Man, you can think of the engulfing candle as being similar to the hero of that game in that it eats or consumes the previous candle. A bullish engulfing candle occurs after a significant downtrend. Note that the engulfing candle must encompass the real body of the previous candle, but need not surround the shadows.
Below you will find an illustration of a bullish engulfing candle: A bearish engulfing candle occurs after a significant uptrend. Again, the shadows need not be surrounded. Below you will find an illustration of a bearish engulfing candle: The power of the engulfing candle is increased by two factors -- the size of the candle and the volume on the day it occurs.
The bigger the engulfing candle, the more significant it is likely to be. A large bullish engulfing candle says the bulls have seized control of the market after a downtrend. Meanwhile, a large bearish engulfing says the bears have taken command after an uptrend.
Also, if volume is above normal on the day when the signal is given, this increases the power of the message. A good example of a bearish engulfing candle ending a rally is found in Avid Technology AVID , a maker of video editing software. Note also the large volume spike on that day. As we shall see later in this book, gaps in candlestick theory are called "windows," and create resistance to further price advances. That in itself should have made any long cautious on AVID.
Another reason for prudence, however, was that it was overbought. It was outside the Bollinger band. In addition to being in overbought territory on stochastics, there was also bearish momentum divergence. The day after the bearish engulfing candle, the stock gapped down.
Stochastics and CCI gave clear sell signals and the trendline from the late April low was broken soon after. Note the long lower shadow which probed outside the Bollinger band on this session. While this candle does not meet the requirements of a hammer the shadow is not double the real body , traders should still pay close attention to long shadows especially in areas of support.
They suggest that there is buying interest at that level. Note also the bullish divergence on the CCI indicator which was recovering from oversold levels. Trader s needed to wait two additional days for the bullish engulfing candle, but when it did come it was a highly reliable signal.
Bullish and bearish engulfing candles warn of trend change before it happens. Combine the appearance of these candles with other technical tools such as CCI, and you should quickly pick up on trend changes. The ability to spot the trend change is key to positioning yourself on the right side of the market, and is vital for trading success.
Still, the appearance of this candle should be a warning to the trader to protect profits in a position. It also suggests that you should watch a stock as a possible short candidate in the trading days ahead. The Dark Cloud Cover candle occurs after a strong uptrend. A series of ascending candles is ultimately "capped" by a final white candle. At this point, the stock or index seems technically healthy and the bulls may be lulled into a sense of false complacency.
On the day of the dark cloud cover, the stock opens above the previous day's high. For a true dark cloud cover to emerge, therefore, the stock should gap above the upper shadow of the previous white "capping" candle. At the opening bell on this trading day, it seems like the uptrend will continue. As the day wears on, however, the bears wrest control. On the dark cloud cover day, the stock closes at least halfway into the previous white "capping" candle.
The larger the penetration of the previous candle that is, the closer this candle is to being a bearish engulfing , the more powerful the signal. Trader s should pay particular attention to a dark cloud cover candle if it occurs at an important resistance area and if the end-of-day volume is strong. Below you will find an example of a Dark Cloud Cover candle: Film and digital camera maker Eastman Kodak EK provides an example of the dark cloud cover.
While the third candlestick was not large, it if the four candles were combined into one, it certainly would have been. When the dark cloud cover emerged therefore, traders should have been wary. While this candle was relatively small, it retreated half-way back into the final white candle. While the Dark Cloud Cover is not as potent a reversal candle as bearish engulfing, its appearance in the chart should be respected. Whereas the dark cloud cover warns that an uptrend might be coming to an end and is thus a signal to take profits on long trades, a piercing candle intimates that a downtrend may be about to reverse and shorts should be covered.
The first thing to look for to spot the piercing pattern is an existing downtrend. With daily candles, the piercing pattern will often end a minor downtrend a downtrend that often lasts between five and fifteen trading days. The day before the piercing candle appears, the daily candle should ideally have a fairly large dark real body, signifying a strong down day. Here is an example of the piercing candle: In the classic piercing pattern, the next day's candle gaps below the lower shadow, or previous day's low.
I find with stocks in comparison to commodities , however, that the gap is very often below the previous day's close, but not less than the previous day's low. On the piercing day, the candle comes back into and closes at least halfway into the real body of day one. If it does not come at least halfway back, then the candle is not a piercing candle and needs to be called by a different name.
The candle is "on-neck" if it closes at day one's low, "inneck" if it closes slightly back into day one's real body, and "thrusting" if it closes substantially into the real body, but less than halfway. In addition, the second day's candle cannot totally make up the ground lost in day one, otherwise it would be a bullish engulfing. Here are a few other points on the piercing candle.
The closer it is to being a bullish engulfing candle, the more positive it is, and thus the greater the possibility of a reversal. Second, take particular note of the piercing candle if it occurs at an important support level. Third, if volume is strong on the piercing day, then the candle gains added significance. Large lower shadows often serve as support areas. In the National lottery generated R4. Lotto is the most popular type of gambling in South Africa but Powerball has been the faster-growing for last years due to its high payouts.
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