An Investor's Guide to Candlestick Patterns

Transcription

1 An Investor's Guide to Candlestick Patterns By Gordon Kristopher Dec 12, :34 PM What Are Candlestick Patterns in Technical Analysis? Candlestick patterns In technical analysis, candlestick patterns are a combination of one or more candlesticks. The pattern forms over short time periods. Candlestick pattern versus chart pattern The following chart shows the candlestick pattern and chart pattern for Apple s (AAP L) stock. C andlestick patterns form as a result of stock prices daily supply and demand forces. C andlestick patterns form over a short time period. Chart patterns form due to the change in prices due to psychological and fundamental factors over long time periods. C andlestick patterns indicate the trend direction for a short time period. In contrast, chart patterns indicate the trend direction for a long time period. Chart patterns can also show a change in trend direction. C andlestick patterns are used for short-term entry and exit points. C hart patterns are used for long-term buy and sell signals. The major candlestick patterns are:

2 Doji Hammer Hanging Man Inverted Hammer Shooting Star Morning Star Evening Star Three Black Crows Three White Soldiers Bullish Engulfing Bearish Engulfing Dark Cloud Cover Piercing Marubozu Spinning Top Abandoned Baby We ll discuss these candlestick patterns and their importance later in this series. Key stocks that show candlestick patterns Recently, we ve seen a Neutral Doji pattern in Atlas Financial Holdings (AFH). We ve seen an Inverted Hammer pattern in Ares C ommercial Real Estate C orporation (AC RE). In contrast, Apartment Investment and Management C ompany (AIV) is showing a Shooting Star pattern. The Long-Legged Doji is seen in the SPDR S& P 500 (SPY). American Tower Corporation (AMT) is showing an Evening Star pattern. Understanding The Doji Candlestick Pattern In Technical Analysis Doji candlestick pattern The Doji candlestick pattern has a single candle. In this pattern, the stock opening and closing prices are equal. The candlestick pattern forms due to indecision between the buyers and sellers in the stock market. It s one of the most common candlestick patterns. There are four types of Doji candlestick patterns: 1. Neutral Doji 2. Long-Legged Doji 3. Gravestone Doji 4. Dragonfly Doji

3 Neutral Doji A Neutral Doji is a small candlestick pattern. The stock open and close at the middle of the day s high and low. This pattern forms when buying and selling activity is at equilibrium. The prior trend and the Doji pattern determine the trend s future direction. Long-Legged Doji A Long-Legged Doji is a long candlestick pattern. The stock open and close at the middle of the day s high and low. This pattern forms when supply and demand forces are at equilibrium. The prior trend and the Doji pattern determine the trend s future direction. Gravestone Doji In the Gravestone Doji pattern, the stock open and close at the day s low. This pattern forms at the bottom of a downtrend. It forms when supply and demand forces are at equilibrium. The prior trend and the Doji pattern determine the trend s future direction. Dragonfly Doji In the Dragonfly Doji, the stock open and close at the day s high. This pattern forms at the peak of an uptrend. It forms when the supply and demand forces are at equilibrium. The Doji patterns are used to identify trends. The patterns are used as entry and exit points. When the Doji pattern forms at the support level, it can be used as an entry point. When the Doji pattern forms at a resistance level, it can be used as an exit point. It s advisable to use a combination of patterns and indicators to determine your trading strategy.

4 Key stocks with these candlestick patterns Recently, we ve seen a Neutral Doji pattern in C ambium Learning Group (ABC D), Atlas Financial Holdings (AFH), and Ann Inc. (ANN). In contrast, AAON Inc. (AAON) is showing a Dragonfly Doji pattern. Alon USA Energy (ALJ) is showing a Long-Legged Doji pattern. The Long-Legged Doji is also seen in the SPDR S& P 500 (SPY). The Hammer And Hanging Man Candlestick Pattern Hammer candlestick pattern The Hammer candlestick pattern is a bullish reversal pattern in technical analysis. The pattern looks like a hammer. The pattern has one candle. The Hammer candlestick pattern forms in a downtrend. It s considered a market bottom or a support. The above chart shows the Hammer and Hanging Man candlestick patterns. Hammer candlesticks form when shares fall from their opening prices due to selling pressure. However, the shares manage to recover most or all of the losses within the trading period. The fact that prices were able to recover most of the losses throughout the intraday reflects substantial buying interest for technical, psychological, or fundamental reasons. When this happens in a downtrend, it points to a possible bottom or change in trend. As a result, it s a reversal pattern. Hanging Man candlestick pattern The Hanging Man candlestick pattern is the same as the Hammer pattern. When a Hammer

5 pattern forms in an uptrend, it s the Hanging Man pattern. The pattern has one candle. It s considered a resistance or market peak. The Hanging Man pattern forms when the stock price falls from the opening price due to significant selling pressure. However, the stock retraces back within the trading period. The price action shows selling pressure for psychological or fundamental reasons. When the Hanging Man pattern forms in an uptrend, it suggests a possible market top or change in trend. So, it s a reversal pattern. The patterns are used to identify trends. The Hammer pattern can be used as an entry point. The Hanging Man pattern can be used as an exit point. It s advisable to use a combination of patterns and indicators to determine your trading strategy. Key stocks with these candlestick patterns Recently, we ve seen the Hammer pattern in Noble Energy (NBL), Oaktree C apital Management (OAK), OC I P artners (OC IP), and ION Geophysical C orporation (IO). In contrast, Bar Harbor Bankshares (BHB) is showing the Hanging Man candlestick pattern. The Inverted Hammer And Shooting Star Candlestick Pattern Inverted Hammer candlestick pattern In technical analysis, the Inverted Hammer candlestick pattern is the reverse of the Hammer pattern. The pattern has one candle. The open, close, and low are near the low of the pattern. The above chart shows the Inverted Hammer and Shooting Star C andlestick pattern.

6 An Inverted Hammer pattern forms when the buyers push the stock price higher against the sellers. However, the stock retraces and closes near the open. The pattern reflects buying interest for technical, psychological, or fundamental reasons. When the pattern forms in a downtrend, it suggests a possible market bottom or change in trend. So, it s one of the reversal patterns. Shooting Star candlestick pattern A Shooting Star candlestick pattern has one candle. It looks like a shooting star. The open, close, and low are near the low of the candlestick. The Shooting Star candlestick pattern forms when buyers push the price higher against the sellers. However, the stock falls and closes near the low. The pattern reflects selling interest for psychological or fundamental reasons. When the pattern forms in an uptrend, it suggests a possible market top or change in trend. So, it s a reversal candlestick pattern. These patterns are used for trend identification. The Inverted Hammer pattern is used as an entry point. The Shooting Star pattern is used as an exit point. It s advisable to use combination of patterns and indicators to determine your trading strategy. Key stocks with these candlestick patterns Recently, we ve seen the Inverted Hammer pattern in Ares C ommercial Real Estate C orporation (ACRE), Cleveland BioLabs (CBLI), and ChemoCentryx (CCXI). In contrast, Chipotle Mexican Grill (C MG) and Apartment Investment and Management C ompany (AIV) are showing the Shooting Star candlestick pattern. Analyzing The Morning Star And Evening Star Candlestick Pattern Morning Star candlestick pattern The Morning Star candlestick pattern is a reversal pattern in technical analysis. The pattern has three candles. It forms at the bottom of a downtrend. The first candle is any long and bearish candle. The second candle is a small and indecisive candlestick. The third candle is any long and bullish candle. Bullish means the stock price closes above the open price. Bearish means the stock price closes below the open price.

7 The above chart shows the Morning Star and Evening Star candlestick pattern. During a downtrend, high pessimism causes heavy selling. The pattern s first candle forms. It s long and bearish. The indecision between the buyers and sellers forms the second candle. It s a small candlestick or a Doji. The expectation of positive stock news in the market forms the third candle. It s long and bullish. When the volume and stock price increases, it suggests a change in trend. Evening Star candlestick pattern The Evening Star candlestick pattern is also a reversal pattern. The pattern has three candles. It forms at the top of an uptrend. The first candle is any long and bullish candle. The second candle is a small and indecisive candlestick. The third candle is any long and bearish candle. During an uptrend, high optimism causes heavy buying. The first candle forms. It s long and bullish. The indecision between the buyers and sellers forms the second candle. It s a small candlestick or a Doji. The expectation of negative stock news in the market forms the third candle. It s long and bearish. When the volume increases and the price decreases, it suggests a change in trend. These patterns are used for trend identification. The Morning Star pattern is used as a buy signal. The Evening Star is used as a sell signal. It s advisable to use a combination of patterns and indicators to determine your trading strategy. Key stocks with these patterns Recently, we ve seen the Morning Star pattern in Allied Nevada Gold C orp. (ANV) and Integrated Silicon Solution (ISSI). In contrast, Green Mountain C offee Roasters Inc. (GMC R), Duke Realty C orporation (DRE), and American Tower C orporation (AMT) are showing the Evening Star

8 candlestick pattern. Three Black Crows And Three White Soldiers Candlestick Pattern Three Black Crows candlestick pattern In technical analysis, the Three Black C rows candlestick pattern is a reversal pattern. It forms at the peak of an uptrend. The pattern has three candles. All three of the candles are long and bearish. The candles are almost the same length. The open of each candle is below the open of the previous candle. When the stock is at the peak of an uptrend and trading at resistance, the market participants anticipate a change in trend due to psychological or fundamental reasons. As a result, they tend to sell the stock. This selling activity forms the Three Black Crows pattern. Three White Soldiers candlestick pattern The Three White Soldiers candlestick pattern is also a reversal pattern. It forms at the bottom of a downtrend. The pattern has three candles. All three of the candles are long and bullish. The candles are almost the same length. The open of each candle is above the open of the previous candle. During the bottom of a downtrend, the market participants anticipate a change in trend due to psychological or fundamental reasons. They tend to buy the stocks. This buying activity forms the Three White Soldiers pattern. When three candles are seen in an uptrend, it suggests the stock trend will make higher highs. These patterns are used for trend identification. The Three White Soldiers pattern can be used as

9 an entry point. The Three Black Crows pattern can be used as an exit point. It s advisable to use a combination of patterns and indicators to determine your trading strategy. Key stocks with these patterns Recently, we ve seen the Three White Soldiers candlestick pattern in Eli Lilly & C o. (LLY), The Southern C ompany (SO), and Northeast Utilities (NU). In contrast, BB& T C orporation (BBT) and Leucadia National C orporation (LUK) are showing the Three Black C rows pattern. The Bearish Engulfing and Bullish Engulfing Candlestick Pattern Bearish Engulfing candlestick pattern The Bearish Engulfing candlestick pattern is a reversal pattern. The pattern has two candles. The first candle is small and bullish. The second candle is long and bearish. In this pattern, the second candle completely covers the first candle. So, it s called the Bearish Engulfing pattern. The pattern forms at the peak of an uptrend. In an uptrend, sellers anticipate a change in trend due to psychological or fundamental reasons. They start pushing the stock prices down to form the second candle. This shows the selling pressure in the market. This suggests a possible change in trend. Bullish Engulfing candlestick pattern The Bullish Engulfing candlestick pattern is a reversal pattern. The pattern has two candles. The first candle is small and bearish. The second candle is long and bullish. In this pattern, the second candle completely covers the first candle. So, it s called the Bullish Engulfing pattern.

10 This pattern forms at the bottom of a downtrend. In a downtrend, buyers anticipate a change in trend due to psychological or fundamental reasons. They start pushing the stock prices up to form the second candle. This shows the buying pressure in the market. This suggests a possible change in trend. These patterns are useful for trend determination. The Bullish Engulfing pattern is used as an entry point. The Bearish Engulfing pattern is used as an exit point. It s advisable to use a combination of patterns and indicators to determine your trading strategy. Key stocks with these patterns Recently, we ve seen the Bullish Engulfing pattern in ExxonMobil (XOM), Anadarko P etroleum C orporation (AP C), and EOG Resources (EOG). In contrast, Verizon C ommunications (VZ) and Southwest Airlines (LUV) are showing the Bearish Engulfing pattern. Dark Cloud Covering And Piercing Candlestick Pattern Dark Cloud Cover candlestick pattern The Dark Cloud Cover candlestick pattern is a reversal pattern. The pattern has two candles. The first candle is bullish. The second candle is bearish. In this pattern, the second candle opens above the first candle s close. The second candle closes below the middle of the first candle. This pattern forms due to indecision in buying and selling activity in the stock market. Piercing candlestick pattern The P iercing candlestick pattern is a reversal pattern. The pattern has two candles. The first candle is bearish. The second candle is bullish. In this pattern, the second candle opens below the

11 first candle s close. The second candle closes above the middle of the first candle. This pattern forms due to indecision in buying and selling activity in the stock market. When the Dark C loud C over pattern forms, investors must wait and see the next price movement. If the next candlestick is a bearish candle, it can be used as an exit point. When the Piercing patterns forms, if the next candlestick is a bullish candle, it can be used as an entry point. However, many traders use a combination of patterns and indicators for entry and exit. Key stocks with these patterns Recently, we ve seen the Dark C loud C over pattern in Baidu Inc. (BIDU), Anworth Mortgage Asset Corp. (ANH), and Education Realty Trust (EDR). In contrast, Paychex Inc. (PAYX) and Ann Inc. (ANN) are showing the P iercing pattern. Understanding The Spinning Top And Marubozu Candlestick Pattern Spinning Top candlestick pattern The Spinning Top candlestick pattern has a single candle. It forms at the peak of an uptrend, the bottom of a downtrend, or in the middle of a trend. It can be a bearish or bullish candle. It s a small candlestick pattern. In this pattern, the stock prices open and close are near each other. This pattern forms when there s indecision among the buyers and sellers in the uptrend, downtrend, or sideways trend. The pattern suggests a possible change in trend. When the Spinning Top pattern forms, traders must wait and see the next price movement. In an uptrend, if a bullish candle forms after the Spinning Top pattern at a support level, it could be used

12 as an entry point. In an uptrend, if a bearish candle forms after the Spinning Top pattern at a resistance level, it could be used as an exit point. It s advisable to use a combination of patterns and indicators to determine your trading strategy. Marubozu candlestick pattern The Marubozu candlestick pattern has a single candle. It forms anywhere in the trend. It can be a long and bearish candle. It can also be a long and bullish candle. For a bullish candle, the open and low are approximately equal. The high and close are also approximately equal for a bullish candle. In contrast, the open and high are approximately equal for a bearish candle. The close and low are also approximately equal for a bearish candle. The above chart shows a sample entry and exit signal using the Marubozu candlestick pattern. In the Marubozu pattern, a bullish candle forms when buyers push the price higher. A bearish candle forms when the sellers push the price lower. When a bullish candle forms at the support of an uptrend, it can be used as an entry point. When a bearish candle forms at resistance, it can be used as an exit point. It s advisable to use a combination of patterns and indicators to determine your trading strategy. Key stocks with these patterns Recently, we ve seen the Marubozu pattern in Altisource Asset Management C orporation (AAMC), AAON Inc. (AAON), and Acacia Research C orporation (AC TG). In contrast, American Assets Trust Inc. (AAT) and Amgen Inc. (AMGN) are showing the Spinning Top pattern. The Bullish And Bearish Abandoned Baby Candlestick Pattern

13 Bullish Abandoned Baby candlestick pattern The Bullish Abandoned Baby candlestick pattern is a reversal pattern. The pattern has three candles. It forms at the bottom of a trend. In this pattern, the first candle is any long and bearish candle. The second candle is a small and bearish candle or a Doji. The second candle doesn t overlap the first or third candle. The third candle is any long and bullish candle. This pattern forms when the forces of selling stocks shift to buying stocks. This happens when investors anticipate a trend change due to psychological or fundamental reasons. In the Morning Star or Evening Star pattern, the second candle overlaps the first and third candle. In the Bullish Abandoned Baby pattern, there isn t an overlap between the first and third candle. This shows a gap in the prices opening. The buyers or sellers are pushing the prices. As a result, a gap forms. Bearish Abandoned Baby candlestick pattern The Bearish Abandoned Baby pattern is a reversal pattern. The pattern has three candles. It forms at the peak of a trend. In this pattern, the first candle is long and bullish. The second candle is a small and bullish candle or a Doji. The second candle doesn t overlap the first or third candle. The third candle is long and bearish. This pattern forms when the forces of buying stocks shift to selling stocks. This happens when investors anticipate a trend change due to psychological or fundamental reasons. These patterns are useful for trend identification. The Bullish Abandoned Baby pattern can be used as an entry point. The Bearish Abandoned Baby pattern can be used as an exit point. It s advisable to use a combination of patterns and indicators to determine your trading strategy.

14 Key stocks with these patterns Recently, we ve seen the Bullish Abandoned Baby pattern in Alexco Resource C orp. (AXU) and InSite Vision Inc. (INSV). In contrast, Allied World Assurance C ompany Holdings (AWH) and ETFs like the Vanguard REIT ETF (VNQ) and the Financial Select Sector SP DR ETF (XLF) are showing the Bearish Abandoned Baby pattern.