Candlestick Reversal Patterns

Major Candlestick Reversal Patterns

Learn and master these powerful reversal patterns with “Candlestick Trading for Maximum Profits”. You’ll also learn to find these patterns when they are the most profitable, filtering out invalid signals to give you the most profit for your trade. To find out more about “Candlestick Trading for Maximum Profits” just visit our home page.

Bearish Candlestick Reversal Patterns.

Bearish Dark Cloud	Psychology A long white candlestick is formed on the 1st day and a gap up is created on the 2nd day. This is encouraging to the bulls. However, the 2nd day closes below the midpoint of the 1st day. Longs quickly question their strategy.
Bearish Doji Star	Psychology The uptrend is in full force with a strong 1st day. All confidence built up by the bulls from the 1st day is destroyed when the 2nd day’s gap up closes near its open. Profit takers will quickly appear if the next day opens lower.
Bearish Engulfing Pattern	Psychology If not much volume occurs on the 1st day of the Bearish Engulfing formation compared to the 2nd day, then this increases the strength of the pattern. The 2nd day opens above the close of the 1st day, however quickly sells off to finally close below the open of the 1st day. This scares the longs and brings into question the bull trend which prompts additional selling in the coming days.
Bearish Evening Star	Psychology The 2nd day gaps higher, but trades in a small range. The bearishness of this indecision is confirmed by the lower close of the 3rd day. Look for lower prices.
Bearish Evening Doji Star	Psychology The bearishness of the doji star created on the 1st two days is confirmed with the 3rd day. If the penetration of the 3rd day is more than 50 percent, then this formation has a much better chance to succeed for the trader.
Bearish Hanging Man	Psychology As with any single candlestick, confirmation is required. The Hanging Man formation shows the price goes much lower than the open then closes near the opening price. This could mean that many longs have positions that they are attempting to sell. Ideally, a black real body Hanging Man with a lower open the following day could be a bearish signal for the days ahead.
Bearish Harami	Psychology A long 1st day with high volume in the existing uptrend brings complacency to the bulls. The next day trades in a small range within the previous day’s real body. Light volume on the 2nd day should give rise to concern by the bulls of an impending change of trend. Look for lower prices over the coming days, especially if the next day provides confirmation of a trend change by closing lower.
Bearish Harami Cross	Psychology The 2nd day’s price range does not pierce the previous day’s range and closes about where it opened. Volume on the 2nd day is low which indicates that traders are lacking enough information to decide whether to go long or short.
Bearish Shooting Star	Psychology The long upper shadow and small real body at the bottom of the trading range are cause for concern by the bulls. They wonder if this is the end of the uptrend and take measures to protect their gains.

Bullish Candlestick Reversal Patterns.

Learn and master these powerful reversal patterns with “Candlestick Trading for Maximum Profits”. You’ll also learn to find these patterns when they are the most profitable, filtering out invalid signals to give you the most profit for your trade. To find out more about “Candlestick Trading for Maximum Profits” just visit our home page.

Bullish Doji Star	Psychology The downtrend is in full force with a strong 1st day. All confidence built up by the bears from the 1st day is destroyed when the 2nd day’s gap down closes near it’s open. Short covering will quickly appear if the next day opens higher.
Bullish Engulfing Pattern	Psychology If not much volume occurs on the 1st day of the Bullish Engulfing formation compared to the 2nd day, then this increases the strength of the pattern. The 2nd day opens below the close of the 1st day, however quickly rallies to close above the open of the 1st day. This damages the spirits of the shorts and brings into question the bear trend which prompts additional buying in the coming days.
Bullish Hammer	Psychology As with any single candlestick, confirmation is required. The Bullish Hammer formation shows the price goes much lower than the open then closes near the opening price. This fact reduces the confidence of the bears. Ideally, a white real body Hammer with a higher open the following day could be a bullish signal for the days ahead.
Bullish Harami	Psychology A long 1st day with high volume in the existing downtrend brings complacency to the bears. The next day trades in a small range within the previous day’s real body. Light volume on the 2nd day should give rise to concern by the bears of an impending change of trend. Look for higher prices over the coming days, especially if the next day provides confirmation of a trend change by closing higher.
Bullish Harami Cross	Psychology The 2nd day’s price range does not pierce the previous day’s range and closes about where it opened. Volume on the 2nd day is low which indicates that traders are lacking enough information to decide whether to go long or short.
Bullish Inverted Hammer	Psychology The long upper shadow and small real body at the bottom of the trading range are cause for concern by the bears. They wonder if this is the end of the downtrend and take measures to protect their gains. If the next day opens above the body of the Inverted Hammer, then expectations could be for shorts to cover and propel a reversal rally.
Bullish Morning Star	Psychology The 2nd day gaps lower, but trades in a small range. The bullishness of this indecision is confirmed by the higher close of the 3rd day. Look for higher prices.
Morning Doji Star	Psychology The bullishness of the doji star created on the 1st two days is confirmed with the 3rd day. If the penetration of the 3rd day is more than 50 percent, then this formation has a much better chance to succeed for the trader.
Bullish Piercing Pattern	Psychology The gap down on the 2nd day perpetuates the downtrend. However, the 2nd day’s close is above the midpoint of the 1st day’s body. This suggests to the bears that a bottom could be forming. This price action is not nearly as discernable using bar charts as it is with candlestick charts. The more penetration of the close on the 2nd day to the 1st day’s body, the more probable the reversal signal will succeed.

Forex Relative Strength Index Indicator Explained

The relative strength index (RSI) is in fact a momentum indicator that can be used to measure whether the market is currently overbought or oversold. Being able to identify the duration where the market is overbought or oversold can prevents you from entering a losing trade.
Here is how to read the Relative Strength Index (RSI)
Overall the RSI has a magnitude of 0 to 100. When it falls below the magnitude of 30, it usually indicates a situation of oversold and when it went above the magnitude of 70, it is usually indicating that the market is overbought.

Overbought & Oversold

However being overbought or oversold does not mean that the price will not move further up or down the market needs some time to correct itself. Similarly it also does not mean that you must enter a trade when the market is in either one of the extreme levels.
How to Use the Relative Strength Index (RSI):
1) As an Entry Indicator:
Depending on the types of market you are trading, there is a slight difference in the way you can use the RSI.
a) Range Trading
In a ranging market which means that the price is moving up and down within a range. You can use the oversold and overbought feature of this indicator to help you enter your trade.
When you see the price approaching a resistance level and the RSI rising above the magnitude of 70 which means that the market is currently overbought, you can enter a SHORT trade to profit from the range.
When the price is approaching a support level and the RSI falls below the magnitude of 30, you should then enter a LONG trade to profit from the range.

Range Trading With RSI

b) Trend Trading
In a trending market, the way you use this indicator to help you in entering a trade will be a bit different from the above. When you are in a trending market, you should be looking to BUY a Dip and SELL a Rally and this is where the RSI can be of use to you.
If the market is in an uptrend, you should wait for the price to retrace before you enter a trade. You can enter a LONG trade when you see the RSI dropping below the 50 marks and then curve up above it.
If the market is in a downtrend, you can enter a SHORT trade if you see the RSI rising above the 50 mark and then curve down moving below it.

Trend Trading With RSI

2) As a Trend Indicator:
Besides using RSI as an entry indicator, it can also be used as a tool for confirming a trend. If you are in an uptrend, you can confirm it by making sure that the RSI is above the 50 mark. If you are in a downtrend, you can confirm it by checking if the RSI is below the 50 mark.
The RSI is a good tool to avoid fake outs in trend and you should always make use of this ability to confirm the trend before you enter a trade.
3) As a Divergence Indicator:
You must have heard of MACD divergence but you may not have heard of RSI divergence. But for those new traders who are reading my blog post, I will go through what divergence is all about.
A divergence occurs when the market is moving in the opposite direction as the indicators.
You will get a positive divergence which is usually formed when the market makes lower low while the indicator makes higher low. The divergence is in fact a leading indicator as it gives you a pre-warning that the market is going to reverse.
You will see a negative divergence when you see the market making higher high while the indicator makes lower high and this is usually an indicator that the market is going to move from up to down.

RSI Divergence

The above are 3 ways you can make use of the Relative Strength Index in your trading. Make sure you include this indicator into your trading toolkit as it is something that can give you an edge if you do it right.

Forex Stochastic Indicator Explained

The stochastic indicator is a tool that is developed by George C.Lane. It is in fact a momentum indicator or oscillator that is used to compare the current market price to the high and low of a specific period of time.
The stochastic is made up of 2 lines, %K and %D. Depending on your setting, you can adjust the sensitivity of these 2 lines to suit your plan.
Although there are 3 types of stochastic namely full, fast and slow, the fast and slow ones are more commonly used. So let us take a look at both of them.

Fast Vs Slow

From the picture above, you can see that there are more crossovers for the fast stochastic which means that it is actually more sensitive than the slower one. However this gives rise to more false signal which is undesirable in trading.
As for the slow stochastic, it is less sensitive and produces lesser false signals as compared to the fast one. Due to its low sensitivity, it will usually signal you to enter a trade after the market has already moved by certain amount.
How to Read the Stochastic?
When the stochastic moves above the 80 level, the market is considered to be overbought and when it moves below the 20 level, the market is considered to be oversold.
However there is one thing you have to take note, when it moves above the 80 level, it does not always mean that the market will reverse. There are times where it will continue to stay above the 80 level and in this situation; it usually indicates that the market is in a strong uptrend.

overbought and oversold

The important thing to note when reading the stochastic is when the %K crosses above %D after it reaches the oversold level or when the %K crosses below %D after it reaches the overbought level.
How to Use the Stochastic?
There are several ways you can use the stochastic to help you in your trading and below are some of them
1) Entry Signal: It can be a great tool when it comes to giving entry signal. Personally I like to enter my position when the %K crosses the %D and move out of either the overbought or oversold level.
If I am looking to go LONG, I will wait for the stochastic %K to cross above the %D and move above the 20 mark. If I am looking for a SHORT trade, I will wait for the %K to cross below the %D and move below the 80 mark.
2) Exit Signal: The concept for using stochastic to exit my position is about the same as the entry. If I have taken a LONG trade, I will wait for it to move to the overbought zone and exit my position after %K crosses below %D and move below the 80 mark.

Exit Signal

3) Reversal Signal: Other than MACD divergence, you can also make use of stochastic divergence to enter a trade. The positive divergence occurs when the market makes lower low while the stochastic make higher low. This is usually an indication that the market is going to reverse up.

Positive Divergence

The negative divergence occurs when the market makes higher high and the stochastic make lower high. This usually signifies a downward reversal is going to occur.

Negative Divergence

The above are 3 ways I usually use the stochastic and I hope that you will be able to make full use of its ability to help you in your trading.

Trade Selection

Your trading week can bear witness to the fulfillment of a lot of long range planning, and the big payoffs that such planning brings to those who are wise and patient-those who want the best of the best. Many times it really pays to be patiently waiting for a trade to burst forth and make some nice gains. A number of the spreads we do are the result of patient waiting for the two sides to come into proper alignment. We plan these trades days or even weeks in advance. When a major entry signal such as the breakout of a Ross hook are being made, every effort within reason should be made to be aboard, even if only for a couple of days.

Regardless of what may be happening on the intraday charts, the order to buy or sell based on a Traders Trick Entry must be in place and waiting as resting orders. Therefore, even if the intraday charts do not yield an adequate entry signal, the order will be filled. The resting orders may be limit orders, so as to avoid being filled on gap breakouts.

To ensure that everything is in place at the right time, you have to have everything prepared beforehand.

Trade selection and adequate planning go hand in hand. This is where the vast majority of would-be professional traders miss the boat.

Much more money is made as a result of proper planning than from sitting and trading everything that comes along or "looks" good.

I'll never fully understand why people think they have to trade so much of the time. Nor will I ever fully grasp why people think that they have to take as many trades as they do.

I was taught just the opposite. I want to cover in greater detail just how I was taught to approach trade selection.

It all starts with proper management-planning, organizing, delegating, directing, and controlling.

I was taught to weave them all together in my trading-they do overlap.

Although planning is the major management function involved in trade selection, you can't possibly plan well unless you are organized to do so.

You must have your tools at hand. Your charts, your data, the proper equipment etc. All of the rudiments for planning must be in place-this is a part of organizing.

You must be physically fit when you plan: well nourished, properly exercised, well rested etc., all part of having your life organized.

I was taught that to be a winning trader, I had to be the best. There could be no middle ground. There were only winners and losers out there, and to be a winner I had to be a champion. And, just like any champion, I had to train, train, train.

I was taught that there were no runners up in trading. When others were busy going to parties, I was to study. When others were listening to the radio or watching TV, I was to practice trading.

I was to study my charts diligently. The charts, as inaccurate as they were, were all I had to hang my hat on. I was to picture and imagine in my mind what made them move and form the way they did. I was to ask myself, "How does what I see in front of me relate to supply and demand?" Supply and demand are what make prices move or not move during a trend.

But there was more to a chart than that. Reflected in the chart were the emotional reactions of human beings. Reactions to rumors and news; to national and world events; to government reports-these too were on the charts.

There was something else on the charts, something that few took into account. That something was the manipulations from and by the market movers, the trading floor and also from and by holders of large inventories of the underlying commodity. These were in the days before financial futures and before electronic trading. Today, the big players have an even greater effect on the markets.

I was taught to look for evidence of any and all of these things when I studied my charts. I was told that the cumulative action of these things caused patterns to form.

I was taught to look for the truths in the markets. There were only two things that were always true-A BREAKOUT, and a TREND. I was to master these phenomena. Over and over I had hammered into my head, the truth is always the truth. When a market breaks out, no one can change that. It is history and it is true. It may turn out to be a "false" breakout, but nevertheless it is a breakout. I had to learn to tell which ones were most likely true breakouts. How would I know that? By the patterns on the chart.

The trend is the trend while it lasts. While a market is trending it is telling the truth. The trend can change, but the truth is the truth. If the market is going up, prices are going up. If the market is going down, then the truth is that prices are going down. It is an immutable fact. I was to learn to make my money by trading with the trend. I was to learn what constitutes a trend. I had to learn to spot trends early so that I could make the most out of the market while it trended. I was to learn to recognize when a trend would most likely begin, and just as important, I had to learn to be even more adept at deciphering when a trend was ending. A trend represents momentum, and momentum is what makes money for you if you are going with it.

I was taught to learn to recognize "my" trade(s), and to take only "my" trades. "Trade the formations and patterns that you can easily recognize and identify,"
I was told.

I was taught to trade using the tricks I had been shown and to accumulate and keep a collection of high probability tricks in my bag of tools. One such tool is the Traders Trick Entry.

How was I to do all this? Practice, practice, PRACTICE. Practice recognition of congestion areas. Practice recognition of high probability breakouts. Practice and more practice. Just like anyone who wants to be a champion at anything, total dedication, study, practice and more practice. I was to become a virtuoso at trading. I was to practice it over and over, always realizing I would never be good enough. There would always be a way that I could do things better, more efficiently, and with greater speed and finesse.

I also had to become proficient in the other aspects of management. I was taught to write out a script of my orders and rehearse giving them. I was taught to tape my orders and write them down. I was taught to be extremely firm and insistent and to develop that tone of voice when I was calling them in by telephone. No nice guy stuff. Polite, but firm and strong, urgent and insistent was the way the orders had to be called in. This was directing those to whom I had given the authority to get my orders to the trading floor. Then I was taught to be extremely intimidating in getting back the results. To be ruthless in demanding good fills.

To ask for time and sales on anything suspect. This was controlling, exacting back responsibility for the authority originally delegated.

I was taught that I owed my broker nothing. He was the servant and I was the master. I was paying him well for the service he rendered. I was to expect the best from a broker. I was to be quick to drop a broker from service. After all, I was the one picking up the tab, not the broker.
Over the years, although markets have changed, nothing has changed in the way of maintaining personal discipline.

You must watch the market, watch every tick if you are daytrading, learn to see what is going on. Pick your trades carefully. Pick only those formations that form well, ones that are clearly what you would like to see. As you gain experience, you will learn to recognize even more trading opportunities.