Archives for April 2012

The Inverted Hammer produces very important attributes when analyzing a potential reversal. It is considered one of the 12 major candlestick patterns and it is comprised on one candle. The inverted hammer is easily identified by a small body with a shadow at least two times greater than the body. It is found at the bottom of a downtrend and it indicates that the bulls are stepping in however selling is still occurring. The color of the small body is not important but a white or green body has more bullish implications than a black or red body. The following day requires a positive day in order to confirm that the inverted hammer signal has occurred.

Criteria

• The upper shadow should be at least two times the length of the body.
• The real body is at the lower end of the trading range and the color of the body is not important however, a white or green body has slightly more bullish implications.
• There should be no lower shadow or a very small lower shadow.

Signal Enhancements

• The longer the upper shadow the higher the potential for a reversal to occur.
• If on the day after this signal occurs, the price opens up higher than the previous day’s close, then the signal has even stronger confirmation.
• The chances that a blow-off day occurred are increased if there is large volume on the day of the inverted hammer signal.

Pattern Psychology

After a downtrend has been in effect the atmosphere is bearish but the price opens and begins to trade higher. The bulls have stepped in however they cannot maintain their strength and the existing sellers know the price back down to the lower end of the trading range. The bears are still in control but on the following day the bulls step in and take the price back up without any major resistance from the bears. If the price stays strong after the inverted hammer day then the signal is confirmed.

Utilizing just the major Japanese Candlesticks trading signals will provide more than enough trade situations for most investors. They are the signals that investors should contribute most of their time and effort. However, this does not mean that the remaining patterns should not be considered. Those signals are extremely effective for producing profits.

Continue your education and read about the secondary signals beginning with the tri-star pattern.

The shooting star candlestick is one of the 12 major candlestick patterns and the Japanese named it the shooting star because it looks like a shooting star falling from the sky with the tail trailing behind it. It is comprised of one candle and it is easily identified by the presence of one small body with a shadow at least two times greater than this body.

Criteria

• The upper shadow should be at least two times the length of the body.
• The real body is at the lower end of the trading range and while the color of the body is not important, a black or red body should have slightly more bearish implications.
• There should be no lower shadow or a very small lower shadow.
• A black or red candle on the following day is needed to confirm the shooting star candlestick did occur.
• A gap down with a lower close is an even better confirmation that it occurred.

Signal Enhancements

• The longer the upper shadow is the higher the potential is for a reversal to occur.
• If on the day after this signal occurs, the price opens up lower than the previous day’s close, then the signal has an even stronger confirmation.
• The chance that a blow-off day has occurred is increased if there is large volume on the shooting star day, although the large volume in not a necessity.

Pattern Psychology

After a strong up-trend has been in effect the atmosphere is bullish. The price open and trades higher and the bulls are in control. Before the end of the day however, the bears step in and take the price back down to the lower end of the trading range. This creates a small body for the day and could indicate that the bulls still have control. The long upper shadow however, represents that sellers started to step in at these levels even though the bulls may have been able to keep the price positive by the end of the day. A lower open or a black or red candle the following day will reinforce the face that selling is occurring.

Japanese Candlestick trading signals consist of approximately 40 reversal and continuation patterns. All candlestick patterns have credible probabilities of indicating correct future direction of a price move. The shooting star candlestick is one of the 12 major patterns. The definition of “major” has two functions. Major in the sense that they occur in price movements often enough to be beneficial in producing a ready supply of profitable trades. They also clearly indicate price reversals with strength enough to warrant placing trades.

Continue to learn more about the major candlestick signals and read about the Inverted Hammer signal.

What is the strongest of the 12 major candlestick patterns, or rather the entire list of candlestick signals?  The Kicker signal. This signal demonstrates a severe change an investor sentiment. In fact, many investors suggest that if you see this signal then you should go long or short, depending upon whether it is bullish or bearish.

Description
The kicker signal, as stated above, is the most powerful signal of all and it works equally well in both directions whether bullish or bearish. Its relevance is magnified when it occurs in overbought or oversold areas and it is formed by two candles. The first candle opens and moves in the direction of the current trend and the second candle opens at the same open of the previous day (a gap open), and then heads in the opposite direction of the previous day’s candle. The bodies of the candles are opposite colors and this formation is indicative of a dramatic change in investor sentiment. The candlesticks really do visually depict the magnitude of the change.

Criteria

• The first day’s open and the second day’s open are the same.
• The price movement is in opposite directions from the opening price.
• The trend has no relevance in a kicker situation.
• The signal is usually formed by surprise news before or after market hours.
• The price never retraces into the previous day’s trading range.

Signal Enhancements

• The longer the candles are the more dramatic the price reversal is.
• Opening from yesterday’s close to yesterday’s open already is a gap, however gapping away from the previous day’s open further enhances the reversal.

Pattern Psychology
The kicker signal demonstrates a dramatic change in sentiment indicating that something has occurred in order to violently change the direction of the price. Usually a surprise news item is the cause of this type of move. The signal illustrates such a change in the current direction that the new direction will persist with strength for a good while. There is one caveat to this signal however. If the next day prices gap back the other way then many investors would strongly urge you to liquidate the trade immediately. This does not happen very often however when it does you will see many investors get out immediately.

The evening star pattern is a top reversal signal and it is exactly the opposite of the morning star signal. Like the planet Venice, the evening star foretells that darkness is about to set in, or in other words, it foretells that prices are about to go down. It is formed after an obvious uptrend and it is made by a long white or green body that occurs at the end of an uptrend. This typically occurs when confidence is finally built up. The following day gaps up however the trading range stays small for the day. Again, this is the star of the formation. The third day is a black or red candle day and it represents the fact that the bears have now seized control. That candle should consist of a closing that is at least halfway down the white or green candle of two days prior. The optimal evening star signal should have a gap before and after the star day.

Criteria

• The uptrend has been apparent.
• The body of the first candle is white or green and is continuing the current trend.
• The second candle is an indecision formation.
• The third day shows evidence that the bears have stepped in and this candle should close at least halfway down the white or green candle.

Signal Enhancements

• The longer the white or green candle and the black or red candle, the more forceful the reversal is.
• The more indecision that the star day illustrates, the better the probability that a reversal will occur.
• A gap between the first day and the second day adds to the probability that a reversal is occurring.
• A gap before and after the star day is even more desirable. The magnitude in which the third day comes down into the white or green candle of the first day indicates the strength of the reversal.

Pattern Psychology
A strong uptrend has been in effect and the buyers can’t imagine anything will go wrong so they begin to pile up. However, it has now reached a point in the prices where sellers start to take profits and think the price is fairly valued. The next day all of the buying is met with selling which causes for a small trading range. The bulls then get concerned and the bears start to take over. The third day is a large sell off da and if there is big volume during these days, it shows that the ownership has dramatically changed hands. This change of direction is immediately seen in the color of the bodies.

Please continue to read about the 12 major candlestick patterns.

The morning star is a bottom reversal signal and it illustrates that prices are going to go up. The Japanese rice traders described it as the planet Mercury, or the morning star, since it foretells brighter things to come. Identifying this signal among other candlestick patterns is relatively easy since it is visually apparent to the eye. There are some very simple parameters that can enhance this signal’s probabilities of creating a reversal. These are explained below.

Criteria

• The downtrend has been apparent.
• The body of the first candle is black or red and is continuing the current trend.
• The second candle is an indecision formation.
• The third day shows evidence that the bulls have stepped in so this candle should close at least halfway up the black or red candle.

Signal Enhancements

• The longer the black or red candle and the white or green candle, the more forceful the reversal is.
• The more indecision that the star day illustrates, the better the probability that a reversal will occur.
• A gap between the first day and the second day adds to the probability that a reversal is occurring.
• A gap before and after the star day is even more desirable.
• The magnitude that the third day comes up into the black or red candle of the first day indicates the strength of the reversal.

Pattern Psychology
A strong downtrend has been in effect and the sellers start to panic. There is a large sell-off day, but the next day as the selling continues, the bulls step in at the low prices. If there is big volume during these days then it shows that ownership has dramatically changed hands. The second day does not have a large trading range and on the third day the bears start to lose conviction as the bull increase their buying. When the price starts to move back into the trading range of the first day then the sellers will diminish and the buyers will seize control. Keep in mind that a Doji or a spinning top is usually the predominant formation in a morning star signal. The important factor is to witness the confirmation of the bulls taking control the next day. That candle should consist of a closing more than half-way up the black or red candle of two days prior.

Continue to learn about candlestick signals and read about the evening star.

The bearish harami is one of the major candlestick patterns that displays common sense in graphic depiction. The elements that create a bearish harami produce clear insights into investor sentiment at a reversal.

Description

The Bearish Harami is the exact opposite of the bullish harami and its presence indicates that the trend is over. It is composed of a two-candle formation with the body of the first candle the same color as the current trend. The first body of the pattern is a long body and the second body is smaller. The open and the close occur inside the open and close of the previous day.

Criteria

• The body of the first candle is white or green and the body of the second candle is black or red.
• The uptrend is apparent and a long white or green candle occurs at the end of the trend.
• The second day opens lower than the close of the previous day and closes higher than the open of the prior day.
• Confirmation is needed for a reversal and the next day should show weakness.

Signal Enhancements

• The longer the white or green candle and the black or red candle, the more forceful the reversal.
• The lower the black or red candle closes down on the white or green candle, the more convincing it is that a reversal has occurred, despite the size of the black candle.

Pattern Psychology
After a strong uptrend has been in effect and after a long white or green candle day, the bears open the price lower than the previous close. The longs get concerned and begin profit taking as the price finishes lower for the day. The bulls are now concerned as the price closes lower and it has now become evident that the trend has been violated. A weak day following convinces everyone that the trend was reversing. Volume increases as a result of profit taking and the addition of short sales.

Harami signals provide an opportunity to maximize returns and they have excellent capabilities of indicating how strong the new trend to the upside will be. If all of your investment funds are currently fully used, the Harami may reveal that one of the positions has stalled for a few days. An aggressive trader may opt to move those funds to a better trade and then return in a few days to reinvest once the position is moving.

Continue to learn about candlestick signals and read about the morning star.

The bullish harami is often seen and is one of the 12 major candlestick patterns. This pattern is composed of a two-candle formation in a down-trending market. The body of the first candle is a long body and is the same color as the current trend while the second body is smaller. The open and the close occur inside the open and the close of the previous day.  The appearance of the bullish harami indicates that the trend is over. The Japanese definition for harami is pregnant woman or body within. The first candle is black or red which is a continuation of the existing trend. The second candle which is the little belly sticking out is usually white but not always. The location and size of the second candle will influence the magnitude of the reversal.

Criteria for bullish harami

• The body of the first candle is black or red and the body of the second candle is white or green.
• The downtrend has been evident for a good period since the long black or red candle occurs at the end of the trend.
• The second day opens higher than the close of the previous day and closes lower than the open of the prior day.
• Unlike the Western “Inside Day” just the body needs to remain in the previous day’s body, where as the “Inside Day” requires both the body and the shadows to remain inside the previous day’s body.
• For a reversal signal further confirmation is required to indicate that the trend is now moving up.

Signal Enhancements

• The longer the candle the more forceful the reversal.
• The higher the white or green candle closes up on the black or red candle the more convinced we are that a reversal has occurred (despite the size of the white or green candle).

Pattern Psychology of the Bullish Harami

After a strong down-trend has been in effect and after a selling day the bulls open the price higher than the previous day’s close. The shorts get concerned so they start covering while the price finishes higher for the day. This is enough support to have the short sellers take notice that the trend has been violated. A strong day the following day convinces everyone that the trend was indeed reversing. Usually the volume is above the recent norm due to the unwinding of short positions.

Learn the other 12 major signals, in addition to the bullish harami, and the analysis of market trends and price trends become very easy. The use of candlestick charts greatly enhances the speed in which you can analyze a trend correctly. The candlestick patterns are graphic statistical analysis and Japanese rice traders have successfully used the signals for centuries. Take advantage of the benefits that Japanese Candlestick trading provides.

Continue to read about candlestick signals and read about the bearish harami.