Archives for September 2012

The rising three methods is an easy pattern to see during an uptrend. A long white (or green) candle forms and it is followed by a series of small candles. Each of the smaller candles is consecutively lower than the previous. The optimal number of pull-back days should be three however; two, four or even five pull-back days can be observed. The most important factor is that these candles do not close below the open of the big white (or green) candle. Also, the shadows on these candles should not go below the white (or green) candle. The candle of the final day of the formation should open up into the body of the last pull-back day and close higher than the first big white (or green) candle.

RISING THREE METHODS

Criteria for the Rising Three Methods

• An up-trend is in progress and a long white (or green) candle forms
• A group of small-bodied candles follow (preferably black or red bodies)
• The close of any of the pull-back days should not close lower than the open of the big white (or green) candle.
• The final day opens up into the body of the last pull-back day and proceeds to close above the close of the first big white (or green) candle day.

Pattern Psychology for Rising Three Methods
The rising three methods pattern suggests a rest in the trend or, in Japanese terms, a rest from battle. The concept is that the first black (or red) candle day brings some doubt into the bull camp. The following day does the same, and by the third day, the bulls are convinced that the bears do not have the strength to push prices down anymore. As a result, the bulls regain courage and start to step in. The rising three methods pattern resembles the western bull flag or pennant formation, however, the concept was originally developed in the 1700s. In modern terms, this pattern suggests that the market is just ‘taking a breather.”

Continue to learn about about the primary candlestick patterns and once you understand those then you can move onto the secondar, reversal and continuations patterns.

The Falling Three Methods is a bearish continuation pattern and it begins with a long black (or red) candle followed by a series of up-ward reaction candles. These candles all form within the range of the original candle, but they have smaller bodies. Normally, the smaller candles are white (or green), since the large trend candle is black (or red). The fifth and final candle is the same color as the original trend candle but it closes at a new low and opens lower than the close of the previous day. The only difference between the fifth and first candle is that the fifth candle will be higher or lower, depending on the trend of the original candle.

Recognizing continuation patterns is important whether you are in a long position or a short one. Besides adding to positions, continuation patterns also confirm your other indicators, even if you are trading on the short side.

FALLING THREE METHODS

Description
The Falling Three Methods is basically the opposite of the Rising Three Methods (which is another pattern discussed in next week’s blog). The market is in a downtrend and a long black (or red) candle forms. It is then followed by a series of small candles, each consecutively higher than the previous. The optimal number of up-trending days should be three. It is important to note that two, four, or even five counter trend days can be observed. Additionally it is important to note are that these candles do not close above the open of the big black (or red) candles and that the shadows do not go above the black (or red) candle’s open. The final day of the formation should open down in the body of the last uptrend day and close lower than the first big black (or red) candle’s close.

Criteria for the Falling Three Methods

• A downtrend is in progress and a long black (or red) candle forms.
• A group of small bodied candles follow, preferably white (or green) bodied.
• The close of any of the up-trend days not does close higher than the open of the big black (or red) candle.
• The final day opens up into the body of the last uptrend day and proceeds to close below the close of the first big black (or red) candle day.

Pattern Psychology of the Falling Three Methods
The Falling Three Methods is considered to be a rest in the downtrend. Just like the Rising Three Methods, the appearance of the white (or green) candle unnerves the bears. The bulls are unable to take the prices higher and the bears regain their confidence and resume selling. The concept is that the first black (or red) candle day brings some doubt into the bull camp. The following day does the same and by the third day, the bears are now convinced that the bulls do not have the strength to push prices up anymore. The bulls get their courage back and start to step in.

Continue to learn about additional candlestick patterns as well as reversal patterns and secondary patterns to learn how you can improve your profits.

Description
The Thrusting Line pattern is almost an On Neck Line or an In Neck Line pattern and it also resembles the Meeting Lines pattern. The Thrusting Line pattern actually has the same description as the On Neck Line pattern except that it closes near and slightly below the midpoint of the previous day’s black (or red) body.

Thrusting Line Pattern Image

Criteria for Thrusting Line Pattern

• A long black (or red) candle forms in a downtrend.
• The following day gaps down from the previous day’s close; however, the body is typically bigger than those found in the On Neck Line and In Neck Line patterns.
• The second day closes just slightly below the midpoint of the previous day’s candle.

Pattern Pasychology for the Thrusting Line Pattern
The same scenario that exists for the On Neck Line pattern also exists for the Thrusting Line pattern. After the market is moving in a downward direction, a long black (or red) candle enhances this downtrend. The following day opens lower, with a small gap down, but the trend halts with a move back up to the previous day’s low. The buyers in this upward movement should be uncomfortable that there is no additional strength in the upward movement. The sellers step back in the following day and continue the downtrend. This downtrend is slightly stronger than the On Neck line and In Neck line patters, but not quite as strong as the Piercing pattern.

The psychology built into a major candlestick signal is simple common sense investment philosophy. When you learn how to utilize the candlestick patterns correctly you now have the knowledge to improve your trading techniques for those trading entities you want to trade. You do not have to depend on canned programs that sometimes work and sometimes don’t work and you do not have to buy or sell stock recommendations blindly based on a research analyst’s recommendation.

Candlestick patterns are created by common sense investment practices. Please continue to learn about the primary, secondary, reversal and continuation patterns to enhance your profits.

This week’s article introduces the “In Neck Line” which is a bearish continuation pattern.

IN NECK LINE

Description

The in neck line pattern is almost a meeting lines pattern. It has the same description as the on neck line pattern except that it closes at or slightly above the previous day’s close. Confirmation is suggested for the in neck line pattern, and when it appears, it indicates some short covering but not a change in trend direction.

Criteria for In Neck Line Pattern

1. A long black (or red) candle forms in a downtrend
2. The following day gaps down from the previous day’s close, but the body is usually smaller than one seen in the meeting lines pattern.
3. The second day closes at the close or just slightly above the close of the previous day.

Pattern Psychology
This is the same scenario as the on neck line pattern. After the market is moving in a downward direction, a long black (or red) candle enhances this downtrend. The following day opens lower with a small gap down, but the trend is halted by a move back up to the previous day’s low. The buyers in this upward movement tend to be uncomfortable since there was not more strength in the upward movement. The sellers typically step back the following day to continue the downtrend.

One of the biggest misconceptions of investors is that prices move based upon fundamental reasons when in fact prices move based upon the “perception” of fundamental reasons. The Japanese Rice traders discovered this many centuries ago. Why do prices go down when good news is announced? The answer is that the anticipation of that good news was already built into the stock price.

The investment psychology incorporated into candlestick signals makes it easier to understand what is going on in an investor’s mind. The signals were created through hundreds of years of visual analysis and interpretation by successful Japanese Rice traders.

Throughout his investment career, Stephen Bigalow has directed his investment acumen towards developing improved methods for extracting profits from the investment markets. His research, encompassing all fundamental and technical methods, resulted in verifying that Candlestick analysis was superior to any other method.

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.

Please continue to learn how to identify each different candlestick trading pattern as well as what that pattern indicates is occurring in the markets.