“There are times to buy, times to sell, and times to rest.”

Most candlestick patterns are reversal patterns; however there are periods of trends that represent rest. Once a pattern is recognized it suggests a direction for future price movement. Continuation patterns, found in candlestick charting, help with the decision-making process. Whatever the pattern may be a decision must be made, even if the decision is to do nothing at all.

It is very important to learn the continuation patterns in addition to the primary and secondary candlestick patterns. In some cases the difference between a reversal pattern and the continuation of a trend can be subtle. Candlestick analysis provides the insight needed to know how minor price variations can affect the direction of a trend and lead to an enhancement of profits.

Each week we will select a continuation pattern and break it down into detail with the description, pattern criteria, and pattern psychology from the list below.

The Upside Tasuki Gap is found in a rising trend. A white or green candle forms after gapping up from the previous white or green candle, as shown in the illustration below. The following day opens lower and closes lower than the previous day. If the gap is not filled then the Bulls maintained control and it is time to go long. If the gap is filled, then the bullish momentum has come to an end. The description of a Tasuki, according to the Japanese, is a “sash that holds up one’s sleeve.”

Criteria for Upside Tasuki Gap

• An uptrend is in progress. A gap occurs between two candles of the same color.
• The color of the first two candles is the same as the prevailing trend.
• On the third day an opposite color candlestick opens within the previous candle and closes below the previous open.
• The third day close does not fill the gap between the two white or green candles.
• The last two candles, which are opposite colors, are usually about the same size.

Pattern Psychology of the Upside Tasuki Gap

Explaining the Tasuki Gap is pretty simple. The Japanese place significance on gaps. When one appears in the middle of the trend and it is not able to fill itself on weakness the next day, the strength is still in the uptrend. The pullback day is now interpreted as a profit-taking day.

Continue to learn about more candlestick patterns to see how it can greatly improve your profits! Primary candlestick patterns should be understood first (such as the doji and hanging man patterns). Once you have a basic understanding of the primary signals,  move onto the secondary candlestick signals and then eventually the continuation pattern such as this upside tasuki gap pattern.

The deliberation pattern can occur in both bull and bear markets. This pattern is formed by two long white (or green) bodies that are then followed by a small white (or green) candle. The deliberation pattern can resemble two other candlestick patterns, depending upon whether it is bullish or bearish in nature. The bearish deliberation pattern resembles the three black crows and the bullish deliberation pattern resembles the three white soldiers formation. It is important to note that the bullish deliberation pattern is a weaker pattern and is less popular than its counterpart, the bearish deliberation pattern. Many don’t use the bullish deliberation as a true reversal pattern but rather to signify a short-term price change indicator.

The bearish deliberation pattern occurs when there is a clear uptrend and is a bearish reversal signal. The first two candles have long white (or green) bodies and close near their highs. The last candle may open at or near the previous day’s close or it may gap up. This small third body is a sign of indecision over the current uptrend. It received its name because the Japanese say that when this signal occurs it is time for deliberation.

Criteria for the Bearish Deliberation Pattern:

• The first two white (or green) candles are relatively equally in length and are long candles
• The third day candle is a small body
• The small body opens at or very near the previous day’s close, or it may gap up slightly.

Pattern Psychology
The deliberation signal can occur after an up-trend or a bounce up during a long downtrend. Just like the advance block pattern, this pattern also represents buyer weakness. It can show the weakness in one day and indicates that a slow-down in the advance means that it is time for the bulls to get out. The deliberation pattern is slightly more difficult to recognize than the advance block pattern so be sure to carefully identify the characteristics associated with each candlestick.

Continue to learn about more candlestick patterns to see how it can greatly improve your profits! Primary candlestick patterns should be understood first (such as the doji and hanging man patterns). Once you have a basic understanding of the primary signals, then move onto the secondary candlestick signals.

The concealing baby swallow is a bullish trend-reversal signal and it is a very rare yet very reliable signal. The first two days of the concealing baby swallow, which are two black marubozus, demonstrate the continuation of a downtrend. On the third day the inverted hammer illustrates that the downtrend is losing steam. Notice the buying strength that is demonstrated as it gaps down on the open and then trades up into the previous day’s trading range. The last day opens higher and closes below the previous day’s close as it completely engulfs the whole trading range of the previous day. Although trading ends at the trend’s low point, the magnitude of the downtrend deteriorates significantly. Investors should expect buying to show itself at these levels.

Criteria for concealing baby swallow

• Two large black marubozus make up the beginning of this pattern and there should be no upper or lower shadows
• The third day is an inverted hammer formation and it gaps down from the previous day’s close
• The final day completely engulfs the third day (including the shadow)

Pattern Psychology
The bears are in control for a while (indicating that the downtrend is strong) and at the end of this downtrend two black marubozu days appear. The third day gaps down at its low and then trades up into the trading range of the previous day. The sellers then step in to negate the buying however the bears take notice of the buying that did occur. The final day opens higher, again, causing much concern for the sellers. As it sells off for the rest of the day, it offers the opportunity for shorts to cover their positions. The new closing low is not of the same magnitude of the previous down days of the trend. The buyers do not run into very much selling resistance from here as the trend is expected to reverse.

The concealing baby swallow is a highly reliable formation but please note that a bullish candlestick with a gap up or a higher close on the following trading day is necessary for confirmation of the trend.

Please continue to learn about more candlestick patterns.

The bearish advance block candlestick is comprised of three green or white upward candlesticks in a row with each candlestick opening below the close of the previous candlestick. Each candlestick also has a smaller range between its open and close than the previous candlestick. The advance block pattern is somewhat indicative as the three white soldiers candlestick pattern but it is bearish in nature. Unlike the three white soldiers pattern, the advance block pattern has consistently long candles and it shows signs of weakness.

The bodies of the advance block pattern are diminishing as prices rise. The upper shadows become longer which indicates that the bulls are getting more resistance to the bears. This pattern can occur in a number of different scenarios however it is most significant when it occurs in an up-trend or if it occurs during a bounce up in a downtrend. When you see this pattern it is visually obvious that the rise is losing its power.

Criteria

• Each white or green candle occurs with higher closes.
• The opens occur in the previous day’s body.
• The bodies are getting smaller and/or the upper shadows are getting longer.

Pattern Psychology
After an up-trend or a bounce up during a long downtrend, the advance block pattern will show itself with an initial strong white or green candle day. However, unlike the Three White Soldiers, each proceeding day becomes less and less strong. If the bulls try to take the prices up then the bears step in and take them back down. After three days of waning strength the bears should confirm the reversal with further deterioration. In other words, this confirmation is visually recognized by its bearish trading in a subsequent candlestick.

Candlestick signals identify where money is flowing in and out of stocks/sectors. Being able to identify and understand the investor psychology that creates the candlestick signals produces a huge advantage. It allows an investor to participate in stock investments that have an extremely high probability of moving in the right direction.

Candlestick patterns are created by common sense investment practices. Please continue to learn about the additional secondary candlestick signals.

The three stars in the south pattern is one of the bullish reversal secondary candlestick patterns and is the opposite of the advance block pattern. This pattern consists of three candlesticks that appear at the end of a downtrend. It is obvious that the trend is slowing down and that selling is weakening. This first candlestick very closely resembles the hanging man pattern. It is a long black (or red) body that occurs at the end of this downtrend. Its long shadow indicates that there was previous buying. The second candlestick resembles the first however it is the smaller version. The third candlestick is also a black (re red) body and is a Marubozu with no shadows. A bullish day following the three stars in the south candlestick pattern provides confirmation that the downtrend fizzled and then reversed.

Criteria for the Three Stars in the South

• The first black (or red) candle day has a lower shadow that indicates that the buyers are stepping in. It is almost a hammer signal.
• The second day produces a candlestick just the like the first but on a smaller scale.
• Day three should be a Marubozu with no shadows. It is within the previous day’s trading range.

Pattern Psychology
The daily formations begin to occur after the downtrend and they indicate bullish behavior in the stock. The second day indicates the same message on a smaller scale as it gaps up on the open and then closes lower on the session. The third and final day is completely engulfed by the first candlestick and price movement slows down. The bears should now be concerned about their positions. New lows are diminishing rapidly but this gives enough time for the short sellers to start covering their positions.

The secondary signals are titled as such because they do not appear as frequently as the 12 major signals. That does not negate the effectiveness of these signals for identifying reversals. Be aware of the implications of these signals and it will provide you with additional opportunities during the course of your investment decisions.

Today’s Pattern – The Breakaway Pattern

When you see either a bullish or bearish breakaway pattern, and the trend is evident, then the breakaway pattern indicates the acceleration of that trend. The breakaway pattern begins with a long candle representing the current trend. The following candle is the same color and it gaps away from that first long candle. While the third day’s candle can be either color, it will not show a change in the current trend. The fourth day continues the trend and therefore continues to produce the same color candles. The fifth day however, reverses the trend. Please note that it only opens slightly the opposite of the current trend and it continues in the same direction to where it then closes in the gap area.

Criteria for the Bullish and Bearish Breakaway Patterns

• The first day is a long-body day and continues in the same color as the existing trend.
• The second day gaps away from the previous close and it is the same color as the first day candle.
• Day three and four have closes that continue the trend.
• The last day is an opposite color day that closes in the gap area between day one and day two.

Pattern Psychology
After a trend, a long candle forms typically in an overbought or oversold area. The following day they gap the price further and that day continues in the same color as the current trend. For the next two following days the bulls and/or bears keep the trend going in the same direction, however with less conviction. On the final day, the trend moves opposite the existing trend with enough force to close in the gap area between day one and day two. This day completely erases the direction of the previous three days.

The secondary candlestick patterns are easy to learn once you have a basic understanding of the major candlestick patterns. Perhaps begin with the doji, bearish and bullish engulfing singals, as well as the hanging man signal to see how these signals can help you to produce profits in any market.

Today’s signal – Trading the Belt Hold Pattern – Reversal Signal

The belt hold is a reversal signal and its lines are formed by single candlesticks. The bullish belt hold is a long white or green candle that has gapped down in a downtrend. It moves higher for the rest of the day from its opening point (which is called a white opening shaven bottom or white opening maruboza). The bearish belt hold is just the opposite and is formed with a severe gap away from the existing uptrend. It opens at its high and immediately backs off for the rest of the day (which is known as a black opening shaven head or black opening maruboza). Belt hold comes from the sumo wrestling term, Yorikiri, which means to push your opponent out of the ring while holding onto his belt. The longer the body of the belt hold, the more significant the reversal signal is.

Criteria

• The candlestick body should be the opposite color of the prevailing trend.
• It significantly gaps open which continues the trend.
• The real body of the candlestick has no shadow at the open end. The open is the high or low of that trend.
• The length of the body should be a long body. The greater the length of the body, the more significant the reversal signal is.

Signal Enhancements – The longer the length of the body, the more significant the reversal pattern is.

Pattern Psychology
After a strong trend is in effect the trend is further promoted by a gap open. This gap is typically a large gap. The opening price gets to a point and then immediately moves back in the direction of the previous close. This makes the opening price the high or the low for the trend. This causes concern however and you will see investors begin to cover shorts or sell outright. This starts to accentuate the move and as a result the existing trend reverses.

Continue to learn about more candlestick patterns to see how it can greatly improve your profits! Primary candlestick patterns should be understood first (such as the doji and hanging man patterns). Once you have a basic understanding of the primary signals, then move onto the secondary candlestick signals.

Meeting Lines (or Counterattack Lines) are formed when opposite colored bodies have the same closing price. The first candlestick body is the same color as the current trend. The second body is formed by a gap open in the same direction as the trend. However, by the close it has come back to the previous day’s close. The bullish meeting line has the same criteria as the piercing pattern except that it closes at the same close as the previous day but not up into the body. Likewise, the bearish meeting line is the same as the dark cloud pattern, but it does not close down into the body of the previous day.

Criteria for the Meeting Lines Pattern

• The first candlestick body should continue the prevailing trend.
• The second candlestick gaps open continuing the trend.
• The real body of the second day closes at the close of the first day.
• The body of the second day is opposite color of the first day
• Both days should be long candle days.

Signal Enhancements – The longer the bodies, the more significant the reversal pattern.

Meeting Lines Pattern Psychology
The trend is further promoted by a long body day after a strong trend has been in effect. The energy is increased the second day with a gap in the same direction. Before the end of the day, however, the price comes back to the same closing price of the previous day. This indicates that the other side of the market has now stepped in. Another day, opposite of the predominant trend is required to demonstrate that the trend has reversed. The opposite colored body does not need to be as long as the first body. Please note that in every case a confirmation day is going to be needed. The meeting lines pattern has more strength if there are no shadows at the meeting point.

Recognizing and understanding the psychology that forms the major candlestick patterns will provide completely new insights for investors to understand optimal times to buy and sell. Japanese rice traders realized that prices do not move based on fundamentals but instead that they move based on the investor perception of those fundamentals.

Take advantage of the benefits that Japanese Candlestick trading provides. Opportunities are easily identified and someone will take advantage of the information the signals provide even if you don’t. Once you learn the valuable benefits revealed by Candlestick formations the rewards will be overwhelming.

When identifying the three inside up and the three inside down candlestick patterns, it is important to note that the Harami pattern occurs after a long candle day that is in the same direction of the trend. Also important to note, is that in order for you to understand both the three inside up and the three inside down patterns, you must be familiar with the bearish harami and bullish harami signals. The Harami is the first indication that the trend has stopped and the third day confirms that the harami has indicated correctly. The three-day pattern is a modern era confirmation of the Harami pattern.

Criteria for Three Inside Up and Three Inside Down Patterns

• The harami pattern is the overriding signal component of this pattern.
• The harami body should be the opposite color of the long candle day.
• Day three has a close that is higher than the open of day one.(Three Inside Up) or lower than day one in the bearish indication.(Three Inside Down)

Three Inside Up and Three Inside Down Pattern Psychology
After a trend and the occurrence of a long body day, (that extends this thread), the harami pattern shows that the trend has stopped. A factor that helps identify the strength of the reversal is how large the harami is compared to the previous day’s body. A body that is relatively large indicates more strength in the opposite direction. Additionally, the magnitude of the strength in day three adds to the potency of the reversal.

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.

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 psychology built into a major candlestick signal is simple common sense investment philosophy. When you learn how to utilize the candlestick signals 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.

The Three White Soldiers (also known as the advancing three white soldiers) is a healthy market reversal pattern and is one of many strong reversal candlestick patterns. It consists of three white (or green candles) with the second and third candles opening lower than the previous days close. They do, however close at a new high.

Criteria for the three white soldiers

• Each consecutive long candle closes with a higher open
• The second and third candlesticks open in the previous day’s body.
• Each day should close very near its high for the day
• The opens should be within the top half of the previous day’s body.

Pattern Psychology for the three white soldiers

After a downtrend, or a flat period, the presence of this formation suggests a healthy rally is going to occur over the next couple of days. This flat period is indicated by prices that stayed low for a long period of time. The market neared its bottom or was already at the bottom which suggests that sellers were present. By the end of each day the buying overcomes the early sellers and as in any rally, too much buying with little selling can be dangerous. Please note that this bullish reversal pattern does not require confirmation.

The average investor does not have to be dependent on the investment professional when utilizing candlestick patterns. Professional recommendations are not always in your best interest at the forefront. Whether totally unfamiliar with investment concepts or very sophisticated in investment experience, the Japanese Candlestick trading formations are easily utilized. The signals and patterns are easy to see and their interpretations are reliable.

Be sure to learn the twelve major candlestick patterns before you move onto the secondary candlestick patterns. You may want to begin with the doji, the engulfing signals, hammer signal, as well as the hanging man signal. Once you learn about the twelve major signals then move onto the secondary signals such as this three white soldiers signal.

Recognizing and understanding the psychology that forms the major candlestick patterns will provide completely new insights for investors to understand optimal times to buy and sell. Japanese rice traders realized that prices do not move based on fundamentals but instead that they move based on the investor perception of those fundamentals.