The Unique Three River Bottom is a bullish pattern and is somewhat characteristic of the Morning Star Pattern. This candlestick signal is formed with three candles and at the end of a downtrend a long black or red body is produced. The second day opens higher as it drops down to new lows and then closes near the top of the trading range. This is a Hammer-type formation and on the third day it opens lower but not below the low of the previous day. It closes higher and produces a white or green candle however it does not close higher than the previous day’s close. The Unique Three River Bottom Pattern is a rare pattern.

Criteria

• The candlestick body of the first day is a long black or red candle and it is consistent with the prevailing trend.
• The second day does a harami or hammer signal and it also has a black or red body.
• The second day’s shadow has set a new low.
• The third day opens lower but not below the lowest point of the previous day. It also closes higher but below the previous days close.

Signal Enhancements
The longer the shadow of the second day the greater the probability of a successful reversal.

Pattern Psychology
After a strong downtrend trend is in effect, the trend is further promoted by a long body black or red candle. The next day prices open higher but the bears are able to take prices down to new lows. Before the end of the day, the bulls bring prices back up to the top end of the trading range. On the third day the bears try to take down prices again but the bulls maintain control. If the following day sees prices going up to new highs then the reversal is confirmed.

Japanese Candlestick trading signals consist of approximately 40 reversal and continuation patterns. All candlestick signals have credible probabilities of indicating correct future direction of a price move.

Continue to learn about other candlestick patterns in addition to the Unique Three River Bottom Pattern.

The upside gap two crows is a three-day pattern that is created between a long white or green candle at the top of an uptrend and a small black or red candle on the second day. The black or red candle gaps open and it pulls back before the end of the day. Even though it has pulled back it did not fill the gap. The third day opens above where the first black or red candle opened. It cannot hold at these levels so it pulls back before the end of the day. It engulfs the small black or red candle’s body and closes lower than the previous day. It is important to note, however, that it still did not close the gap from the white or green candle.

Criteria for Upside Gap Two Crows:

• A long white candle continues the uptrend.
• The real body of the following day is black or red while gapping up but not filling the gap.
• The third day opens higher than the second day open and closes below the second day close. This produces a black or red candle that completely engulfs another small black or red candle.
• The close of the third day is still above the close of the last white or green candle.

Pattern Psychology for The Upside Gap Two Crows Pattern:
The atmosphere is bullish after a strong uptrend has been in effect. The price gaps open but it cannot hold the gains. Before the end of the day the bears step in and take the price back down, however the gap up from the white or green candle was not filled. The following day the bulls try again but they open the price higher than the open of the previous day. Again, they cannot hold the price up and so it backs off and closes lower than the previous day. This has now taken all of the steam out of the bulls. At this point, you want to see the bears really stepping in the following day to confirm the reversal. Please note that the upside gap two crows is not as bearish as the two crows pattern.

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.

Two Crows Pattern

The Two Crows Pattern is a three-day top reversal pattern. The two crows pattern is a gap pattern just like the upside gap. This pattern is created between the long white or green candle at the top of an uptrend, and the small black or red candle on the second day. The black candles gaps open and pulls back before the end of the day, but even though it has pulled back, it did not fill the gap. The third day opens in the body of the small black or red candle. The Bears maintain control and move it lower as they are able to fill the gap and close the price within the white or green candle body. Since the gap is filled so quickly, it eliminates any expectations from the bulls.

Criteria

1. A long white or green candle continues the uptrend.
2. The real body of the following day is black or red while gapping up and not filling the gap.
3. The third day opens within the second day’s body and closes within the white or green candle’s body. This produces a black or red candle that fills in the gap.

Signal Enhancements
If the third day closes more than halfway down the white or green candle, it would form an Evening Star Pattern.

Pattern Psychology
The atmosphere is bullish after a strong uptrend was in effect. The price gap opens but cannot hold the gains. Before the end of the trading day the bears step in and take the price back down. The gap up from the white or green candle was not filled however, and the following day the price opens slightly higher within the body of the previous black or red candle. The bulls are not as boisterous and cannot keep the momentum going. Prices go lower and close in the white or green candle range. The gap up from the bullish exuberance of the previous day is very quickly wiped away. Again, the further the third day closes into the white or green candle body the more bearish the implications are.

Please continue to learn how to identify the different candlestick patterns as well as what the patterns indicate is occurring in the markets.

Description

The Three Identical Crows pattern has the same criteria as the Three Black Crows pattern. The difference is that the opens are at the previous day’s close. The three identical crows is one of the secondary candlestick patterns. 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.

Criteria for Three Identical Crows

1. Three long black or red bodies occur and all are either close to or equal in length
2. The prior trend should have been up.
3. Each day opens at the close of the previous day.
4. Each day closes near its low.

Pattern Psychology

After an uptrend is in effect a long black or red candle forms, however the selling is more severe. There does not appear to be any buyers at the following day’s open. There are three long black or red candles that have a stair-stepping pattern to them and this indicates a much greater motivation to get out of the position.

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.

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.
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.

The three black crows pattern resembles three crows looking down from their perch, hence their name. This pattern is one of the secondary candlestick patterns because it does not appear as frequently as any of the 12 major signals. The three black crows pattern occurs after a strong uptrend and it indicates that the crows are looking down or in other words that lower prices are to come. It is the opposite of the three white soldiers signal which will be reviewed in future blogs.

Criteria

• Three long black or red bodies which are all close to or equal in length
• The prior trend is up
• Each day opens within the body of the previous day
• Each day closes near its low

Pattern Psychology for Three Black Crows Pattern

A long black or red candle forms after an up-trend and this up-trend has reached levels where the sellers have now started to step in. The first long black or red candle body is followed by two more long black or red candles and each candle opened in the previous day’s body. This indicates that buying was occurring early each day but that the bears continued to force the prices down by the end of each day. Consistent selling provides for a stronger potential for a downtrend to occur rather than a rapidly overselling period.

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.

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.

Continue your candlestick analysis education and read more about the major and secondary candlestick patterns.

The Tri-Star pattern is considered one of the secondary candlestick patterns because it does not appear as frequently as any of the 12 major signals. Please note however that this does not negate the effectiveness or the importance of these secondary signals when identifying reversals. You are provided with additional opportunities during the course of investment decisions when you are aware of the implications that the secondary signals can have.

The Tri-Star pattern is relatively rare however it is a very significant reversal indicator. It is comprised of three dojis and the three-day period illustrates indecision.

Criteria for Tri-Star pattern

•  All three days in the three-day time period are dojis
• The middle day gaps above or below the first and third day and the length of the shadow should not be excessive in length. This is especially true when viewed at the end of a bullish trend.

Signal Enhancements

• A stronger reversal move is indicated the greater the gap is away from the previous day’s close.
• The chances that a significant reversal will occur, is increased by large volume on one of the signal days.

Pattern Psychology

After an up-trend or a downtrend has been in effect the appearance of the first doji reveals there is now indecision in the bull’s and the bear’s camp. The following days gaps in the same direction as the existing trend and forms the second doji. This reveals that there is no certainty in either direction. The third day opens opposite the previous trend’s direction and forms another doji for that day. At this point any investors that had any convictions will now most likely reverse their position. Due to the rarity of the Tri-Star pattern investors should double check the data source to confirm good data.

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. In consulting with money management and energy trading firms, he has successfully combined conventional research methods with Candlestick analysis to greatly enhance investment returns. His implementation of statistical analysis with the Japanese Candlestick methodology has produced some unique successful trading programs.

Continue your candlestick analysis education and read about the three black crows pattern.

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.