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.

The dark cloud cover is a signal that tells an obvious reversal of a trend and is the bearish counterpart to the piercing pattern. It is one of the 12 major candlestick patterns and it is named the dark cloud cover because it looks like a dark cloud over a nice bright sunny uptrend.

The first day of this pattern is a long white or green candle at the top end of a trend with the second day’s open higher than the high of the previous day. It closes at least half way down the previous day’s candle and the further down the white or green candle it closes the more convincing the reversal is. Keep in mind that a close at or below the previous day’s open turns this pattern into a bearish engulfing signal.

Criteria for the dark cloud cover

• The body of the first candle is white or green and the body of the second candle is black or red.
• A long white candle occurs at the top of the trend. The up-trend has been evident for a good period.
• The second day opens higher than the trading of the prior day.
• The black or red candle closes more than half-way down the white or green candle.

Signal Enhancements for the dark cloud cover

• The longer the candle the more forceful the reversal.
• The higher the gap up is from the previous days close the more pronounced the reversal.
• The lower the black or red candle closes into the white or green candle the stronger the reversal.
• Large volume during these two trading days is a significant confirmation.

Pattern Psychology

After a strong up-trend has been in effect the atmosphere is bullish. Exuberance sets in as the price gaps up. The bears begin to appear and push the price back down and it finally closes at or near the lows for the day. The close has negated most of the previous day’s gains and the bulls are now concerned because they see that the uptrend may have stopped. This signal makes for a good short with a stop being the high of the black or red candle day. Notice that if the dark cloud candlestick closes lower and below the open of the previous day it will become a bearish engulfing pattern which has slightly stronger bearish implications.

Using candlesticks signals with other technical analysis tools greatly enhances the ability to recognize what the candlestick charts are revealing. Use of these patterns will benefit you for the rest of your investment career.

The piercing pattern is one of the 12 major candlestick patterns and it is a two-candle formation that occurs when the market is in a down trend. The first candle is black or red which is a continuation of the existing trend and the second candle opens below the low of the previous day. The piercing pattern closes more than midway up the black or red candle which is near or at the high for the day.

Criteria for piercing pattern

• 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 of time and a long black candle occurs at the end of the trend.
• The second day opens lower than the trading of the prior day.
• The white or green candle closes more than halfway up the black or red candle.

Signal Enhancements

• The longer the candle the more forceful the reversal.
• The greater the gap down from the previous day’s close the more pronounced the reversal.
• The higher the white or green candle closes into the black or red candle the stronger the reversal.
• Large volume during these two trading days is a significant confirmation.

Pattern Psychology

After a strong downtrend has been in effect the atmosphere is bearish. Fear becomes more predominant and the prices gap down. The bears may even push the prices down further however before the end of the day the bulls step in and dramatically turn prices around. The prices finish near the high of the day and the move has almost negated the price decline of the previous day. This now has the bears concerned. This move is confirmed by more buying the following day.

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 recommendations. The candlestick signals provide guidance as to what investors are actually doing at a certain point in time. Learn the 12 major candlestick patterns as well as the secondary patterns and your investments perceptions will greatly improve.

Continue to learn about candlestick signals and read about the Dark Cloud Cover.

The hanging man is one of the 12 major candlestick patterns and it produces very important attributes when analyzing a potential reversal. This signal is comprised of one candle and it is easily identified by the presence of a small body with a shadow at least two times greater than the body. It is found at the top of an up-trend and the probability of making a correct trade  becomes extremely high when utilizing this signal. The Japanese named this pattern the hanging man because it looks like a head with the feet dangling down.

Criteria for hanging man

• The upper shadow should be at least two times the length of the body.
• The real body is at the upper end of the trading range. The color of the body is not important although a black or red body should have slightly more bearish implications.
• There should be no upper shadow or a very small upper shadow.
• To confirm the hanging man signal a black candle should be seen the following day. An even better confirmation of this signal is to see a gap down with a lower close.

Signal Enhancements

• The longer the lower shadow the higher the potential of a reversal occurring.
• A gap up from the previous day’s close sets up for a stronger reversal provided prices trade lower the day after the hanging man signal is formed.
• Although it is not a necessity a large volume on the signal day increases the chances that a blow-off day has occurred.

Pattern Psychology

After a strong up-trend has been in effect the atmosphere is bullish. The price opens higher but then begins to move lower. The bears take control but before the end of the day the bulls step in and take the price back up to the higher end of the trading range. This creates a small body for the day and could indicate that the bulls still have control. The long lower shadow however represents that sellers have started stepping in at these levels. Even though the bulls may have been able to keep the price positive, by the end of the day the evidence of selling is apparent. A lower open or a black or red candle the following day reinforces the fact that selling continues.

The twelve major candlestick signals demonstrate the visual elements produced by human emotions. You can learn to correctly analyze what these emotions are doing at specific points of a trend. Use Japanese Candlesticks to profit from your investment decisions today!

Continue to learn about candlestick signals and read about the Piercing Pattern.

One of the most visually compelling candlestick patterns is the hammer signal. This signal is easily recognized by the lower shadow also known as the tail that protrudes to the downside after an extended downtrend.

The hammer signal is comprised of one candle and it is easily identified by the presence of a small body with a shadow at least two times greater than the body. It is found at the bottom of a downtrend and this shows evidence that the bulls started to step in. The color of the small body is not important but a white or green candle has slightly more bullish implications than a black or red body. A positive day is then required the following day to confirm this signal.

Criteria for the hammer signal

• The lower shadow should be at least two times the length of the body.
• The real body is at the upper end of the trading range. The color of the body is not important although a white or green body should have slightly more bullish implications.
• There should be no upper shadow or a very small upper shadow.
• The following day needs to confirm the hammer signal with a strong bullish day.

Signal Enhancements

• The longer the lower shadow the higher the potential of a reversal occurring.
• A gap down from the previous day’s close sets up for a stronger reversal move as long as the day after the Hammer signal opens higher.
• Large volume on the Hammer day increases the chances that a blow-off day has occurred.

Pattern Psychology

After a downtrend has been in effect the atmosphere is very bearish. The price opens and starts to trade lower. The bears are still in control but the bulls then step in and they start to bring the price back up towards the top of the trading range. This creates a small body with a large lower shadow and represents that the bears could not maintain control. The long lower shadow now has the bears questioning whether the decline is still intact and a higher open the next day would confirm that the bulls had in fact taken control.

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.

Continue to read about candlestick signals and read about the Hanging Man.

The bullish engulfing signal is important to learn since it is one of the major candlestick patterns. When the elements of this signal are broken down an investor can clearly understand what was going on in investor sentiment to cause a reversal. Four hundred years of observations from Japanese Rice traders has recognized this signal as a very high probability reversal signal.

The bullish engulfing signal may happen often as it is a major reversal pattern. It is comprised of two opposite colored bodies and it is formed after a downtrend. It opens lower than the previous day’s close and closes higher than the previous day’s open. Thus, the green candle completely engulfs the previous day’s red candle.

Criteria for bullish engulfing signal

•  The body of the second day completely engulfs the body of the first day. Shadows are not a consideration.
• Prices have been in a definable down trend even if it has been short term.
• The body of the second candle is opposite color of the first candle, with the first candle the color of the previous trend. The exception to this rule is when the engulfed body is a doji or an extremely small body.

Signal Enhancements for bullish engulfing signal

• A large body engulfing a small body.
• The previous day shows the trend was running out of steam. The large body shows that the new direction has started with good force.
• When the engulfing pattern occurs after a fast move down, there will be less supply of stock to slow down the reversal move. A fast move makes a stock price over extended and increases the potential for profit taking.
• Large volume on the engulfing day increases the chances that a blow-off day has occurred.
• The engulfing body engulfs the body and the shadows of the previous day. The reversal has a greater probability of working.
• The greater the open gaps down from the previous close the greater the probability of a strong reversal.

Pattern Psychology

After a downtrend has been in effect the price opens lower than where it closed the previous day. Before the end of the day, the buyers have taken over and moved the price above where it opened the day before. The emotional psychology of the trend has now been altered. Utilizing candlestick signals makes learning to invest in the stock market much easier to understand. One of the fastest and easiest processes for learning to invest is to learn the candlestick signals. Each major signal provides an immense amount of information.

You can learn about the hammer signal another major candlestick pattern.