11 Morning Star

 14 Key Candlestick Formation

Morning Star

The Morning Star Pattern is a bullish reversal pattern, usually occuring at the bottom of a downtrend. The pattern consists of three candlesticks:

• Large Bearish Candle (Day 1)
• Small Bullish or Bearish Candle (Day 2)
• Large Bullish Candle (Day 3)

The first part of a Morning Star reversal pattern is a large bearish red candle. On the first day, bears are definitely in charge, usually making new lows.

The second day begins with a bearish gap down. It is clear from the opening of Day 2 that bears are in control. However, bears do not push prices much lower. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji).

Generally speaking, a bullish candle on Day 2 is a stronger sign of an impending reversal. But it is Day 3 that holds the most significance.

Day 3 begins with a bullish gap up, and bulls are able to press prices even further upward, often eliminating the losses seen on Day 1.

Morning Star Candlestick Chart Example

The chart below shows an example a Morning Star bullish reversal pattern that occured at the end of a downtrend:

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10 Evening Star

14 Key Candlestick Formation

10. Evening Star

The Evening Star Pattern is a bearish reversal pattern, usually occuring at the top of an uptrend. The pattern consists of three candlesticks:

• Large Bullish Candle (Day 1)
• Small Bullish or Bearish Candle (Day 2)
• Large Bearish Candle (Day 3)

The first part of an Evening Star reversal pattern is a large bullish green candle. On the first day, bulls are definitely in charge, usually new highs were made.

The second day begins with a bullish gap up. It is clear from the opening of Day 2 that bulls are in control. However, bulls do not push prices much higher. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji).

Generally speaking, a bearish candle on Day 2 is a stronger sign of an impending reversal. But it is Day 3 that is the most significant candlestick.

Day 3 begins with a gap down, (a bearish signal) and bears are able to press prices even further downward, often eliminating the gains seen on Day 1.

Evening Star Candlestick Chart Example

The chart below stock shows an example a Evening Star bearish reversal pattern that occured at the end of an uptrend:

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9 Bearish Harami Inside Bar

 14 Key Candlestick Formation

Bearish Harami Inside Bar

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The Bearish Harami is one of the major signals that exhibits common sense into graphic depiction. Candlestick analysis provides a clear understanding of what happens to investor sentiment at the reversal areas. The elements that create a Bearish Harami produce clear insights into what was going on in investor minds at a reversal.
BEARISH HARAMI

 Description
The Bearish Harami is the exact opposite of the Bullish Harami. The pattern is composed of a two-candle formation. The body of the first candle is the same color as the current trend. The first body of the pattern is a long body; the second body is smaller. The open and the close occur inside the open and the close of the previous day. Its presence indicates that the trend is over.
Criteria

• The body of the first candle is white; the body of the second candle is black.
• The uptrend has been apparent. A long white 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.
• For a reversal signal, confirmation is needed. The next day should show weakness.

Signal Enhancements

• The longer the white candle and the black candle, the more forceful the reversal.
• The lower the black candle closes down on the white candle, the more convincing 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 candle day, the bears open the price lower than the previous close. The longs get concerned and start profit taking. The price finishes lower for the day. The bulls are now concerned as the price closes lower. It is becoming evident that the trend has been violated. A weak day after that would convince everybody that the trend was reversing. Volume increases due to the profit taking and the addition of short sales.

Having insight ito the effect of Haramis provides an opportunity to maximize returns. If all of your investment funds are being fully used, a Harami may reveal that one of the positions has stalled for a few days. An aggressive trader may want to move those funds to a better trade, and then come back after a few days to reinvest once the position is moving.

 

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8 Bullish Harami Inside Bar.

  14 Key Candlestick Formation

 8. Bullish Harami Inside Bar.

The Bullish Harami is an example of visual statistic analysis. Upon witnessing a bullish Harami at the end of a downtrend, an investor has a good idea of what to expect. This major signal becomes a vital information packed analytical tool.

Description

The Harami is an often seen formation The pattern is composed of a two candle formation in a down-trending market. The body of the first candle is the same color as the current trend. The first body of the pattern is a long body, the second body is smaller. The open and the close occur inside the open and the close of the previous day. It’s presence indicates that the trend is over.

The Japanese definition for Harami is pregnant woman or body within. The first candle is black, a continuation of the existing trend. The second candle, the little belly sticking out, is usually white, but that is not always the case. The location and size of the second candle will influence the magnitude of the reversal.
Criteria

• The body of the first candle is black, the body of the second candle is white.
• The downtrend has been evident for a good period. A long black 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 days body, where as the "Inside Day" requires both the body and the shadows to remain inside the previous days body.
• For a reversal signal, further confirmation is required to indicate that the trend is now moving up.

Signal Enhancements

• The longer the black candle and the white candle, the more forceful the reversal.
• The higher the white candle closes up on the black candle, the more convincing that a reversal has occurred despite the size of the white candle.

Pattern Psychology
After a strong down-trend has been in effect and after a selling day, the bulls open the price a higher than the previous close. The shorts get concerned and start covering. 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 next day would convince everybody that the trend was reversing. Usually the volume is above the recent norm due to the unwinding of short positions.

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7 Dark Cloud Cover

14 Key Candlestick Formation

7. Dark Cloud Cover

DARK CLOUD COVER

Description
The Dark Cloud Cover is the bearish counterpart to the Piercing pattern. The first day of the pattern is a long white candle at the top end of a trend. The second day’s open is higher that the high of the previous day. It closes at least one-half way down the previous day candle, the further down the white candle, the more convincing the reversal. Remember that a close at or below the previous day’s open turns this pattern into a Bearish Engulfing pattern. Kabuse means to get covered or to hang over.
Criteria

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

Signal Enhancements

• 1. The longer the white candle and the black candle, the more forceful the reversal.
• 2. A higher the gap up from the previous days close, the more pronounced the reversal.
• 3. The lower the black candle closes into the white candle, the stronger the reversal.
• 4. 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. They gap the price up. The bears start to show up and push the price back down. It finally closes at or near the lows for the day. The close has negated most of the previous days gains. The bulls are now concerned. They obviously see that the uptrend may have stopped. This signal makes for a good short, with a stop being the high of the black candle day. Notice that if the Dark Cloud Cover were to close lower, below the open of the previous day, it becomes a Bearish Engulfing pattern. The Bearish Engulfing pattern has slightly stronger bearish implications.

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6 Piercing Pattern

 14 Key Candlestick Formation

6. Piercing Pattern

Description

The Piercing Pattern is composed of a two-candle formation in a down-trending market. The first candle is black, a continuation of the existing trend. The second candle is formed by opening below the low of the previous day. It closes more than midway up the black candle, near or at the high for the day
Criteria

• 1. The body of the first candle is black; the body of the second candle is white.
• 2. The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.
• 3. The second day opens lower than the trading of the prior day.
• 4. The white candle closes more than halfway up the black candle.

Signal Enhancements

• 1. The longer the black candle and the white candle, the more forceful the reversal.
• 2. The greater the gap down from the previous days close, the more pronounced the reversal.
• 3. The higher the white candle closes into the black candle, the stronger the reversal.
• 4. 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. 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. They finish near the high of the day. The move has almost negated the price decline of the previous day. This now has the bears concerned. More buying the next day will confirm the move.

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5 Hanging Man

14 Key Candlestick Formation

5. Hanging Man

The Hanging Man produces some very important attributes when analyzing a potential reversal. It is considered one of the 12 major signals. Learn how to use a Hanging Man signal correctly. The probabilities of being in a correct trade when utilizing this signal becomes extremely high.

 Description
The Hanging Man is also comprised of one candle. 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. The Japanese named this pattern because it looks like a head with the feet dangling down.
Criteria

• 1. The upper shadow should be at least two times the length of the body.
• 2. The real body is at the upper end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.
• 3. There should be no upper shadow or a very small upper shadow.
• 4. The following day needs to confirm the Hanging Man signal with a black candle or better yet, a gap down with a lower close.

Signal Enhancements

• 1. The longer the lower shadow, the higher the potential of a reversal occurring.
• 2. A gap up from the previous days close sets up for a stronger reversal move provided the day after the Hanging Man signal trades lower.
• 3. Large volume on the signal day increases the chances that a blowoff day has occurred although it is not a necessity.

Pattern Psychology

After a strong up-trend has been in effect, the atmosphere is bullish. The price opens higher but starts 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, creating a small body for the day. This could indicate that the bulls still have control if analyzing a Western bar chart. However, the long lower shadow represents that sellers had 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 the selling was apparent. A lower open or a black candle the next day reinforces the fact that selling is going on.

When identifying the Hanging Man signal under the correct conditions, with stochastic in the overbought conditions, at the top of an uptrend, provides the information needed for identifying the possibility of a trend reversal. When learning to play the stock market, being able to put all the probabilities in ones favor is very important. When will an uptrend reverse? When indications start appearing that demonstrate that the sellers are starting to take control! The Hanging Man signal provides the elements that indicate the sellers stepping into a trend. Use this information to your advantage.

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4 Hammers

14 Key Candlestick Formation

 HAMMERS AND HANGING MAN

4.  HAMMERS

One of the most visually compelling signals is the Hammer signal. The hammer signal is easily recognized by the lower shadow ( the tail ) protruding to the downside after an extended downtrend.

 Description

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

Criteria

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

Signal Enhancements

1. The longer the lower shadow, the higher the potential of a reversal occurring.
2. A gap down from the previous day's close sets up for a stronger reversal move provided the day after the Hammer signal opens higher.
3. 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. The bulls then step in. They start bringing the price back up towards the top of the trading range. This creates a small body with a large lower shadow. This represents that the bears could not maintain control. The long lower shadow now has the bears questioning whether the decline is still intact. A higher open the next day would confirm that the bulls had taken control.

  

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3 Bearish Engulfing Patterns

14 Key Candlestick Formation 

3. BEARISH ENGULFING PATTERN

The Bearish Engulfing signal is one of the 12 major signals. It provides a very clear representation of what is going on in investor sentiment. Where most stock market data is numeric, the candlestick signals provide that same information in a graphic form. Most stock market data requires evaluation. This evaluation often involves complicated formulas. The candlestick signals are very basic visual analytical tools. The Bearish Engulfing signal visually illustrates that there has been a dramatic change in investor sentiment. Candlesticks were developed specifically to add more information to chart analysis, so that traders can more easily review what price is telling them.

A simple review of the Bearish Engulfing signal reveals why the signal works very well as a candlestick sell signal. This is the stock market data that an investor should be using for both technical analysis as well as fundamental analysis. The information conveyed in this signal creates an extremely high probability that the buying is over. It also reveals an opportunity for establishing a good short position.

Review

The Bearish Engulfing pattern is a major reversal pattern comprised of two opposite colored bodies. The Bearish Engulfing Pattern is formed after an up trend. It opens higher than the previous day’s close and closes lower than the previous day’s open. Thus, the black candle completely engulfs the previous day’s white candle. Engulfing can include either the open or the close be equal to the open or close of the previous day, but not both.

Criteria

• 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 uptrend, even if it has been short term.
• The body of the second candle is opposite color of the first candle, the first candle being 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

• 1. A large body engulfing a small body. The previous day was showing the trend was running out of steam. The large body shows that the new direction has started with good force.
• 2. When the engulfing pattern occurs after a fast spike up, 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 and a meaningful pullback.
• 3. Large volume on the engulfing day increases the chances that a blow off day has occurred.
• 4. The engulfing body engulfing more than one previous body demonstrates power in the reversal.
• 5. If the engulfing body engulfs the body and the shadows of the previous day, the reversal has a greater probability of working.
• 6. The greater the open gaps up from the previous close, the greater the probability of a strong reversal.

Pattern Psychology

After an uptrend has been in effect, the price opens higher than where it closed the previous day. Before the end of the day, the sellers have taken over and moved the price below where it opened the day before. The emotional psychology of the trend has now been reversed.

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2 Bullish Engulfing

14 Key Candlestick Formation

2. Bullish Engulfing

A Bullish Engulfing signal is one of the major signals. When the elements out of a Bullish Engulfing signal are broken down, an investor can clearly understand what was going on in investor sentiment to cause a reversal. 400 years of observations from Japanese Rice traders has recognized the Bullish Engulfing signal as a very high probability reversal signal.

BULLISH ENGULFING PATTERN

Description

The Engulfing pattern is a major reversal pattern comprised of two opposite colored bodies. The Bullish Engulfing Pattern formed after a downtrend. It opens lower that the previous day’s close and closes higher than the previous day’s open. Thus, the white candle completely engulfs the previous day’s black candle.

Criteria

• 1. The body of the second day completely engulfs the body of the first day. Shadows are not a consideration.
• 2. Prices have been in a definable down trend, even if it has been short term.
• 3. The body of the second candle is opposite color of the first candle, the first candle being 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
[*]1. 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.
[*]2. 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.
[*]3.Large volume on the engulfing day increases the chances that a blowoff day has occurred.
[*]4. The engulfing body engulfs the body and the shadows of the previous day, the reversal has a greater probability of working.
[*]5. 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.

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