The Inverted Hammer Signal

14 Key Candlestick Formation

14.The Inverted Hammer Signal

 Description
The Inverted Hammer is comprised of one candle. It is easily identified by the 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 are stepping in, but the selling is still going on. The color of the small body is not important but the white body has more bullish indications than a black body. A positive day is required the following day to confirm this signal.
Criteria

• 1. The upper shadow should be at least two times the length of the body.
• 2. The real body is at the lower 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 lower shadow, or a very small lower shadow.

Signal Enhancements

• 1. The longer the upper 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.
• 3. The day after the inverted hammer signal opens higher.
• 4. Large volume on the day of the inverted hammer signal increases the chances that a blow off day has occurred.

Pattern Psychology

After a downtrend has been in effect, the atmosphere is bearish. The price opens and starts to trade higher. The Bulls have stepped in, but they cannot maintain the strength. The existing sellers knock the price back down to the lower end of the trading range. The Bears are still in control. But the next day, the Bulls step in and take the price back up without major resistance from the Bears. If the price maintains strong after the Inverted Hammer day the signal is confirmed.

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14 The Inverted Hammer Signal

14 Key Candlestick Formation

14.The Inverted Hammer Signal

 Description
The Inverted Hammer is comprised of one candle. It is easily identified by the 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 are stepping in, but the selling is still going on. The color of the small body is not important but the white body has more bullish indications than a black body. A positive day is required the following day to confirm this signal.
Criteria

• 1. The upper shadow should be at least two times the length of the body.
• 2. The real body is at the lower 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 lower shadow, or a very small lower shadow.

Signal Enhancements

• 1. The longer the upper 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.
• 3. The day after the inverted hammer signal opens higher.
• 4. Large volume on the day of the inverted hammer signal increases the chances that a blow off day has occurred.

Pattern Psychology

After a downtrend has been in effect, the atmosphere is bearish. The price opens and starts to trade higher. The Bulls have stepped in, but they cannot maintain the strength. The existing sellers knock the price back down to the lower end of the trading range. The Bears are still in control. But the next day, the Bulls step in and take the price back up without major resistance from the Bears. If the price maintains strong after the Inverted Hammer day the signal is confirmed.

 

 

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The Shooting Star

14 Key Candlestick Formation

13. The Shooting Star 

 Description
The Shooting Star 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. It is found at the top of an uptrend. The Japanese named this pattern because it looks like a shooting star falling from the sky with the tail trailing it.
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. The color of the body is not important although a black body should have slightly more bearish implications.
• There should be no lower shadow or a very small lower shadow.
• The following day needs to confirm the Shooting Star signal with a black candle or better yet, a gap down with a lower close.

Signal Enhancements

• The longer the upper shadow, the higher the potential of a reversal occurring.
• A gap up from the previous day's close sets up for a stronger reversal move provided.
• The day after the Shooting Star signal opens lower.
• Large volume on the Shooting Star day increases the chances that a blow-off 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 and trades higher. The bulls are in control. But before the end of the day, the bears step in and take the price back down to the lower 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 upper 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.

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13 The Shooting Star

14 Key Candlestick Formation

13. The Shooting Star 

 Description
The Shooting Star 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. It is found at the top of an uptrend. The Japanese named this pattern because it looks like a shooting star falling from the sky with the tail trailing it.
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. The color of the body is not important although a black body should have slightly more bearish implications.
• There should be no lower shadow or a very small lower shadow.
• The following day needs to confirm the Shooting Star signal with a black candle or better yet, a gap down with a lower close.

Signal Enhancements

• The longer the upper shadow, the higher the potential of a reversal occurring.
• A gap up from the previous day's close sets up for a stronger reversal move provided.
• The day after the Shooting Star signal opens lower.
• Large volume on the Shooting Star day increases the chances that a blow-off 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 and trades higher. The bulls are in control. But before the end of the day, the bears step in and take the price back down to the lower 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 upper 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.

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12 Kicker Signal Bullish-Bearish

14 Key Candlestick Formation

The Kicker Signal

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What is the strongest candlestick signal? The Kicker signal! It demonstrates a severe change an investor sentiment. A good rule of thumb is that if an investor sees a Kicker signal, he/she should go long or short depending on whether it is a Bullish Kicker or a Bearish Kicker.

Description
The Kicker signal is the most powerful signal of all. It works equally well in both directions. Its relevance is magnified when occurring in the overbought or oversold area. It is formed by two candles. The first candle opens and moves in the direction of the current trend. The second candle opens at the same open of the previous day, a gap open, and heads in the opposite direction of the previous day’s candle. The bodies of the candles are opposite colors. This formation is indicative of a dramatic change in investor sentiment. The candlesticks 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, the more dramatic the price reversal.
• Opening from yesterday’s close to yesterday’s open already is a gap.
• However, gaping away from the previous day’s open further enhances the reversal.

Pattern Psychology

The Kicker signal demonstrates a dramatic change in the investor sentiment. Something has occurred 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. If the next day prices gap back the other way, liquidate the trade immediately. This does not happen very often, but when it does, get out immediately.

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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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1 The Doji Signal

12 Key Candlestick Formation

1. The Doji Signal

Learning how to read stock charts can be a very simple process. The major signals clearly illustrate trend reversals. Most investors, when learning how to read stock charts, feel that they need a multitude of indicators on one chart. Candlestick analysis does not require numerous indicators. When utilizing the major candlestick signals, chart analysis becomes very easy. The major signals reveal an immense amount of information. When learning how to read stock charts, the process should be as simple as possible.

The Doji is one of the most revealing signals in Candlestick trading. It clearly indicates that the Bulls and the Bears are at an equilibrium, a state of indecision. The Doji, appearing at the end of an extended trend, has significant implications. The trend may be ending. Just this fact alone creates a multitude of investment programs that can produce inordinate profits. What is the best method for making big trading profits? Knowing how to read the stock charts! Knowing the direction of a trading entity and the strength of that move! Candlestick analysis perfects that trading strategy. Candlestick charts reveal high probability profitable reversals. Hundreds of years of investing refinement have proven that point.

The Japanese say that whenever a Doji appears, always take notice. A well-founded rule of Candlestick charts followers is that when a Doji appears at the top of a trend, in an overbought area, sell immediately. Conversely, a Doji seen at the bottom of an extended downtrend requires buying signals the next day to confirm the reversal. Otherwise, the weight of the market could take the trend lower. Knowing how to read the stock charts reveals the parameters that make a major signal most effective.

The Doji signal is comprised of one candle. It is formed when the open and the close occur at the same level or very close to the same level in a specific timeframe. In candlestick charting, this essentially creates a cross formation. As the following illustration demonstrates, the horizontal line represents the open and close occurring at the same level. The vertical line represents the total trading range during that time.

DOJI

 

Upon seeing a doji in an over-bought or oversold conditions, (over-bought or oversold conditions can be defined using other indicators such as stochastics), becomes an extremely high probability reversal situation. When a doji appears, it is demonstrating that there is indecision now occurring at an extreme portion of a trend. This indecision can be portrayed in a few variations of the doji.

Criteria

1. The open and close are the same or nearly the same
2. The length of the shadow should not be excessively long, especially when viewed at the end of a bullish trend.

Signal Enhancements

1. A gap away from the previous day's close sets up for a stronger reversal move.
2. Large volume on the signal day increases the chances that a blowoff day has occurred, although it is not a necessity.
3. It is more effective after a long candle body, usually an exagerated daily move compared to the normal daily trading range seen in the majority of the trend.

 A Doji is more relevant after a strong trend, in this case when a doji forms after a strong uptrend, it is indicative that buy orders are diminishing or there is a huge resistance forming just above the doji. This resistance are the sellers jumping in front of a huge locomotive, but if their numbers are weak, they would not be able to stop a strong uptrend and the price would continue to go higher. However, if sell pressure overwhelms the current strength of buyers, it is likely that the trend would reverse and would go further when nervous traders on long position protects and locks their gains by closing their positions.
 

 

Types of Doji

Long-Legged Doji

This indicates a strong battle between the "bulls" and the "bears" like dragging the price with a strong resistance all the way to where they wanted but lost control to the opposing force. A long-legged doji shows that the market traded at a wide range for a specific period. It is characterized by long twin shadows above and below its body.

Gravestone Doji

This simply states that the bulls lost their shirt in battle, somehow, buyers dominated most of the session but caught off guard by sellers suddenly resurfacing pushing the price to where it opened. Since there are no lower shadows or wicks, buyers still supported the price indicating that the sell pressure isn't enough to break the price level. Gravestone Doji is formed when the price traded higher but ended the period back down near or on its open price.

Dragonfly Doji

This is the reverse of the Gravestone Doji where sellers were able to drag the price down but a sudden surge in buy orders weakened their grip. This indicator shows that the "bulls" are building up force and starts applying pressure upwards, a very long bottom shadow Dragonfly Doji can be interpreted as a bullish signal, due to the fact that the price has been dragged all the way down, but still managed to re-surface back to its opening price, only a very strong surge in buy volume can generate this kind of movement.

Four price Doji

This Doji indicates extreme balance between buyers and sellers resulting in a stalemate in price. The Doji lacks both lower or upper shadow since the price never moved the entire session.

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