Morning and Evening star reversal pattern

 A gap in a chart can give us much information.  Essentially a gap could be an entry point or an exit point. A gap down is an indication that fear and panic are on the increase. From a trader’s point of view, a gap down is a signal that warns a bottom is nearing. The trader has all the reason to anticipate a buy signal in a gap down pattern. the gap up tells us the stock price has reached a point of resistance and a sell off  is about to set in. from a traders point of view, this is ideal time to sell the holdings or go short in the market. The gap down and gap up could be noticed in a Morning star and Evening star candle patterns, which have been described below.

The eastern sky sees a morning star just before a sunrise. Since it foretells a reversal, ahead of other indicators, this pattern is known as Morning star.   

The Morning star pattern is a bullish reversal pattern. The Morning star candle pattern is a combination of three candles. The morning star candle formation can form in a downtrend. A long bearish candle on day one is followed by a short-bodied candle. This short candle should have opened in gap down. The following day that is the third day, a gap up opening seen in the form of a white candle. The closing of the third day’s candle should be above or nearer to the midpoint of the first candle. In most charts, this type of Morning star candle pattern points to a trend reversal. The reluctance in selling anticipating a trend reversal halts the price slide and drives the market upwards.

 

The evening star in the sky announces the night and darkness is nearing. The evening star too tells us the same message, that the dark days are ahead. 

The Evening star pattern is just the opposite of Morning star can pattern. This pattern too requires three candles. In an uptrend market a bearish reversal pattern with a small body appears. This candle will be a gap up candle. This candle is to be taken as a second day pattern. On the third day, another candle forms gap down and closes somewhere near the midpoint of first day’s candle. This pattern is an indication that the sellers are active in the market. The lack of buying activity could drive the price downwards, which is foretold in the form of Evening star.

 Usually the Morning and Evening star reversal patterns accompanied by large volumes, which is also supportive of the reversal trends. Both Morning star and Evening star patterns are very reliable and gives the trader an excellent opportunity to enter trade.

The Hanging man, Hammer and the Inverted Hammer patterns

The Hanging Man described in the figure is a single candle pattern.  The identification of this pattern is fairly easy. It has a small body a long lower shadow. The shadow should be around twice the length of the body. The name Hanging man has been assigned because it resembles a head and long feet hanging from it. The formation of this pattern normally happens in an uptrend market. The Hanging Man pattern appears when a stock opens higher than the previous day but unable to hold on and trades low, but at the end of the day the buyers manage to propel the price upwards. The color of the body can be anything. But a black candle carries more weight towards bearishness. A longer shadow too can be indicative to a bearishness. Similarly a large volume will be supportive of the signal. For trading purpose, the Hanging Man pattern needs a confirmation signal on the following day.

The Hammer pattern described in the figure is one of the easily identifiable patterns. The hammer is a single candle pattern. it has a small body and only a lower shadow. The shadow’s length is around twice that of the body of the candle. The Hammer pattern appears when a stock opens lower and sees the low of the day, but rallies back  to regain some of the losses.. The formation of this hammer pattern could be seen at the bottom of a downtrend. The long lower shadow is an indication of presence of buyers. Although the color of the body is not very important, a white body makes the pattern stronger. The hammer pattern is also seen a potential support level. The hammer is a very reliable reversal pattern.

 The inverted Hammer is also a single candle reversal pattern. This pattern could form in a downtrend and therefore is a trend reversal pattern. The price opens lower than the previous candle and sees higher trading levels. But during the day’s trade, sheds some price gains and closes nearer to the opening price. The pattern resembles a hammer in an inverted manner.This pattern needs a confirmation candle on the following day's trading.

All the above three patterns are very important reversal patterns that should be paid attention to.

Doji reversal patterns

 The Doji is a single candle pattern that can appear in an uptrend or downtrend markets. When the opening and the closing price of a stock is almost same a horizontal line will cross the vertical line that represent the high and lows of the day. This kind of appearance is known as Doji candle pattern. This is one of the most important patterns that cannot be overlooked. The Doji pattern point to indecision in the minds of traders indecision means there is a difference of opinion regarding the trend of the market. The Doji is a very reliable trend reversal indicator. At the top of a trend it signals that the resistance levels have been touched. At the bottom of a downtrend, the Doji pattern signals the formation of support levels.  

There are three main types of Doji patterns that can be easily understood. They are  (1) The Long Legged Doji  (2) The Gravestone Doji (3) Dragonfly Doji 

The Long legged Doji (JUJI) is self explanatory pattern which suggests the day’s activity. The Bulls and the Bears have been very active. The bears trying to drive the price down, but the bulls have managed to drive the price up by intensive buying. 

The Grave stone Doji (TOHBA) indicates, the lack of buying interest in the market and only the sellers were active. The open and close price is at the low of the day’s trading. The absence of bottom shadow the Doji candle appears to be like a grave stone. Hence the name Gravestone Doji. 

A Dragonfly Doji (TONBO) appears where the open and close price is at the high of the day’s trading. The pattern indicates there is buying interest in the trader’s mind. Moreover, virtually no sellers present.  We can observe this pattern forming at the bottom of a trend indicating the turn of the trend well in advance.

Besides these patterns, we do come across two other Doji patterns worth mentioning. They are (4) Morning Doji star and (5) Evening Doji star. The Morning Doji star pattern can form in a downtrend this comprises of a black candle, Doji and a white candle. The third days’ white candle must close within the first day’s black candle. This formation is regarded as a strong reversal point.

The Evening Doji star is likely to appear in an uptrend. This pattern includes a white candle, a Doji and a black candle. The third day’s black candle should close within the body of the first day’s white candle. This pattern is a strong indicator of a trend reversal.

Both Morning and Evening Doji stars are very reliable patterns that can offer trading opportunities.

Bullish and Bearish Engulfing Patterns

The Engulfing Patterns are known as Tsutsumi in Japanese. The Engulfing Patterns are one of the most important patterns that can be often noted in candlestick charts. The Engulfing patterns can be a warning signal. It indicates the buyer and seller sentiments or what they have in their mind. We normally see a change in trend after the formation of engulfing patterns. There are two kinds of engulfing patterns, one is the Bullish Engulfing and the other is Bearish Engulfing. 

BULLISH ENGULFING

The very common occurrence of this Bullish Engulfing pattern could be observed in a downtrend. When the price opens below the previous day’s closing price and closes above the opening price of the previous day, we observe a white candle forming. This white covers the entire black candle pattern of the previous day. The length of the white body will be larger than the black body of the previous day’s black body. The shadow part of the white candle does not play any major role in the assessment of this pattern. For a chart reader this pattern is known as Bullish Engulfing pattern. This pattern is considered a reversal pattern, which means a change of trend is on the way. If the body of the previous day’s candle is very smaller than the body of the engulfing pattern, then the reversal could be termed a very strong.

BEARISH ENGULFING

The Bearish Engulfing Pattern normally forms in an uptrend market. When the price opens higher than the previous day’s closing price and closes below the previous day’s opening price, we observe a candle with black body totally covering the body of the previous day’s candles body. In this pattern, too the shadows are not taken into consideration. This pattern signals a reversal in the making. When the body of the previous day’s body is smaller the significance of the Bearish Engulfing pattern increases. In a strong uptrend, this formation also signals profit booking taking place. 

The bullish and bearish engulfing patterns are too good to be ignored and a chart reader should be aware of this in order to identify trading opportunities.

The History of Candlestick Charting

The origins of candlestick charting  dates back to the year 1700 when a rice trader named Munehisa  Homma  who hailed from a rice trading community. Homma took over his father’s  rice trading business and continued his business in the Japanese town of Sakata

Homma studied the rice trading with interest and found a novel art of predicting the price of rice. He took into consideration the supply and demand conditions which played a major part in rice trading. He also studied the trading psychology of traders and incorporated into his method. These studies led to the birth of Candlestick charting. This system was hugely successful and Homma became an authority in candlestick system of trading.

 The basic candlestick consists of  a body, Lower and Upper shadows. The color of the body indicates the bullishness or the bearishness of the stock. When the price closes above the opening price the candle is called a bullish candle and is indicated by black or green color. When the price closes below the opening price the candle becomes a bearish candlestick and it is indicated by black or red color. The upper shadow’s length can vary between short and long depending upon the data. There may be candlestick, which does not have an upper shadow. The same could be said for the lower shadow. The upper shadow of the candlestick denotes the action of sellers and the lower shadow of the candlestick indicates the buyers activity, The size of the candlestick body plays the most important part of the candle pattern. The size of the candlestick body can indicate the general activity of the traders. It stands as an indicator that can point towards inactivity to extreme volatility. Depending on the size and the position it takes in a candlestick chart pattern, the body can be interpreted with different meanings.

The candlestick chart pattern can be applied in multiple time frame. Interpretation of the candlestick pattern can be based upon a single candle or in association with other accompanying candlestick patterns. A three candlestick pattern can emit a stronger signal than a single  candle pattern formation.

I would like to dedicate this entire web site for candlestick charting and candlestick chart related posts, in this site my objective is to write various candlestick pattern formations and its relevance to the stock market.

  The candlestick chart pattern can be applied in multiple time frame. Interpretation of the candle can be based upon a single candle or in association with other accompanying candle patterns. A three candle pattern can emit a stronger signal than a single  candle pattern formation.

I would like to dedicate this entire web site for candlestick charting and chart related posts. In this site my objective is to write various candlestick pattern formations and its relevance to the stock market. 

I hope the contends of this site will be informative, useful and enjoyable.