70 candlestick patterns every trader should know-RKG

     INTRODUCTION     

Over four hundred years of Research by Japanese Rise traders, they developed the system of candlestick signals. Adopted by the Honma family, he became known as Sokuta Honma. His successful interpretation of the candlestick formations made him the most successful rice trader in Japan, and the wealth he produced for his family became legendary wealthy.

Japanese Candlestick charting and analysis is one of the most effective technical methodologies in the universe of technical analysis. Japanese Candlestick signals possess one major attribute that is not present in other technical systems. The signals are created by the change in investor sentiment. The secrets of the effectiveness of the signals can be learned in a fast and easy process. An investor does not need to be knowledgeable about technical charting to take immediate advantage of the signals. The graphical formation of a signal makes reversals immediately visible. A Candlestick formation provides a visual graphic of investor psychology during a specific time period.

There are more than 70 candlestick signals in the candlestick universe and We are going to learn all major signals which are the strongest reversal signals.

So, Lets Get Started...

BASICS INFORMATION

Horizontal lines represent the open and the close (figure a). Once both lines are added to the chart, they are boxed. This box is called the Body. The lines extending from the body represent the extremes of the price movement during the day. These are known as the shadows. The shadow above the body is known as the upper shadow. In some Japanese analytical circles, the upper shadow is also described as the hair. The shadow below the body is known as the lower shadow or the tail. The length of the shadows has important implications to the strength of reversal moves.

If the close is higher than the open, the body is green and is called a Bullish

Candle (figure b).

If the close is lower than the open, the body is red and is called a Bearish Candle 

(figure c).

Keep in mind, this does not necessarily mean that a green body represents that the price was up for the day or that a red body represents that the price was down for the day. The body color only illustrates where the close was compared to the open. The bodies with shadows look much like candles, thus the name Candlesticks.

Hammer

The Hammer signal can be easily identified by having a small body with a shadow to the downside at least two times greater than the body. When the hammer signal found at the bottom of the downtrend, it shows that the bulls are taking control. The color of the body is not important but the green candle has slightly more strength than the red body. A bullish positive day required the following day to confirm this signal.

Check points:

1. The lower shadow must be at least two times greater than the body.

2. There should be no shadow at the upper side of the body or a very small upper shadow.

3. The body must be at the upper side of the trading range.

4. The color of the body is not important, but the green body has slightly more strength.

5. The conformation must be needed with the following strong bullish day.

Signal strength points:

1. Longer lower shadow shows higher reversal strength.

2. Higher volumes on hammer day increase chances of reversal.

3. Gap down hammer from previous day shows more reversal strength provided that the next day candle opens higher.

Psychology:

Consider the downtrend is running bears are in control, then the price opens and starts to trade lower, the bulls then step in and they start to move price up toward upper trading range. It creates a small body with large lower shadow. This states that the bears are losing control. Higher open the next day would confirm that bulls have taken control.

Study Examples:

We will study following examples, how Hammer signal indicates strong reversal when occurred at the bottom of the downtrend.

In above example the hammer signal occurred at the bottom of the down trend(fig. 1.1). the next day candle opened higher, this confirms that up trend has started and this can be the entry point for long position.

Hanging man

The Hanging Man signal can be easily identified by the presence of a small body with shadow to the a downside at least two times greater than the body. Hanging Man signal is found at the top of an uptrend. Japanese named this pattern because looks like head with feet hanging below. When Hammer signal found at the top of an uptrend it is called as Hanging man.