Reversal Patterns ( Break-Away )
This Candlestick Pattern could also be called Pump and Dump,
and only differs from the Morning Star in the number of congestion bars
present before the latest market participants are caught with their
pants down.
This is one of the most reliable reversal patterns by the mile. The PZ Candle Patterns indicator can recognize Break-Away patterns of multiple bars in length .This particular formation might take place with or without gaps, and with or without breaking the low of the first bar. It does not matter how it takes places, the indicator will detect it. If we could extrapolate this pattern from dozens to hundreds of bars, we would detect range-bound markets being broken.
This one of the most reliable
reversal patterns. But be careful, sometimes the price movement is fully
exhausted by the last candle.
Fakey
The Fakey Pattern indicators rejection of an
important level within the market. Often times the market will appear to
be headed one direction and then reverse, busting novice traders as the
big players push price back in the opposite direction.
The pattern consists of an inside bar followed by
a false break and then a close back within its range. The entry is
triggered as price moves back up past the high of the inside bar. The
opposite applies in the bearish version.
This pattern can trigger big moves in the forex market.
Counter Gaps
Sometimes a gap becomes a sudden and explosive
reversal, in which bulls or bears counter-attack and force other market
participants to cover their positions. Several patterns are used to
describe this situation, but the PZ Candle Patterns blends all of them into one single pattern.
This pattern has only one implication: you should
trade the reversal and help the big hands to take down the price.
A counter-gap signals the reversal of
the price after the gap has been closed. It is an explosive pattern
which has many names and variations.
Three Soldiers & Three Crows
A bullish candlestick pattern that is used to
predict the reversal of the current downtrend. This pattern consists of
three consecutive long-bodied candlesticks that have closed higher than
the previous day, with each session's open occurring within the body of
the previous candle.
These long-bodied candlesticks are a sign of the
change in investor sentiment and are used by traders to confirm a shift
in momentum. This pattern may form after a period of consolidation, but
it is not as desirable as it would be if it were found at the end of a
prolonged downtrend.
An universal reversal pattern that
will suceed when others have failed. It might also act as a continuation
pattern if one bar of the formation has tested lower lows.
Hammers, Shooting Star & Hanging Man
Hammer candlesticks form when a security moves
significantly lower after the open, but rallies to close well above the
intraday low. The resulting candlestick looks like a square lollipop
with a long stick, and is single day reversal pattern.
The Shooting Star is a single day pattern that
can appear in an uptrend. It opens higher, trades much higher, then
closes near its open. It looks just like the an Hammer turned upside
down, indicating that buyers are not willing to bid the price higher.
Hammers can also form during an uptrend and
inverted hammers can also form during a downtrend. If so, they are
called Hanging Man and Inverted Hammer, respectively, but represent very
unreliable reversal patterns.
A popular single-bar reversal pattern but not very reliable just by itself. Use support/and resistance levels to confirm trades.
Engulfing
This reversal pattern consists of two candles.
The first day is a narrow range candle that closes down for the day. The
sellers are still in control of the stock but because it is a narrow
range candle and volatility is low, the sellers are not very aggressive.
The second day is a wide range candle that
"engulfs" the body of the first candle and closes near the top of the
range. The opposite applies in the bearish version.
Don't overvalue the engulfing pattern, look for divergences or other confirmations before trading it.
Outside Up & Outside Down
This pattern is one of the more clear-cut three
day bullish reversal patterns. The formation reflects buyers overtaking
selling strength, and often precedes a continued rally in price.
In fact up to day-two we have a bullish Engulfing
pattern, itself a strong two-day reversal pattern, and this pattern
emerges when we wait for confirmation.
This pattern is just a breakout-confirmed version of the engulfing pattern, but it is much more reliable.
Harami
When you see this pattern the first thing that
comes to mind is that the momentum preceding it has stopped. On the
first day you see a wide range candle that closes near the bottom of the
range. The sellers are still in control of this security.
Then on the second day, there is only a narrow
range candle that closes up for the day. This pattern is not especially
reliable, it is better to wait for confirmation using the Inside Up or
Inside Down pattern.
Haramis are not very reliable in the forex market.
Be careful about them.
Inside Up & Inside Down
This is a three-bar reversal pattern. Up to
day-two we have a simple Bullish Harami pattern. Haramis give a
clear-cut formation reflecting buyers overtaking the strength in the
downtrend. This formation often precedes a continued rally in price.
With just a Harami pattern, most candlestick
analysts will usually wait for additional conformation before entering a
long position. The Inside formation is that confirmation.
This pattern is just a breakout-confirmed version of the harami pattern. A little more tradeable.
Morning Star & Evening Star
A three day bullish reversal pattern that is very
similar to the Morning Star. The first day is in a downtrend with a
long black body. The next day opens lower with a Doji that has a small
trading range.
The last day closes above the midpoint of the first day. The Morning Star is the basic anatomy of a sudden Pump and Dump operation in the market.
Other reversal patterns are more reliable than this one.
Trade with caution.
Kickers
Kickers are one of the most explosive and powerful
reversal patterns. Like most candle patterns there is a bullish and
bearish version. In the bullish version, the security is moving down and
the last red candle closes at the bottom of the range.
Then, on the next day, the stock gaps open above
the previous days high and close. This "shock event" forces short
sellers to cover and brings in new traders on the long side. The
opposite takes place in the bearish version.
Piercing & Dark Cloud
This is also a two-candle reversal pattern where
on the first day you see a wide range candle that closes near the bottom
of the range. The sellers are in control. On the second day you see a
wide range candle that has to close at least halfway into the prior
candle.
Those that shorted the security on first day are
now sitting at a loss on the rally that happens on the second day. This
can set up a powerful reversal.
If you could blend the two bars
of the formation, you would see a hammer pattern. The best to trade
this pattern is placing pending orders at the breakout level.
Belt Hold
A significant gap down occurs. The remaining
price action for the day occurs to the upside. This triggers a buying
spree. Shorts cover their positions due to concern over this price
action. The opposite applies in the bearish version.
This pattern has only one implication: you should
trade the reversal and help the big hands to take down the price.
The Belt-Hold pattern is just a two-bar version of the Counter-Gap pattern.
Continuation Patterns
Rising Three & Falling Three
A bullish continuation pattern in which a long
white body is followed by three small body days, each fully contained
within the range of the high and low of the first day. The fifth day
closes at a new high and forces bears to cover their shorts. The
opposite applies in the bearish version.
This is one of the most reliable continuation patterns available. The PZ Candle Patterns indicator can recognize rising and falling patterns of multiple bars in length.
This one of the best and most reliable continuation patterns. Use it to hop into existing trends safely.
Tasuki Gap
A continuation pattern with a long white body
followed by another white body that has gapped above the first one. The
third day is black and opens within the body of the second day, then
fills in the gap between the first two days, but does not close the gap.
This suggests that the uptrend will continue and
might be a good time to get into the market at a good price. The
opposite applies in the bearish version.
If the gap holds up and the market keeps moving, this pattern is a very good trading opportunity.
Side by Side Gap
A continuation pattern with a long white body
followed by another white body that has gapped above the first one. The
gap might be closed or not, but two bullish days announce that the
market is inclined to climb higher.
This pattern is much more effective if the third
day closes above the second day's high. The opposite applies in the
bearish version.
Two bars closing in the direction of
the previous gap is a good continuation pattern. For longs, it is much
better if the current bar has closed above the last bar. The opposite
applies for shorts.
Windows
The same as a Western gap. Windows are
continuation candlestick patterns. When the market opens a window to the
upside, it is a rising window. It is a bullish candlestick pattern and
the rising window should be support.
There is much psychology behind windows. Gaps can
act as resistance or support. The trend might continue strongly or it
might fill the gap first. The market an also reverse right after a gap.
Continuation gaps act as support and resistance
Weakness Patterns
Advance Block & Descend Block
This formation is similar to the Three Soldiers
formation. However, the Advance Block chart alerts traders to the
weakness of the upside price action since the close of the second and
third days are significantly less than their highs, each bar having a
smaller body and longer upper wick than the preceding one.
The opposite applies in the bearish version. A variation of this pattern, also recognized, is Three Stars in the north and Three Stars in the south, which only difference is that each bar makes a lower high than the previous one.
This pattern only means weakness! You need further confirmation to treat it as a reversal pattern.
Deliberation
This formation is very similar to the Advance
Block and Descend Block patterns. The key difference is that all of the
weakness shows up on the third day. The first two days have powerful
upward moves.
The quick change in sentiment opens the window
for daytraders to initiate shorts or capture profits. This pattern is
not very reliable, but it certainly sets the mood for a convincing
reversal pattern in the future.
This is not a reversal pattern, but
sets the mood for a reversal in the short-term future. If the market
finally reverses closing the gap, it will be signaled by the Counter-Gap
pattern.
Neutral Patterns
Marubozu
The Marubozu takes place when a security has
traded strongly in one direction throughout the session and closed at
its high or low price of the day. A marubozu candle is represented only
by a body; it has no wicks or shadows extending from the top or bottom
of the candle.
The white marubozu candle indicates that buyers
controlled the price of the stock from the opening bell to the close of
the day, and is considered very bullish. The opposite applies in the
bearish version.
The marubozu by itself has few trading implications. The middle value of the bar usually becomes a new support or resistance.
Squeeze Alert
Just as its name suggests, the squeeze alert
pattern should be treated as a valuable alert signal that the market is
in for a swift and dramatic change of direction.
This three candlestick formation rarely occurs,
but when it does you should immediately tighen your stoploss and trade
the next breakout of the master candle when it takes place.
This pattern is likely to take place before the big players dump their shares forming a Break-Away pattern. You can be smart and get in before it happens.
Dojis
The doji is probably the most popular candlestick
pattern. The stock opens up, goes nowhere throughout the day and closes
right at or near the opening price. Quite simply, it represents
indecision and causes traders to question the current trend.
Several dojis and other indecision patterns
together usually mean that a squeeze is coming, and are useful to detect
congestion zones.
Variations like Long Legged Doji, Dragonfly Doji,
Gravestone Doji and stars are not worth detecting, since their trading
implications are not much different.
The doji has very few trading implications.
