Basics of Japanese Candlestick Part 2 - Reversal Patterns
Srujani Panda / 04 Jan 2012
Any charting technique’s utility can be measured by its ability to identify when the current trend can reverse and when one can expect the current trend to continue. Reversal patterns are patterns which once identified can help traders predict a price reversal.
What are the top 5 Japanese Candlestick Reversal patterns:-
1. Three black crows
The upside-gap two crows consist of two black candlesticks. If there are three declining consecutive black candlesticks it is called three black crows pattern (see Figure). The three black crows presage lower prices if they appear at high-price levels or after a mature advance. Three crows are also sometimes called three-winged crows. The Japanese have an expression, "bad news has wings." This is an appropriate saying for the three-winged crow pattern. The three crows are, as the name implies, three black (red) candlesticks. Likened to the image of a group of crows sitting ominously in a tall dead tree, the three crows have bearish implications. The three lines should close at, or near, their lows. Each of the openings should also be within the prior session's real body.
2. Bullish and bearish engulfing pattern
Most candlestick signals, are based on combinations of individual candlestick lines. The engulfing pattern is the first of these multiple candlestick line patterns. The engulfing pattern is a major reversal signal with two opposite colour real bodies composing this pattern.
3. Harami (bullish and bearish)
The harami pattern (see figure) is a small real body which is contained within a prior relatively long real body. "Harami" is an old Japanese word for "pregnant." The long candlestick is "the mother" candlestick and the small candlestick as the "baby" or “foetus”
4. Doji [PAGE BREAK]
Doji are valued for their ability to call market tops. This is especially true after a long white candlestick in an uptrend (see FIGURE). The reason for the Doji's negative implications in uptrend is because a Doji represents indecision. Indecision, uncertainty, or vacillation by buyers will not maintain an uptrend. It takes the conviction of buyers to sustain a rally. If the market has had an extended rally, or is overbought, and then a Doji surfaces (read "indecision"), it could mean the scaffolding of buyers' support will give way.
Figure : Nifty, Intraday , Doji at top
5. Tweezers top & bottoms
Tweezers are two or more candlestick lines with matching highs or lows. They are called tweezers because they are compared to the two prongs of a tweezers. In a rising market, a tweezers top is formed when the highs match. In a falling market, a tweezers bottom is made when the lows are the same. The tweezers could be composed of real bodies, shadows, and/or doji. A tweezers occurs on nearby or consecutive sessions and as such are usually not a vital reversal signal. They take on extra importance when they occur after an extended move or contain other bearish (for a top reversal) or a bullish (for a bottom reversal) candlestick signals.
Figure below elaborate on this idea.
In the next article we will discuss the top candlestick continuation patterns.
If you want to stay updated with the share market news today, keep a close watch on the indian stock market today with real time movements like sensex today live and overall stock market today trends. Investors tracking ipo allotment status, ipo news today, or the latest ipo india can also follow daily updates along with bse share price live data. Whether you are learning how to invest in stock market in india, preparing for a market crash today, or searching for the best stocks to buy in india, insights on top gainers today india, top losers today india, trending stocks india and long term stocks india help in making informed investment decisions.