Part 13 Technical Analysis – Sitting candles

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Part 13: Technical Analysis – Sitting candles

This article was not written by me, I have received it as an e-mail written by one of the traders using BERSI 2.0 STRATEGY. I liked it a lot, therefore, I have decided to edit it a little bit and share it with you (with author’s blessing, of course �� ) Let me know if you liked this article!

Using BERSI 2.0 strategy

I would like to dedicate this article to candles and their analysis for better trading. Methods, which I will explain today, can be used with BERSI 2.0 but also for drawing trend lines, lines of support and resistance, or Fibonacci lines.

Some of you may have experienced, that even if the indicator for trade seemed strong, the trade was not successful. Since I’ve backtested BERSI strategy for a long time and used other methods to raise its success rate, I have to say that after few weeks I’ve finally made it.

Personally, I search for trades in M5 timeframe and then open trades with 10 – 15 minutes expiration time. I’ve decided to share my experience with all of you – fans of Step’s website and his BERSI strategy.

Sitting candles

We now focus on what I call „sitting candles“: candles with a tall body but without wick and touching IB Weekly or Daily lines.

Sitting candle example

And what does this mean? As we can see, there has been an occurrence of Three Line Strike, but the price has reverted and went downwards even if the expectation was for the candle to go up.

This is an example of a sitting candle. This candle is rare and usually appears before the candle with an arrow (see picture for the illustration). In this situation, I do not trade as I do not know which way the price will go, because it is sitting on the daily line. And it could be broken (breakout) or the price might reverse. The exception is an IB Weekly, from which the price almost always reverses.

This is just a theory, but it has helped me to avoid many bad investments and thus saved my money. Therefore, a sitting candle is ideal for trading with Weekly IB, but not for Daily IB.

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Weekly line breakouts

Another strong indicator is weekly line breakouts. This formation occurs often, but I think many traders don’t trade it because of the breakouts.

I do not trade this formation because of the breakouts and candle types. We could expect growth and reverse downwards, but this does not happen often.

Wickless candle

Finally, what is a wickless candle? This formation occurs from time to time and I do not recommend to make trades even if the arrow is present. The wickless candle may indicate that price does not know yet which way to go and trading is, therefore, risky.

The trade might be successful, but in many cases is not. This is confirmed fact from my analyst as opposed to the previous two pictures �� .

My trades

Ans how do I trade? I like trading Weekly line reverses the most. It is probably the strongest and best indicator of the overall strategy. It may be traded with or even without an arrow.

That’s all for today. And for those who do not have this excellent strategy: At least try it. Lines, not only arrows, play an important role in this strategy which will help you navigate the market.

Download BERSI 2.0 strategy

Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

Understanding Basic Candlestick Charts

Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. In the 1700s, a Japanese man named Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders. 

Candlesticks show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.

Key Takeaways

  • Candlestick charts are used by traders to determine possible price movement based on past patterns.
  • Candlesticks are useful when trading as they show four price points (open, close, high, and low) throughout the period of time the trader specifies.
  • Many algorithms are based on the same price information shown in candlestick charts.
  • Trading is often dictated by emotion, which can be read in candlestick charts.

Candlestick Components

Just like a bar chart, a daily candlestick shows the market’s open, high, low, and close price for the day. The candlestick has a wide part, which is called the “real body.”

This real body represents the price range between the open and close of that day’s trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.

Traders can alter these colors in their trading platform. For example, a down candle is often shaded red instead of black, and up candles are often shaded green instead of white.

Candlestick vs. Bar Charts

Just above and below the real body are the “shadows” or “wicks.” The shadows show the high and low prices of that day’s trading. If the upper shadow on a down candle is short, it indicates that the open that day was near the high of the day.

A short upper shadow on an up day dictates that the close was near the high. The relationship between the days open, high, low, and close determines the look of the daily candlestick. Real bodies can be long or short and black or white. Shadows can be long or short.

Bar charts and candlestick charts show the same information, just in a different way. Candlestick charts are more visual, due to the color coding of the price bars and thicker real bodies, which are better at highlighting the difference between the open and the close.

The above chart shows the same exchange-traded fund (ETF) over the same time period. The lower chart uses colored bars, while the upper uses colored candlesticks. Some traders prefer to see the thickness of the real bodies, while others prefer the clean look of bar charts.

Basic Candlestick Patterns

Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random, at other times they form patterns that traders use for analysis or trading purposes. There are many candlestick patterns. Here a sampling to get you started.

Patterns are separated into bullish and bearish. Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall. No pattern works all the time, as candlestick patterns represent tendencies in price movement, not guarantees.

Bearish Engulfing Pattern

A bearish engulfing pattern develops in an uptrend when sellers outnumber buyers. This action is reflected by a long red real body engulfing a small green real body. The pattern indicates that sellers are back in control and that the price could continue to decline.

Bullish Engulfing Pattern

An engulfing pattern on the bullish side of the market takes place when buyers outpace sellers. This is reflected in the chart by a long green real body engulfing a small red real body. With bulls having established some control, the price could head higher.

Bearish Evening Star

An evening star is a topping pattern. It is identified by the last candle in the pattern opening below the previous day’s small real body. The small real body can be either red or green. The last candle closes deep into the real body of the candle two days prior. The pattern shows a stalling of the buyers and then the sellers taking control. More selling could develop.

Bearish Harami

A bearish harami is a small real body (red) completely inside the previous day’s real body. This is not so much a pattern to act on, but it could be one to watch. The pattern shows indecision on the part of the buyers. If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.

Bullish Harami

The bullish harami is the opposite or the upside down bearish harami. A downtrend is in play, and a small real body (green) occurs inside the large real body (red) of the previous day. This tells the technician that the trend is pausing. If it is followed by another up day, more upside could be forthcoming.

Bearish Harami Cross

A bearish harami cross occurs in an uptrend, where an up candle is followed by a doji—the session where the candlestick has a virtually equal open and close. The doji is within the real body of the prior session. The implications are the same as the bearish harami.

Bullish Harami Cross

A bullish harami cross occurs in a downtrend, where a down candle is followed by a doji. The doji is within the real body of the prior session. The implications are the same as the bullish harami.

Let’s look at a few more patterns in black and white, which are also common colors for candlestick charts.

Bullish Rising Three

This pattern starts out with what is called a “long white day.” Then, on the second, third, and fourth trading sessions, small real bodies move the price lower, but they still stay within the price range of the long white day (day one in the pattern). The fifth and last day of the pattern is another long white day.

Even though the pattern shows us that the price is falling for three straight days, a new low is not seen, and the bull traders prepare for the next move up.

A slight variation of this pattern is when the second day gaps up slightly following the first long up day. Everything else about the pattern is the same; it just looks a little different. When that variation occurs, it’s called a “bullish mat hold.”

Bearish Falling Three

The pattern starts out with a strong down day. This is followed by three small real bodies that make upward progress but stay within the range of the first big down day. The pattern completes when the fifth day makes another large downward move. It shows that sellers are back in control and that the price could head lower.

The Bottom Line

As Japanese rice traders discovered centuries ago, investors’ emotions surrounding the trading of an asset have a major impact on that asset’s movement. Candlesticks help traders to gauge the emotions surrounding a stock, or other assets, helping them make better predictions about where that stock might be headed.

The 5 Most Powerful Candlestick Patterns

Candlestick charts are a technical tool that packs data for multiple time frames into single price bars. This makes them more useful than traditional open-high, low-close bars or simple lines that connect the dots of closing prices. Candlesticks build patterns that predict price direction once completed. Proper color coding adds depth to this colorful technical tool, which dates back to 18th-century Japanese rice traders.

Steve Nison brought candlestick patterns to the Western world in his popular 1991 book, “Japanese Candlestick Charting Techniques.”   Many traders can now identify dozens of these formations, which have colorful names like bearish dark cloud cover, evening star and three black crows. In addition, single bar patterns including the doji and hammer have been incorporated into dozens of long- and short-side trading strategies.

Key Takeaways

  • Candlestick patterns, which are technical trading tools, have been used for centuries to predict price direction.
  • There are various candlestick patterns used to determine price direction and momentum, including three line strike, two black gapping, three black crows, evening star, and abandoned baby.
  • However, it’s worth noting that many signals emitted by these candlestick patterns might not work reliably in the modern electronic environment.

Candlestick Pattern Reliability

Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they’ve been deconstructed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail investors and traditional fund managers who execute technical analysis strategies found in popular texts.

In other words, hedge fund managers use software to trap participants looking for high-odds bullish or bearish outcomes. However, reliable patterns continue to appear, allowing for short- and long-term profit opportunities.

Here are five candlestick patterns that perform exceptionally well as precursors of price direction and momentum. Each works within the context of surrounding price bars in predicting higher or lower prices. They are also time sensitive in two ways:

  1. they only work within the limitations of the chart being reviewed, whether intraday, daily, weekly or monthly.
  2. their potency decreases rapidly three to five bars after the pattern has completed.

Top 5 Candlestick Patterns

This analysis relies on the work of Thomas Bulkowski, who built performance rankings for candlestick patterns in his 2008 book, “Encyclopedia of Candlestick Charts.”   He offers statistics for two kinds of expected pattern outcomes:

  1. reversal – Candlestick reversal patterns predict a change in price direction
  2. continuation – while continuation patterns predict an extension in the current price direction.

In the following examples, the hollow white candlestick denotes a closing print higher than the opening print, while the black candlestick denotes a closing print lower than the opening print.

  • Three Line Strike

The bullish three line strike reversal pattern carves out three black candles within a downtrend.   Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar. According to Bulkowski, this reversal predicts higher prices with an 84% accuracy rate. 

  • Two Black Gapping

The bearish two black gapping continuation pattern appears after a notable top in an uptrend, with a gap down that yields two black bars posting lower lows.   This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 68% accuracy rate. 

  • Three Black Crows

The bearish three black crows reversal pattern starts at or near the high of an uptrend, with three black bars posting lower lows that close near intrabar lows. This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. The most bearish version starts at a new high (point A on the chart) because it traps buyers entering momentum plays. According to Bulkowski, this pattern predicts lower prices with a 78% accuracy rate. 

  • Evening Star

The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high.   The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 72% accuracy rate. 

  • Abandoned Baby

The bullish abandoned baby reversal pattern appears at the low of a downtrend, after a series of black candles print lower lows.   The market gaps lower on the next bar, but fresh sellers fail to appear, yielding a narrow range doji candlestick with opening and closing prints at the same price. A bullish gap on the third bar completes the pattern, which predicts that the recovery will continue to even higher highs, perhaps triggering a broader-scale uptrend. According to Bulkowski, this pattern predicts higher prices with a 70% accuracy rate. 

The Bottom Line

Candlestick patterns capture the attention of market players, but many reversal and continuation signals emitted by these patterns don’t work reliably in the modern electronic environment. Fortunately, statistics by Thomas Bulkowski show unusual accuracy for a narrow selection of these patterns, offering traders actionable buy and sell signals.

Putting the insights gained from looking at candlestick patterns to use and investing in an asset based on them would require a brokerage account. To save some research time, Investopedia has put together a list of the best online brokers so you can find the right broker for your investment needs.

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