Candlestick Patterns (Part I)
on Aug.09, 2009, under Poker
Most candlestick patterns are valid based only on the market activity of the previous few days. For instance, some of the candlestick patterns indicate a change in trend. Using one of these without knowing about the previous trends wouldnt be very useful.
When you spot and identify a particular candlestick pattern you should take it as a signal that something is going to happen to the market in the near future. What you should do based on that candlestick pattern depends on the context. Usually the context in which you find the candlestick pattern tells you a great deal about them. Lets consider simple candlestick patterns first.
The Bullish White Marubozu: The longest white candle is the most bullish of the candlestick patterns. It represents the day when bulls control the market and push prices higher from the opening to the closing. With the long white candle closing near the high, chances are the bulls will be back for more buying the following day.
One common feature of the long white candle is an open near the low of the day and a close near the high of the day. This means that buying has been taking place all the day. With the long white candle, the low price on the candlestick is a good support level.
The Bullish Dragonfly Doji: A Doji is formed when the opening and the closing prices are the same. So essentially there is no stick in the candlestick. For a Doji to be created, a day must begin and end with the same price.
Doji patterns are usually associated with a market turn. Doji depicts a day where the battle between the bulls and the bears has been fairly equal. A Doji may not look very exciting to you. But dont be fooled.
A Dragonfly Doji is unique in that three of the four candlestick patterns- the open, high and the close are all equal. The price action depicted by the Dragonfly Doji bodes very well for those hoping that prices go higher. The low of the Dragonfly Doji day is considered a near term support level. You can make smart trades based on the Dragonfly Dojis.
The Bearish Long Black Candle: The long black candle is the direct counterpart of the long white candle discussed earlier. The long black candle is as bearish as it gets. It means that sellers take over at the beginning of the day and push prices lower and lower until the end of the day.
These sellers are selling just to get out of their trades. Price sensitivity is very low for these sellers. Seeing this type of enthusiastic selling must give you the confidence that the bears will be in control for a few more days after the appearance of the long black candle. You can capitalize on this fact. The long black candlestick pattern is a good bearish signal.