Chapter 6 – Japanese Candlesticks – Bullish Reversal Patterns

This in an excerpt from the forthcoming Liberated Stock Trader Book and Training Course

As we are concerned with spotting changes in price moves we will focus on the Reversal Patterns.  This section is the Bullish Reversal Pattern meaning when a price is moving down and you see this sign, the price may change direction and start moving up in the short term.  These are the most common patterns not an exhaustive list but it will give you an idea of what is common in all patterns.

The Hammer – this hammer can be either filled or hollow, the Japanese say the price is hammering out a bottom.  What is important here is that at the end of a down move, the buyers and sellers test out an extreme low (the long shadow) however by the closing bell the price has returned higher.

The lows were tested but price found no comfort there, there were enough buyers at this level to move price back up.

Inverted Hammer – this hammer shows that at the end of a downward move the stock gaps significantly down there is much movement throughout the day moving back to fill the gap but the price settles lower for the day.  This shows significant price action and that buyers are showing strong interest in the stock at these levels.


Bullish Engulfing – here we have a negative spinning top or a short day during a down trend, then followed by a long day of real power the long white body tells you something significant has changed and so has the sentiment, a clear trend reversal.


Bullish Harami – during a downtrend we experience a very negative “Long Day” followed by a short positive day.  This indicates the market participants have found a level they are happy with.  Candlesticks are most useful when predicting a change in trend, this might be from an “up” to a “down” trend or from a “down” trend to a “sideways” trend.  In the case of this Harami, the change in trend may be from downwards to sideways.

Piercing Line – this shows a day of real strength following a very negative day.  The White candle gaps down on open but the buyers show real demand throughout the day to retrace more that 50% of the previous day’s losses.

Summary

Each Candlestick pattern has a specific story to tell.  If you can understand the story being told you do not need to memorize the name of each pattern and the text book meaning.  Re-read this article and try to imagine the story.  Combining the action of multiple days will allow you to understand the current psychology of the market participants therefore giving you an insight into tomorrows price action.

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Other Chapter excerpts from the Liberated Stock Trader Book & Training Course are here :

Chapter 1 – Essential Stock Market Knowledge – Fundamentals

Chapter 2 – Why do Booms and Busts Occur?

Chapter 3 – Stock Market Cycles – Business & Economic Cycles – Kondratieff to Kuznets

Chapter 4 – Is the Company in great shape – P/E Ratio

Chapter 5 – How to find the best stocks

Chapter 6 – Japanese Candlesticks – Bullish Reversal Patterns

Chapter 7 – How to draw trend lines

Chapter 8 – ROC Rate of Change Indicator