In both the Bullish and Bearish Engulfing pattern formation the second candle engulfs the body of the first. A long legged doji candlestick forms when the open and close prices are equal. The first rule about the tail should help keep you in line. Another advantage of using a candlestick chart is that you may combine them with conventional market indicators such as moving averages and trendlines.
1. A Way To Look At Prices
When dealing with such small time horizons , viewing a chart and using technical analysis are efficient tools, because a chart and associated patterns can indicate a wealth of information in a small amount of time. In this section, we will discuss the "candlestick chart" and the importance of identifying trends. In the next lesson, we'll get into a common chart pattern called the "head and shoulders. While everyone is used to seeing the conventional line charts found in everyday life, the candlestick chart is a chart variant that has been used for around years and discloses more information than your conventional line chart.
The candlestick is a thin vertical line showing the period's trading range. A wide bar on the vertical line illustrates the difference between the open and close. The daily candlestick line contains the currency's value at open , high , low and close of a specific day. The candlestick has a wide part, which is called the "real body". This real body represents the 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.
The small real body whether hollow or filled shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime. Marubozu means there are no shadows from the bodies. A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price.
This is a very bullish candle as it shows that buyers were in control the entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern. A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low. It is called so because the Japanese will say the market is trying to hammer out a base. A hammer pictorially displays that the market opened near its high, sold off during the session, then rallied sharply to close well above the extreme low.
Note it can close slightly above or below the open price, in both cases it would fulfill the criteria. Because of this strong demand at the bottom, it is considered a bottom reversal signal. A perfect hammer in Forex is the same as in any other market: This means it can have a little upper shadow, but it has to be much smaller than the lower shadow.
The smaller the body and the longer the tail, the more significant the interpretation of the hammer as a bullish signal. Another important criteria is the color of the body: Most patterns have some flexibility so much more illustrations would be required to show all the possible variations. This is what we attempt to do in the Practice Chapter. The illustration below is a sample question taken from the Practice Chapter's assessment.
There you will find dozens of real case studies to interpret and answer. Each example will show a detailed explanation of the correct answer so that you can really integrate this knowledge in your trading.
A way to look at the prices 2. Common Candlestick Terminology 2. Dark Cloud Cover 2. News, Analysis and Education Reports on Candlesticks. Analytical Tools A chart is primarily a graphical display of price information over time. Technical indicators and trendlines can be added to it in order to decide on entrance and exit points, and at what prices to place stops.
All these charts can also be displayed on an arithmetic or logarithmic scale. The types of charts and the scale used depends on what information the technical analyst considers to be the most important, and which charts and which scale best shows that information. If your interest is a qualitative view of the market, because you want to display data that have had a large percentage of increase or decrease in price, usually longer-term charts, then it is more appropriate to use a logarithmic chart.
While the arithmetic shows price changes in time, the logarithmic displays the proportional change in price - very useful to observe market sentiment. You can know the percentage change of price over a period of time and compare it to past changes in price, in order to assess how bullish or bearish market participants feel.
However, in the Forex market, the arithmetic scale is the most appropriate chart to use because the market doesn't show large percentage increases or decreases in the exchange rates. On an arithmetic chart equal vertical distances represent equal price ranges - seen usually by means of a grid in the background of a chart. The arithmetic scale is also the most appropriate to apply technical analysis tools and detect chartist patterns because of its quantitative nature.
Besides the arithmetic scale, the Forex world has also adopted the Japanese candlestick charts as a medium to access a quantitative as well as a qualitative view of the market. Traditionally the Japanese attribute yang qualities expansion to bullish candles and yin qualities contraction to bearish candles.
When the yang reaches an extreme there is stillness, and stillness gives rise to yin. A reversal in market forces follows the same principle: This balance between ying and yang forces is another way to look at swing movements in price similar to the wave principles covered in the previous chapter B Candles can be used across all time frames — from intraday to monthly charts.
For example, on a weekly chart, an individual candle line would be composed of Monday's open, Friday's close and the high and low of the week; while a four hour candle would comprise the same price levels for that time period. Marubozu candlestick Although this candle is not one of the most mentioned ones, it's a good starting point to differentiate long candles from short candles.
The doji also means the market has gone from a yang or ying quality to neutral state. In western terms it is said that the trend has slowed down - but it doesn't mean an immediate reversal! This is a frequent misinterpretation leading to a wrong use of dojis. Depending on the shape of the shadows, dojis can be divided into different formations: Engulfing Pattern Many single candlestick patterns, such as dojis, hammers and hanging man, require the confirmation that a trend change has occurred.
They become more significant to the market when they fulfill the following criteria: This pattern occurs when a candle's body completely engulfs the body of the previous candle. A bullish engulfing commonly occurs when there are short-term bottoms after a downtrend. In Forex, a bullish engulfing will seldom open below the last candle's close, but usually at the same level. But a bullish engulfing will always close above the previous candle open price, and a bearish engulfing will always close below the previous candle open price.
See below the picture of a bearish engulfing pattern for a better understanding. When engulfing occurs in a downward trend, it indicates that the trend has lost momentum and bullish investors may be getting stronger.
Conversely, a bearish engulfing will occur when the market is at the top after an uptrend. Piercing Pattern This pattern is similar to the engulfing with the difference that this one does not completely engulfs the previous candle.
It occurs during a downward trend, when the market gains enough strength to close the candle above the midpoint of the previous candle note the red doted halfway mark. This pattern is seen as an opportunity for the buyers to enter long as the downtrend could be exhausted. A piercing pattern in Forex is considered as such even if the closing of the first candle is the same as the opening of the second candle. Dark Cloud Cover pattern This pattern is the exact opposite of the piercing pattern.
It happens during an upward trend when the session opens at or slightly above the previous closing price, but the demand can't be sustained and the exchange rate loses ground falling below the midpoint of the previous candle. This pattern indicates the opportunity for traders to capitalize on a trend reversal by position themselves short at the opening of the next candle.
It may also be used as a warning sign for bullish positions as the exchange rate could be entering a resistance zone. While the green circled patterns fulfill all the recognition criteria, the red circled don't.
Harami pattern On a Japanese Candlestick chart , a harami is recognized by a two-day reversal pattern showing a small body candle completely contained within the range of the previous larger candle's body. This formation suggests that the previous trend is coming to an end.
The smaller the second candlestick, the stronger the reversal signal. On a non-Forex chart, this candle pattern would show an inside candle in the form of a doji or a spinning top, that is a candle whose real body is engulfed by the previous candle.