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By Sylvain Vervoort
With this article we have a look at the candlestick charts bottom reversal patterns. We will discuss a few strange names like bullish engulfing pattern, piercing line, bullish counter attack, bullish harami, morning star, hammer and inverted hammer, three white soldiers and more. If you need some basic clarification you can look for my articles “Introduction to candlestick charts” and “Candlestick charts basic patterns”.
Before looking at the bottom reversal patterns we have to define the rules for a bottom reversal to be a valid pattern.
– A bottom reversal is only possible AFTER a downtrend.
– Most of the patterns need a confirmation.
– A confirmation must appear one up to three candles after the pattern.
– This confirmation is a big white candle, high volume with the new up-move, a rising window, or breaking a resistance.
[youtube]http://www.youtube.com/watch?v=UpcSMZwDfoE[/youtube]
– A reversal pattern during price reaction must be considered a continuation pattern.
– For the best result, you must combine candlestick patterns with Western technical analysis.
An unconfirmed pattern has no further meaning.
When in a downtrend, there is a small black body, not a doji, followed and enclosed by a bigger white body; you have a bullish engulfing pattern. Though not necessary, it is better when the white body also encloses the short shadows of the black candle. An exceptional occurrence at the end of a downtrend is a white body followed by a bigger black body; this is called a last engulfing pattern.
A piercing line is a bigger black body that is followed by a white body with a lower opening price than the low of the black body in a downtrend; however, the white candle closes above the midpoint of the black body. A confirmation is required.
A bullish counterattack is a bigger black candle in a downtrend, followed by a bigger white candle. Closing prices of both candles are at the same price level. Confirmation is needed.
A bullish harami in a downtrend, a white, but preferably a black body followed by a small white or black candle that is best completely covered by the first candle body. A bottom reversal signal after confirmation. Black-white and black-black, called homing pigeon, combinations are the most common.
A bullish harami cross in a downtrend is a white but preferably a black body that is followed by a doji that is ideally completely covered by the first candle body. A bullish harami cross pattern needs confirmation.
A morning star is a bigger black body, followed by one or more small black or white bodies below the closing price of the first black body. The white candle that follows ideally lays 50% or more within the first black body and has a rising window with the previous candle body.
A morning doji star is a bigger black body, followed by one or more dojis with a falling window below the closing price of the first black body. The white candle that follows ideally lays 50% or more within the first black body and has a rising window with the previous doji body. This is a stronger reversal signal than a morning star.
A bullish abandoned baby pattern is a morning doji star with a window between the doji and the black and white candle, resulting in an island reversal. The island can have more candles and more than one doji.
A hammer is a small white or black body close to the high price. It has a long shadow below with a minimum size of twice the height of the body. There is a very small shadow or no shadow at the top. A dragonfly doji is a specific version of the hammer pattern. Confirmation is required. A white body is more positive.
An inverted hammer is a small black but preferably a small white body near the low price. It has a long shadow above that is, at minimum, twice the size of the body. It only has a very small shadow or no shadow below. A gravestone doji is a specific version of the inverted hammer. A bottom reversal only after confirmation.
Three white soldiers are three white candlesticks with each bar having higher closing prices, close to the high of the bar. Opening prices of candles two and three are within the body of the previous candles. Many times, there will be a small reaction before the new uptrend is resumed.
This concludes my overview of the most important candlestick bottom reversal patterns. In the following article we will have a look at candlestick continuation patterns and we will also talk about some candlestick trading techniques.
About the Author: Want to learn more about candle bottom reversal patterns? You can find technical analysis articles for free at my website:
stocata.org/
. Sylvain Vervoort is a trader and the author of a new book ‘Capturing Profit with Technical Analysis’ and a regular contributor to Stocks & Commodities.
Source:
isnare.com
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