FuturesTechs Blog

This is a quick summary of important candlestick patterns. It’s presumed that you know the basics of candles: if you don’t, see the article links in our Members Area.

Without further ado, let’s begin.

1. Bullish Marabuzo

Number of candles: 1.

Description: long green candle which opens near its low, and closes near its high.

Implications: BULLISH.

2. Bearish Marabuzo

Number of candles: 1.

Description: long red candle which opens near its high, and closes near its close.

Implications: BEARISH.

3. Doji

Number of candles: 1.

Description: candle which closes near where it opened.

Implications: REVERSAL.

4. Shooting Star

Number of candles: 1.

Description: candle which closes near where it opened, at the bottom of the period’s range.

Implications: BEARISH REVERSAL (in an uptrend).

5. Hammer

Number of candles: 1.

Description: candle which closes near where it opened, at the top of the period’s range.

Implications: BULLISH REVERSAL (in a downtrend).

6. Hanging Man

Number of candles: 1.

Description: candle which closes near where it opened, at the top of the period’s range.

Implications: BEARISH REVERSAL (in an uptrend) (only weak effectiveness)

7. Inverted Hammer

Number of candles: 1.

Description: candle which closes near where it opened, at the bottom of the period’s range.

Implications: BULLISH REVERSAL (in a downtrend) (only weak effectiveness)

8. Bullish Engulfing Pattern

Number of candles: 2.

Description: green candle with a lower open and a higher close than the previous candle.

Implications: BULLISH REVERSAL (in a downtrend)

9. Bearish Engulfing Pattern

Number of candles: 2.

Description: red candle with a higher open and a lower close than the previous candle.

Implications: BEARISH REVERSAL (in an uptrend)

10. Harami

Number of candles: 2.

Description: candle with a real body contained within the range of the prior real body (which must have moved in the direction of the prior trend).

Implications: REVERSAL (only weak effectiveness)

11. Dark Cloud Cover

Number of candles: 2.

Description: red candle with a higher open than the previous candle, but a close in the bottom half of that prior candle.

Implications: BEARISH REVERSAL (in an uptrend)

12. Piercing Pattern

Number of candles: 2.

Description: green candle with a lower open than the previous candle, but a close in the top half of that prior candle.

Implications: BULLISH REVERSAL (in a downtrend)

13. Morning Star

Number of candles: 3.

Description: long red candle followed by a small-bodied candle which gaps lower. The third candle closes in the top half of the first candle.

Implications: BULLISH REVERSAL (in a downtrend)

14. Evening Star

Number of candles: 3.

Description: long green candle followed by a small-bodied candle which gaps higher. The third candle closes in the bottom half of the first candle.

Implications: BEARISH REVERSAL (in a downtrend)

Graham Neary MSTA (graham@futurestechs.co.uk)

Bar charts were the most popular way of depicting price movements until Japanese candlestick charts invaded Western technical analysis during the 1970s, but are still as useful as they’ve ever been.

They depict the same information as candlesticks, merely presented in a different way. They have their own terminology, and are most commonly used in conjunction with classical chart patterns like the Head and Shoulders and Triangle (though candlesticks are equally adept at displaying these).

In this article we’ll take a look at some bar patterns and see how they compare to the candlestick patterns you’ll find in our daily reports.

First, the basics: what do they look like? The show the day’s range with a vertical line connecting the high and the low. A little bar to the left of this line is shows where we opened, and another little bar to the right shows the close. Graphically:

With this understood, let’s compare how the same information looks in bars and candlesticks:

It should be clear that the only difference is in the presentation. Any pattern in bars or candlesticks can be expressed equivalently in the other format. Now for some patterns:

Ringed Highs and Lows

These are simple reversal patterns used to identify entry points. The Ringed High is formed when a sequence of higher lows is broken with a lower low, whilen the Ringed Low is the converse: a sequence of lower highs is broken with a higher high. They work across any timeframe.

Example of a Ringed Low:

We buy when the latest “lower high” is broken to the upside.

Example of a Ringed High:

We sell when the latest “higher low” is broken to the downside.

Note that the open and close (little bars on either side of the vertical line) are irrelevant when it comes to this pattern. We’re only looking at the highs or lows.

Reversal Day

There are competing definitions for this term, but we’ll accept the one found in Technical Analysis of the Financial Markets by John J. Murphy (New York Institute of Finance). A top reversal day is formed in an uptrend when we get a bar with a higher high but a lower close. The bottom reversal day is formed in a downtrend when we get a lower low but a higher close.

Here’s an example of top Reversal Days in Bobl futures. The first one wasn’t followed by an immediate change in trend, only a day of weakness. The second one, though, was fully confirmed (demonstrating this this pattern, like all others, is not infallible!)

The pyschology behind this pattern is fairly simple: market participants saw the trend continuing intraday with an expansion of the range in the direction of that range. This wasn’t followed through, though, and the close was actually lower than the previous day’s (or higher, in a downtrend).

Key Reversal Day

This is a more extreme version of the Reversal Day mentioned above.

In passing, let’s say what the Outside Day is. This is a session whose range completely surrounds the range of the previous day, i.e. we have a higher high and a lower low. Similarly, the Inside Day has a range entirely within the previous one.

The Key Reversal Day is an Outside Day with a lower close when we’re in an uptrend, or a higher close when we’re in a downtrend.

Equivalently for a downtrend: the open is lower than the previous day’s close, but the close is higher than the previous day’s high.

(Note: some sources have slightly different requirements for the Key Reversal Day, but let’s leave this confusion to one side!)

The following 2-bar pattern would a be a Key Reversal bottom in a downtrend:

The idea is that the market started out in line with the prevailing trend (the above second candle even gapped lower than the first one). This early positivity is reversed, though, and we end up closing the day in the opposite direction, finishing past the extremes of the previous session.

The Key Reversal Day is related to the Bearish Engulfing candlestick pattern and it wouldn’t be very far wrong to say that the Engulfing Pattern was the candlestick analysis equivalent of the Key Reversal Day.

This market topped out with a Bearish Engulfing Pattern that also qualifies as a Key Reversal Top.

Summary

Let’s summarise all of the patterns explained in this article:

Ringed High: sequence of higher lows, broken by a lower low.

Ringed Low: sequence of lower highs, broken by a higher high.

Reversal Day (Top): day with a higher high but a lower close (in an uptrend).

Reversal Day (Bottom): day with a lower low but a higher close (in a downtrend).

Outside Day: a higher high and a lower low than the previous day.

Inside Day: a lower high and a higher low than the previous day.

Key Reversal Day (Top): Outside day that closes lower (in an uptrend).

Key Reversal Day (Bottom): Outside day that closes higher (in an uptrend).

We mostly focus on candlestick analysis in our research, but also try to take note of significant bar chart patterns formed in the markets we cover. As with all techniques, bar charts are not infallible but, with some experience, domake it easier to read the markets  To read our daily research of the futures and FX markets, please sign up for a free trial.

Graham Neary MSTA (graham@futurestechs.co.uk)

We are often asked here at FuturesTechs about training courses on Technical Analysis.

There are many providers out there, but none with the impeccable reputation of the UK’s Society of Technical Analysts. The STA runs their Diploma Course every year at the London School of Economics in Aldwych. The course runs for 11 Wednesday evenings in a row and covers every aspect of Technical Analysis with tutoring from the leaders in their field in this country.
If you are at an institution be aware this course may be suitable for your CPD.
At the end of the course you will be ready to take your Diploma Exam, an internationally recognised professional level qualification in Technical Analysis.

I would highly recommend this course if you wish to advance your knowledge of Technical Analysis.

For more information I have posted contact details and an application form on our links page here.

Or you can go straight to the STA website and sign up here.

There is a discount if you book before December 11th, so don’t mess about!

Alternatively, if you cannot make the course you can study at home with the Society’s Home Study Course. Click here for details.

This year I have been collared into doing two of the lectures, so if you sign up I look forward to seeing you then!

Cheers,

Clive.