We simply need to follow the path of price and then analyze it in the context we have learned until now. Multiple candles patterns have greater predictive power than single candles because the simultaneous analysis of multiple candles can make use of double or triple content.
In the previous blog, we have provided you with a brief about candlesticks and how single candle patterns can be used to identify bullish and bearish trends in the market. Now, we will go one step ahead and introduce the candle patterns which can be used by traders to identify the various trends in the market and ride the trend in order to make money. Here is a brief look at what those patterns mean:
The engulfing pattern usually consists of two successive candlesticks, wherein the second candlestick is significantly larger than the first and engulfs it completely.
The second candlestick often resembles the marubozu candlestick, which consists of a long body without a shadow. If the candlesticks initially become smaller during a downward trend, they indicate that the sellers are slowly withdrawing from the market.
The following engulfing candlestick then signifies that the strength ratio suddenly reverses and more buyers enter into the market so rapidly that they reverse the trend direction within a single candlestick. In this case, the Engulfing formation is a reversal signal: the price then has a higher probability of moving further in the direction of the engulfing candlestick since the strength ratio has shifted on one side.
A bullish engulfing candle pattern is formed when the price of a stock moves beyond both the high and low of the previous day range. It engulfs.
Usually, this sort of pattern will tell a trader the price has moved down, found some support or buying volume, and then made a bullish move back up by breaking the previous day’s high. Often this type of candle can be the signal for a sustained upward move or trend change.
The opposite of a bullish engulfing candle, a bearish engulfing candle pattern will move to test a level above the previous day high, then after finding selling volume will move sharply downwards, breaking the previous day’s low. Again this can be a precursor to a sharp sustained drop in price or trend change.
The Harami Pattern
Before you start with the Hindi translation of this word, its better to clarify that the word does not stand for ‘Harami’ in Hindi but instead it is a Japanese word which means ‘pregnant’.
Harami is a two-candle pattern with the first candlestick seen as the “mother” with a large real body that completely encloses or embodies the smaller second candlestick, creating the appearance of a pregnant mother. The second candlestick may appear to be a spinning top or a doji. When the second candlestick is a doji, the pattern is called a harami cross.
The Bullish Harami
The bullish harami candlestick consists of a large red candle followed by a smaller green candlestick whose body is located completely within the real body of the preceding large candle.
Most often, bullish Haramis will show up in a chart after a decline in price. The smaller the body on the second candlestick the higher the chance we have for reversal. Sometimes we even see a doji candlestick appeared as the second portion of a Bullish Harami. When this happens this is an extremely powerful confirmation of the upcoming trend reversal.
Here is a look at how this pattern evolves:
In the above example, we can see a bearish trend in the stock in the middle of the image after which we can see a reversal and a positive upswing. The way to catch this pattern is to look at the candles circled in the middle and on looking at them isolated we can see that it resembles the image of a pregnant woman.
As we know that ‘pregnant’ in Japanese is Harami which indicates a reversal which is of bullish nature in this scenario.
Always remember that in a bullish Harami pattern the smaller candle will always be bullish in nature and the larger candle is bearish in nature.
The Bearish Harami
In case you were wondering, this pattern is the exact opposite of the Bullish Harami pattern and is generally found at the top of the chart and similar to an engulfing pattern and gives the trader an opportunity to initiate a short trade.
Here is how it works:
The market generally is in an upswing and the stock seems to go up and ends the day on a positive note and hence we can see a blue candle at the end of the day. On the next day for some reason, the market opens lower causing panic in the bulls and leads to panic selling at their end causing the prices to drop and smaller bearish candle to form on that day.
The pattern generally resembles that of a pregnant woman which indicates a reversal which is bearish in nature with the bearish candle being smaller than the previous bullish candle which is evident in the snapshot attached above.
The Tweezers pattern is a minor trend reversal pattern that consists of two candlesticks with more or less the same high or the same low or some variation thereof. It is the only candlestick pattern where the highs or lows are the most important factor rather than the body or the shape of the candles.
If the tweezers pattern appears in an uptrend, it is called a Tweezers Top and should have the same high. If it appears in a downtrend it is called a Tweezers Bottom and should have the same low. In addition, the two candlesticks should have alternating colors with the first confirming the current trend and the second indicating weakness. The pattern is more reliable when the first candlestick has a large real body while the second candlestick has a short real body. It is also more reliable when the Tweezers pattern is confirmed or makes another pattern, such as an engulfing or piercing pattern with identical highs or lows.
Tweezer Top Pattern
The Tweezers Top pattern appears in an uptrend. The first candlestick in this pattern should be a bullish candlestick with a large real body followed by a bearish candlestick with a short real body. The two candlesticks must have either the same high or their real bodies should be at the same high level. The pattern is more reliable when seen in the context of the broader price chart with the pattern appearing at market highs, or near resistance or trend lines.
The Tweezers Bottom pattern appears in a downtrend with the first candlestick being a dark, bearish candlestick with a large real body, followed by a bullish candlestick with a short real body. The two candlesticks must have either the same low or the bottom of their real bodies should be at the same level. The pattern is more reliable when it appears at market lows, or near support lines or at lower trend lines.
Three Black Crows
The three black crows is a bearish trend reversal pattern and is the opposite of the Three White Soldiers covered in the next section. It consists of three bearish candlesticks in descending order which symbolize a moderate trend reversal point in the markets.
This trade setup should be considered viable if it appears in a rally or within an established uptrend as it indicates weakness in the market and an increased potential for downward price action.
Each of the three bearish candles should consist of a long real body with relatively short candle shadows protruding. Furthermore, each new bearish candle will close below the lowest level of the preceding bearish candle, resulting in a progression downwards.
Typically each new candle will open somewhere within the real body of the preceding candle and continue the downtrend as the sell-off continues and bearish momentum enters the markets. This pattern is extremely easy to spot and should be considered when shorting a stock, however, due to the nature of the long black candles which make up this formation one should always consider the oversold conditions in the markets and watch for possible pullbacks before any major downtrends emerge.
Three White Soldiers
The Three White Soldiers pattern can be found in a downtrend and is symbolic of a bullish price reversal in the markets. When this pattern occurs traders should start considering long positions and entering a trade in order to take advantage of a newly established up-trend. When this pattern occurs traders should start considering long positions and entering a trade in order to take advantage of a newly established up-trend.
Similar to the three black crows, the Three White Soldiers pattern will consist of three consecutive bullish candles, each having a long and drawn out real body of its predecessor and continue the uptrend by forcing the price to go even higher.
Due to the long and drawn-out nature of the bullish candles in this pattern, traders should be careful of overbought conditions in the markets and should watch for price reversals downwards before any major bullish trends take place.
Upside Gap Two Crows
The upside Gap Two Crows pattern is a very rare and powerful candlestick pattern that is very similar to the Evening Star or Engulfing Candle patterns, but it has a few differences which make it a more effective trading tool. Similar to the Evening Star, the Upside Gap Two Crows will be a bearish top reversal pattern, however, this one will consist of three candlesticks.
The first candlestick in the pattern will always be a bullish candle with a very large real body. This bullish candlestick will be followed by two consecutive bearish candles which are smaller in size. The two consecutive bearish patterns should form an Engulfing Candle pattern.
The first bearish candlestick that follows the large bullish candle must have a gap towards the upside between its real body and the real body of the bullish candlestick. Next, the third candlestick that forms in this formation must engulf the middle candlestick -meaning that its real body must be both above and below the real body limits of the middle candle.
The Upside Gap Two Crows pattern differs from the evening star pattern due to the third candle engulfing the middle one. This pattern is considered extremely bearish and when it appears in an up-trend it is indicative of an upcoming reversal downwards. When traders identify the Upside Gap Two Crows pattern they should immediately short a stock and take advantage of the increased bearish momentum in the markets.