Because the bullish and bearish pressures in the market have reached equilibrium. Since these forces on the price are roughly equal, it is very likely that the previous trend will end. This situation could bring about a market reversal, which is a price move contrary to the preceding trend. Thus, seeing the Doji candle will often indicate an upcoming price reversal.
Hammer Candlestick Family The hammer candlestick family also consists of related single candlestick patterns. Hammers have a long upper or lower wick and a small candle body on the opposite side. Like the Doji, a hammer candlestick pattern indicates that a price reversal might be on its way.
Members of the hammer family of candlesticks include the following: Hammer A hammer candle will have a long lower candlewick and a small body in the upper part of the candle. Hammers often show up during bearish trends and suggest that the price might soon reverse to the upside.
Inverted Hammer The inverted hammer has a long upper candlewick and a small body in the lower part of the candle. Same as the hammer, an inverted hammer appears during bearish trends. It suggests a price reversal. Hanging Man The hanging man looks the same as the hammer, but it appears during bullish trends and suggests that a correction to the downside might soon materialize. Shooting Star The shooting star has the same structure as the inverted hammer. When it appears during bullish trends, it indicates that the recent rise could stop and the market will start correcting lower.
This image will give you a better idea of the hammer candle family. The green arrows represent moves higher, while the red arrows represent price declines. As you can see, the candle might look the same but the previous trend and its direction give different signals. Notice that each candle pattern in the hammer family is a reversal pattern that could be bearish or bullish depending on what directional move preceded it. Engulfing Candlestick Patterns Engulfing candlestick patterns are double candle patterns.
Bullish Engulfing Pattern The bullish engulfing pattern appears during bearish trends. It consists of a bearish candle followed by a bullish candle that engulfs the first candle. This pattern suggests a bullish move will soon occur.
Bearish Engulfing Pattern The bearish engulfing pattern appears during bullish trends. It consists of a bullish candle, followed by a bearish candle that engulfs the first candle. This pattern indicates a bearish move may soon be forthcoming. Morning and Evening Star Candlestick Patterns The morning and the evening star are triple candle patterns.
They also forecast reversals. The more stock files you process, the better the results. Before downloading every stock symbol in your markets, try downloading or so. Check how long it takes Patternz to process that many. Then add more as needed and time allows. Others that have tried to replicate the indicator have had success, but it's not an easy gig nor terribly hard. Most trip over the "backfilling" of counts between the Nr7's end and the breakout.
Pay special attention to that. If you read the Patternz manual and the above construction page , you should understand how I count the patterns. I want to trade using your chart pattern indicator. I specifically warn against this because signals can change for 7 days. Usually, they are stable after 3 days but that is an observation. Why aren't my Patternz patterns the same as the setups reported each Friday? For Friday's blog post "Patterns Trading Setups for the Weekend" , I manually find and catalog each pattern during the week and those are reported each Friday.
Patternz finds patterns automatically. I may discard Patternz's patterns and add more of my own to the mix. Does Patternz accept data from Metastock? Patternz cannot read Metastock files. Patternz can only read data files ending in. Thus, use the Metastock program to covert the files into. The new version of Patternz will download quote data automatically so you don't have to read in.
Again, you should visit the File Format page in Patternz to configure the program correctly for the data files. I have no intention of making Patternz compatible with Metastock data. Because I don't use Metastock and trying to verify that the files work can be troublesome. Plus, if they change their format, Patternz will break.
Lots of users will be upset and blame me. Then they'll want me to fix it. And they will want it done for free. Why should I bother with the hassle? Why don't I charge for Patternz, the free program that finds chart patterns and candlesticks? I do not want to be in the business of selling software. I do not want to worry about people ripping me off by selling my software on the Internet and pocketing the money.
Can I have the Patternz algorithms? They are too valuable to just give away. And promising you will not share them with anyone will not work either, regardless of whether you sign a non-disclosure form. I've already learned of one individual considering paying a firm to reverse engineer Patternz. How does Patternz work? First I identify the peaks and then I find the valleys in a historical price series.
Once I have those, then it is just a matter of stitching them together. A triple top is just three peaks near the same price. The algorithms are simple 'if-then-else' constructs but the package is quite accurate and very fast providing you keep the data files short a year or two long. If you want a more technical approach, then create a software package genetic algorithm that when given a date range where a known-good chart pattern appears, it will determine the recognition rules and then find other examples, learning from its mistakes.
That will take longer to build than the 3 months or so it took to write Patternz. Can you recommend trading software? I wrote my own trading software, which I do not distribute to the public. Since I have what I need to trade, I have not shopped around for other software. I have no recommendations. I would check there to see what other traders are using. A new version of Patternz has been released. It works with Windows 7 home premium and newer editions of the operating system, including Window I have no plans to make Patternz compatible with non-Windows machines.
I have enough trouble keeping it working with current versions. Do you use fundamentals in your trading? Yes, I do. I want to know if the company has reasonable debt levels and what their current ratio is. I want to know what the insiders are doing with their stock buying or selling in the past year. Does the company pay a dividend and can they afford to pay it the payout ratio.
And so on. Once the company passes my fundamental tests, then I move onto the technicals for timing. Will you be my mentor? Why not? Because it takes too much time up to 4 hours of research for each trade , and I have too many people asking for help. That's why I wrote my books, and that's why I have a free website. The books are easy to read and understand. They are a lot less expensive than paying for a coach or mentor.
The Evolution of a Trader series of books explains the four trading styles and how I tried them all. It's a good place to start to get tips on buy and hold, position, swing, and day trading. Getting Started in Chart Patterns is a wonderful entry-level book for people new to chart patterns. However, it is not a primer on how to buy a stock for those who know nothing about equities.
I wrote a mentor article to help you newbie traders, so be sure to read that. If you follow its guidance, it'll help a lot. Visit the studies page and tutorials on my website. Read my books. Use the site's search feature for common terms. If you can't find your answer there, then contact me. Read the next question and answer to better understand what goes into successful trading. What one chart pattern can make me a bundle? The question is a simple one but the answer is not.
It's a lot like asking a dealership, "Which vehicle is best for me? Or will a bus suffice for the dozen kids you have? Or maybe you need an wheeler to ship that cargo for your business. The correct answer depends on more questions, questions only you can answer, not me. For chart patterns, the long answer is that learning to trade them correctly is like taking years to become a brain surgeon. Don't expect to be successful overnight, or even in a year. You'll have to know the answers to questions like these.
Which breakout direction should I trade? Do reversals or continuation patterns perform best? Should I look for them at the end of long trends or at the start of trends? Should the inbound trend be steep or shallow or does it matter? How important to success of a trade is the industry in which my stock does its primary business? How important is the market trend? Is the market choppy and volatile, range bound, or trending? How often will I get a throwback or pullback?
Should I wait to buy until after a throwback completes? Should I trade busted patterns instead? Am I a buy-and-hold investor, position trader, swing trader or day trader? Am I planning to trade as a hobby or invest for the longer term? Do I have enough money to last a downturn?
Is my portfolio diversified to spread risk or concentrated to make big bucks quickly? Is the stock volatile, high or low even negative beta? Is the stock a trend follower or a countertrend player? What time frame will I be trading? Should I use the log or linear scale when viewing charts?
What time frame should I use to view my charts? Do I have the patience to become a successful trader? Can I keep emotion out of my trading? Can I handle the pressure of trading alone or do I need a group dynamic? Do I have the skills to do the research necessary each day before and after trading? How will I handle loss after loss after loss? Should I use leverage? Will I blow out my account with too much leverage? Should I trade options, stocks, forex, futures, or all of them? Will listening to my broker make me broker?
That one simple question has turned into a complex answer. It's so complex that traders like me write books on the subject. If you have had the patience to read through the long answer, I'll give you the short answer. Good luck with that. I'm from India or wherever and I need help with our markets. Can you help me trade the Sensex or whatever? Read the question about mentoring. Your markets are different than the U. You have different rules and your trading style will be different, too.
I'm not familiar with your markets so my advice either won't work or might be wrong anyway. I also deal with stocks only, not currencies or other security types. Use this website to learn tips you can use in your markets or find ideas to test on your securities. Fear and greed don't change from culture to culture, but only you can decide what applies to your style of trading and what will work where you live.
The question is often phrased like this: "I tested your chart pattern or candlestick pattern and got different results. Bulkowski, you must be wrong. When I turned into a software engineer, I blamed hardware. Either way, the fault was nearly always mine.
As I matured, I decided to quit blaming others for my own mistakes and first assumed that I was the cause. Here are the reasons why you can't reproduce my results. Different data. I dislike using one security like the QQQQs for my tests. Thus, my tests often involve hundreds of stocks from to thousands and years of daily price data.
If you don't use the same data, you'll get different results. Depending on how thorough your tests are, your results may or may not be close to mine. My data is split and dividend adjusted at the time of initial download, and then split but not dividend adjusted thereafter. Not adjusting the dividends will cause different results. This is one reason why the results will be close, but not exact. Data is a problem with Patternz when users try to reproduce my chart pattern indicator.
Their stock symbol list is different than mine and they get slightly different results. No kidding! If you use a lot of symbols, then the results should be close enough. I tested my symbol database and another trader who used the entire stock market, over symbols.
The results were not the same, but very close. Different methods. If you use a different testing method than the one I use, then expect different results. If you decide to use stops and I choose to measure performance at selected intervals how far price moves a day later, 3 days later, a week later, and so on , then yes, the results will be different.
You should expect that. Think of it as you choosing to race a Honda Civic and I choose a Corvette. Both are cars, but don't expect your Civic to win every race. Different testing times. Frequently, I split the results into bull and bear markets because I think it better helps traders determine what will work best under different market conditions.
If you combine bull and bear markets together, in one test, then your results will be different than mine. Different time scales. I use end-of-day data for my tests because that's what I have available. If you test using intraday data or weekly data then that may explain the different results. Different markets. My tests use securities based in the United States. I have seen a chart of the same stock from the US and from another country, in which the charts look different enough that I could see a pattern in his chart, but not in mine.
Even comparing end-of-day quote data finds that yahoo! Imagine what a candlestick on the one-minute scale will look like if your chart and mine are off by one second. In that one second, price can move dramatically, changing the shape of the candle. I found this out when day trading with another trader who lives 30 miles from me. He used a different data source and his candles were sometimes different than mine.
Automated v. For chart patterns, I prefer quality over quantity and that means I manually looked at each of more than 38, chart patterns when I wrote the second edition of my book, Encyclopedia of Chart Patterns. If you use an automated service, then recognize that they will not be as accurate as your eyes in locating chart patterns. And that includes Patternz my free pattern recognition software. It makes mistakes. I use the engine behind my Patternz program to help find patterns, and use other technology to help catalog the various features of a chart pattern, but I make up to six passes on each pattern to verify that it is valid and to make sure that all features are accurately represented in my data collection.
Dividend adjustments. My data was adjusted for splits and dividends when I downloaded it. I update it each trading day and will manually adjust it for stocks splits, but not dividend adjustments. Thus your price data, if adjusted for dividends, will not match mine, nor will your performance numbers.
Before you blame me for any difference in testing results, consider how difficult it is to verify that aspirin can reduce heart attacks. Some studies indicate that it works, others say it doesn't, and the rest found no meaningful benefit. If any of the above listed items apply to your tests, then you can expect different results.
It's possible that both of our tests are correct, but are specific to our market. How many stocks do I follow daily? I have about securities which I review periodically. Among them are the major indices, over ETFs exchange traded funds , and lots of stocks. What chart patterns are the most reliable and which do I like?
You can find them ranked here. My answer to this has changed over time. In the beginning, I liked descending triangles , double bottoms , and head-and-shoulders bottoms. More recently, cloud banks and diving boards have caught my interest.
When I go bottom fishing for stocks, I like to see an upward breakout from a flat base and check the upside potential of the stock hence, a cloud or diving board setup. Sometimes, just the exit from a congestion area is worth trading. I search less for a distinct pattern. A head-and-shoulders bottom points the way higher, but if overhead resistance is going to kill the uptrend, then I'll skip the potential trade. If the industry is suffering, I'll skip the trade.
If the market is showing weakness, then I'll wait until the picture clears. What indicators do I use in my trading? Price is the best indicator! It's the only one I use now. I used CCI for divergence and for confirmation of short term trades. For BBs, when price nears a horizontal band, it tends to bounce off it. Also, when the bands narrow, expect a breakout from congestion. How do I use the measure rule? The measure rule varies from chart pattern to pattern, but it usually involves finding the pattern's height and adding it to upward breakouts or subtracting it from downward breakouts the breakout price.
The result is the target price. A better method is to compute the height as just described and multiply it by the "Percentage meeting price target. Portfolio: How do I pick stocks to follow? I have two stock lists. One is a list of stocks I own or am thinking of owning my portfolio. The other list is a watch list. The stocks in the watch list are the ones I pull from and put in my portfolio. I don't go trolling for stocks in the general market.
Rather, I just scan my watch list each day and stop on anything that interests me. Reviewing the same stocks each day means you get to know both the stock and industry. You know when a stock is cheap and when it is expensive. This entry describes how I build the watch list, not my portfolio list. When I built the original list years ago, I used Value Line available free in most libraries and picked companies that I knew were solid fundamentally.
I looked for price to have a heartbeat, meaning up and down movement over the years. I looked at the yearly price range. If it was just a few points wide, I moved onto the next stock. I wanted to see the low price was half the high price in at least two of the past 5 years.
In other words, the stock doubled in at least two years. I avoided selecting companies too expensive or too cheap. I also selected stocks with a large year price appreciation potential. I built a list of at least five stocks in each industry, just to be sure I had good representation.
If the stock was a utility, I looked at the yield first then safety rating and read about how safe the dividend was in their view. I looked at the payout ratio, debt load, and other fundamental factors before adding it to my watch list. That was then. Since my list is built, when I want to fatten up an industry by adding a company or if I am adding a new industry to the list, I will look at yahoo!
I will read the profile of the company to be sure that it fits into my definition of the industry in other words, if it mines gold and has a small subsidiary that makes concrete, I do not want to put it into the cement industry. Below that and their existence gets dicey. Also, I avoid thinly traded stocks, say, below k to k shares daily.
On the way down, bullish chart patterns disappear. For example, you do not see a double bottom confirming price rising above the peak between the two bottoms when a stock continues making new lows. When the market bottoms, bullish chart patterns appear, but that is not the time to buy.
Those patterns will have upward breakouts, sure, but many will fail soon after when price reverses heads back down. The market has not begun trending, and it is a dangerous time to trade. Bad news pushes the market lower, almost daily. Eventually, price will level out. You will see many basing patterns, such as rectangles. Bad news that used to drive the market down by hundreds of points in a single day hardly budges it now. You will see many bullish chart patterns forming, such as double bottoms , head-and-shoulders bottoms , and triple bottoms , as if individual issues are just begging to move higher, but there is still some hesitation.
Those with upward breakouts will have price continuing to rise in a nervous stair-step move. Before, one low followed another but now, price makes higher valleys and higher peaks in many securities. That is the time to buy. Remember that the market looks ahead six months, so even though you hear bad news, the market may move up anyway, shrugging off the news and bursting upward on good news.
One other tip. I would avoid trading high and tight flags.
BETTER PLACE SEVENDUST LYRICS DENIAL
A hammer pattern is shown on the following chart. A hanging man pattern looks similar to a hammer pattern, with the only difference being that it forms at the top of an uptrend. In this case, a hanging man pattern shows that selling pressure is growing — represented by the long lower wick - despite the uptrend.
A hanging man pattern is shown on the following chart. A three inside up pattern begins with a bearish candlestick, followed by a bullish candlestick which forms inside the first candlestick, and followed by a third bullish candlestick which closes well above the high of the first candlestick. A three inside up pattern is shown on the following chart. A three inside down pattern is shown on the following chart. Doji pattern The final candlestick pattern which we are going to cover, and also one of the most important Forex chart candlestick patterns, is the doji pattern.
The doji pattern is a specific candlestick pattern formed by a single candlestick, with its opening and closing prices at the same, or almost the same level. A doji pattern signals market indecision. Neither buyers nor sellers managed to move the price far away from the opening price, signaling that a price reversal may be around the corner. A doji pattern is shown on the following chart.
As you can see, a doji pattern can form both during an uptrend and downtrend. How to trade Forex based on candlestick patterns Candlestick patterns are a great tool used by many Forex traders to confirm a trade setup. They should not be used to trade on their own, as they can produce a large number of false signals along the way.
Forex candlestick strategy As we've previously stated, the best Forex trading candlestick strategy is to use candlestick patterns for trade setup confirmations. Once the engulfing pattern forms, a trade could enter in the direction of the pennant breakout.
Once the pullback is completed, a bullish engulfing pattern confirms the opening of a trade in the direction of the breakout. The body of the candle must be at the top end of the trading range. Bullish Hammer Inverse Hammer While the hammer candle pattern occurs when a price trades lower than it opened at, the inverted hammer almost always occurs at the bottom of a downtrend.
These candles are generally warnings of coming price changes. Inverse Hammer Bullish Engulfing The first pattern on this list that involves more than one candle, the bullish engulfing pattern is a two candle reversal pattern. After the first dark candle appears, a second larger and hollow one forms and engulfs the body of the first one.
However, buying pressure pushes the price up past the previous high which makes the price an eventual win for buyers. Bullish Engulfing Piercing Line Another price pattern similar to the bullish engulfing candle, the piercing line is an indication of a potential short-term reversal from a downward trend to an upward trend.
The piercing line pattern takes into account a first day opener close to the high and a closing near the low. In between, there is an average trading range. Piercing Line Morning Star Moving on from two candles to three, the morning star pattern is three candles which follow a downward trend and it is used to indicate the beginning of an upward ascent.
This pattern is a precursor to the reversal of the previous price movement. Morning Star Three White Soldiers The three white soldiers is another 3 candlestick pattern which is usually found at the end of a trend.
The pattern is formed when 3 long bullish candles appear after a downtrend. This is a signal that a reversal has occurred. This is regarded as one of the most blatant bullish signals you can find in the market.
