Japanese Candlestick Charts:

The Secret Weapon of the Trader

 Utilizing Japanese Candlesticks

Did you ever see a chart that looked like this?

I recall when I was new to trading and investing. I often pulled up five-year line charts of stocks that were already up some 1,000% and thought,  "All I have to do is buy one of these and hold it and I'll be rich in five years." Buy-and-hold strategies always sound good -- until you encounter a bear market. And the bear market of 2001 brought an end to this way of thinking.

Eventually, over my years of trading and evolving, I found myself viewing Japanese candlestick charts. Instead of the popular western bar charts, now I only view Japanese candlestick charts, which have been utilized and refined by our Eastern counterparts for centuries.

For many, they add a third dimension that bar charts lack, and that's emotion. Simply by changing the way we view the high, low, open and close data, and adding color to the chart, we can now more easily discern the bullish/bearish sentiment or Yin/Yang energy of any chart. Because of this, Japanese candlestick charts far exceed Western bar or line charts in any technical analysis platform.

Compare the line chart (above) with the Japanese candlestick chart (below):

Once you learn the language of Japanese candlestick charting, it's much easier to discuss what the chart is saying. When the trend is up and a doji candlestick (see definition, page 3) appears, it's a warning sign of a pending reversal.

When the market gaps higher and closes below the low of the previous day's doji, the trend has reversed from bullish to bearish. It's that simple. When the real bodies are long and black (or red), the bearish trend continues.

When the real bodies are small, the market lacks direction, as is often the case when an important economic report is due out in a couple of days.

Japanese candlesticks give great entry and exit signals. Candlesticks are designed to show the yin and yang of the market (or bull and bear, greed and fear, etc.) This report will show you how to use them as a 'trigger' to a trade.

Combining candlestick signals with the other technical and sentiment components will further increase the chances of a successful trade. Say, for example, when a stock gives a reversal signal on increased volume, say a shooting-star Japanese candlestick, then the high of that candle should get tested. Knowing this gives you an opportunity for a better entry point in the stock. One of the key components of successful trading is getting an entry point that allows for the setting of a stop that's outside the previous swing high or low. But we're getting ahead of ourselves.

We're not going to go into a detailed discussion of the origin and development of Japanese candlesticks. If you're looking for that, I suggest you read any of the books by Steve Nison, who is well known for bringing candlesticks to the West. What we'll cover here is a review of the key components of candlesticks and how you can utilize them with Samurai Stock Trader.

First we'll provide a brief index of popular candlesticks and how they're drawn. I believe the best way to show you is through charts. Get used to looking at them, for in order to become a successful trader, you'll eventually need to look at thousands.

 On the left are the basic components of the Japanese candle. A red candle denotes a negative (bearish) close and the white candle indicates a positive (bullish) close. While there’s no more data than a bar chart, the candles add another dimension to the chart.

Japanese Candle Glossary

Doji: The doji is a reversal signal and possibly the most important candle you can watch for. The lack of a real body means the bulls and bears are fighting and the balance of powers may be shifting, thus signaling a change in the short-term trend.

Spinning Top: The spinning top is neutral candle and can be either white or black. The Japanese place emphasis on the size and color of the real body. The smaller the real body, the less direction the market has.

Hammer or Hanging Man: These are also reversal signals; the real body can be either red or white. The hammer may signal the end of a downtrend, and the hanging man occurs after an uptrend. The lower shadow must be at least twice the length of the real body.

Bearish Engulfing: This is a formation that can signal the end of an uptrend. The red candle is larger and completely engulfs the real body of the white candle. The shadows are not significant. A Dark Cloud Cover is a variation of the bearish engulfing, except that the red candle extends more than halfway into the white candle and does not engulf the entire candle.

Bullish Engulfing: This formation can signal the end of a downtrend. Here the white candle engulfs the bearish red candle.

Evening Star: This pattern can signal the end of an uptrend. The translation from Japanese candles is as follows: The evening star is the first sign that "night" or "darkness" is coming. The second candle can be white or red. If it is a doji, then it is called an evening doji. The same pattern, showing up inversely in a downtrend can signal a reversal of the downtrend.

The previous list of Japanese candlesticks and candlestick patterns (combinations of candlesticks) should give you a start. Now we'll take a look at several charts with examples of each.

As you can see from the above graph of AHAA, we identified several doji and hammer candlesticks as well as bullish and bearish engulfing candlestick patterns. This shows you how powerful a tool candlesticks can be -- but it doesn't tell you which candlestick is coming next.

Candlestick readers are generally not concerned with what's happening next, but what is happening right now. The key to candlestick trading is waiting for the close before you read the candles, otherwise what looked like a reversal doji could turn into something else. Daily candle traders will wait until just about the close (or just before the following open) to make a trade if they're getting the signal they want. The Japanese call this a night attack, which is a deluge of trades right at or just before the close. The same idea applies for the opening trade with the occurrence of a morning attack.

But before you trade based on candlesticks, there are several rules you must follow. Especially with the doji, which is the king of all candlesticks.

First of all, doji, as well as many of these reversal candlestick patterns, can act as both support and resistance depending upon where they show up in a chart's price structure. This is because, as their candle suggests, most of the trade takes place at a concentrated price level.

But the doji and hammer candlesticks need a confirmation before you should technically act on it. That means if you get a doji or a hammer in an uptrend, you need a close below the close of either as an actual confirmation that the trend has changed.

I hesitate to say "reversed" instead of "changed" because the trend can go three ways: up, down or sideways. So just saying an uptrend has reversed doesn't mean that the trend has reversed lower; it could just be signaling a sideways consolidation. Stocks do that sometimes.

Other reversal signals include the following:

The bullish morning doji star and the bearish evening doji star

The bullish or bearish engulfing pattern

The bearish dark cloud cover and the bullish piercing pattern

The bearish hanging man

The bullish hammer

The bullish inverted hammer

Both the bullish and bearish hirami pattern

We'll cover all of these in the examples below, but pay attention to the order in which I've listed them above. I've found in my experience that those signals at the top of the list are stronger and more reliable than the signals at the bottom of the list.

More examples...

I've included the chart of NFX as a sample of the types of charts you should look at. It's obviously a candlestick chart, with 10-day and 50-day moving averages, with a volume study and a stochastic (14, 1, 3). This is a short recommendation I made for my clients based on the formation of a tweezer-top candlestick reversal pattern. It also has a Fibonacci Projection off the last swing move higher, which I utilized to provide a projection to the downside. The formation of this reversal pattern near a high price level with a negative market bias led to a successful trade.

The Trigger System: How to Incorporate the Use of Japanese Candlesticks into Samurai Stock Trader

Instead of going with a point system here, in order to incorporate your candlestick reading into this system, we'll establish the level-1 trigger and the level-2 trigger.

We're using the term "trigger" meaning "to initiate," and the levels will correspond with our level of confidence. The trigger levels are as follows:

Level 1:
A reversal candlestick occurring in either an uptrend or downtrend

Level 2:
Confirmation of a level-1 trigger
A reversal candlestick pattern

For example, if you have an uptrend, and you get a doji candle, you have a level-1 trigger. And if that trigger is followed by a lower close, you have a level-2 trigger.

The reason we differentiate between trigger levels is because of risk and reward. Obviously, if you trade off a level-1 trigger, you're accepting more risk in the event there's a continuation of the trend against your trade. However, if you do enter on a level-1 and catch the top of a reversal, you have a better entry point, can place a tighter stop, and ultimately have a higher reward potential.

Let's look at some examples:

In the previous chart, I'll summarize the following reads:

Point A: Here we have two level-1 triggers. Doji candles in a downtrend tend to be continuation patterns. That means just as it sounds, so it's best to wait for a confirmation. The second doji came on September 10, 2001 and we all know what happened the following day. So it's unfair to include that doji, as it quite likely would have resulted in a reversal if it weren't for the tragedy on the 11th.

Point B: Here we have a level-1 trigger (a hammer candle) followed by a confirmation. As you can see, by reducing the risk and waiting for the following day to enter, you would have missed out on the meat of the initial trade.

Point C: Here we have a top marked by a shooting star candlestick. It's interesting to note the long-legged doji and regular doji that followed on the previous two days. I like to think of doji as a yellow traffic light, which means you should proceed with caution. Another important thing to note here is that shooting star candles (that mark tops) like to be retested, especially if they come on increased volume. It's important to understand this in your overall trade setup.

Point D: Here we have a morning doji star reversal candlestick pattern. You can also see the reward component of the risk/reward ratio in entering on a doji in a downward trend.

Point E: Here we have an evening doji star candlestick pattern. Even though the third candlestick is white, it is a lower close than the doji.

This inroductory report should give you some insight regarding Japanese candlesticks, and I hope it encourages you to learn more on the subject.

Closing Comments

Chart reading is the most important component of any trading system you decide to utilize. Since candlesticks give you a reading that is so superior to any other charting method, I suggest you never look at another chart. And when beginning to trade this system, I recommend you wait for the confirmation and trade only on level-2 triggers. As you get the hang of it, which will depend upon the time you devote to learning and your level of proficiency from the onset, you can begin to act on level-1 triggers.

Japanese Candlesticks – What they won’t tell you…

Read any book or article on interpreting Japanese Candlesticks, you’d think that making a million in the market would be easy – all you have to do is be in the know.

Don’t get me wrong.  Ever since I saw my first candlestick chart and ready my first of many overpriced books on the subject, I was hooked.  They give you a unique way to not only read a chart, but also communicate your interpretation of a stock’s chart action.  So as a trader and a writer, candles are the Holy Grail, so to speak.  But are they?

I don’t want to put too much doubt into reading candles – but I do want to make you aware of the potential pitfalls of trying to read and act on candlesticks.

Before I get into the pitfalls of candles, for you beginner readers, here’s how they work.  Candlesticks are simply another way of drawing the daily high, low, open and close data.  The open and the close form what’s called the real body.  If the open is higher than the close, the real body is red.  And if the close is above the open, the real body is white.  Lines called “shadows” are drawn from the real body to the high and the low. 

That’s the basic structure.

Giving names to each of the daily candles gives you further insight into the action of the market.  I’ve put together the following glossary and will add my comments to individual terms.

Complete Glossary: Images coming soon:

High Wave- a candlestick with a very long upper or lower and a short real body. A group of these can foretell a market turn.

High-price gapping play-see Gapping play.

In-neck line –a small white candlestick in a downtrend whose close is a slightly above previous black candlestick’s low of the session.

After this white candlestick’s low is broken, the downtrend should continue. Compare to on-neck line, and piercing pattern.

Inverted hammer- following a downtrend, this is a candlestick line that has a long upper shadow and a small real body at the lower end of the session. There should be no, or very little, lower shadow. It has the same shape as the bearish shooting star, but when this line occurs in a downtrend, it is a bullish bottom reversal signal with confirmation the next i.e., a white candlestick with a higher close or a higher opening] .

Inverted three Buddha pattern- see “Three Buddha pattern”.

Long-legged doji- a doji with very long shadows.

This is an important reversal signal. If the opening and closing of a long-legged doji session are in the middle of the session’s range, the line is called a rickshaw man. See illustration under Doji.

Lower shadow- see “Shadows”.

Mat-hold pattern -a bullish continuation pattern. A white candlestick is followed by a small black real body, which gaps higher. Then there are two small black candlesticks, which are followed by a strong white candlestick [or a candlestick which gaps open above the last black candlestick].

Morning star- a major bottom reversal pattern by three candlesticks.

The first is a long black real body, the second is a small real body [white or black] which gaps lower to form a star, and the third is a white candlestick that closes well into the first session’s black real body.

Morning doji star - the same as a morning star except the middle candlestick is a doji instead of a small real body.  Because there is a doji in this pattern it is considered more bullish than a regular morning star.

Morning attack- the Japanese expression for a large buy or sell order on the opening that is designed to significantly move the market.

On line-a black candlestick in a downtrend is followed by a small white candlestick whose close is near the low of the session of the black candlestick. It is bearish continuation pattern. The market should continue to move lower after the white candlestick’s low is broken. Compare to in-neck line, a thrusting line, and a piercing pattern.

Piercing pattern- a bottom reversal signal. In a downtrend, a long black candlestick is followed by a gap lower during the next session. This session finishes as a strong white candlestick which closes move than halfway into the prior black candlestick’s real body. Compare to the on-line, the in neck line, and the thrusting line.

Real body – the stick part of the candlestick line. It is defined by the closing and opening prices of the session. When the close is higher than the open, the real body is white [or empty]. A black [or filled in] real body is when the close is lower than the opening.  See the illustration under candlestick lines and charts.

Rickshaw man - see long legged doji.

Rising three methods-see three methods.

Separating lines-when, in an uptrend [downtrend] the market opens at the same opening as the previous session’s opposite color candlestick and then closes higher [lower]. The prior trend should resume after this line.

Shadows- the thin lines above and below the real body of the candlestick line. They represent the extremes of the day. The lower shadow is the line on the bottom of the real body. The bottom of the lower shadow is the low of the session. The upper shadow is the line on top of the real body. The top of the upper shadow is the high of the session.

Shaven bottom- a candlestick with no lower shadow.

Shaven head- a candlestick with no upper shadow.

Shooting star- a candlestick with a long upper shadow with little, or no lower shadow, and a small real body near the lows of the session that arises after an uptrend. It is a bearish candlestick signal in an uptrend.

Side-by side white lines- two consecutive white candlesticks which have the same open and whose real bodies are about the same size. In an uptrend, if these side-by –side white lines gap higher, it is a bullish continuation pattern. In a downtrend, these side-by side white lines gapping lower are bearish since they are viewed as temporary short covering. Gapping side-by-side lines are very rare.

Spinning top- a candlestick with a small real body.

Stalled pattern – a small white real body, which is either above the prior long white real body or near its top. Sometimes there is a short white candlestick before the long white one. At the emergence of the stalled pattern, the market’s rally should stall. Also called a deliberation pattern.

Star-a small real body [i.e., a spinning top] which gaps away from the previous long real body. A star reflects a diminution of the force of the trend preceding the star. Sometimes a star following a long black line in a downtrend is called a raindrop.

Tasuki gaps- there are downside and upside tasuki gaps. The downside tasuki gap is formed when, in a declining market, a black real body gaps lower. This candlestick is followed by a white candlestick, of about the same size, which opens in the black session’s real body and then closes above the black’s real body. It is a bearish continuation pattern.   The upside tasuki gap is a bullish continuation pattern. It is formed when a white candlestick, which gaps higher, is followed by a black candlestick of about the same size, which opens within the white real body and closes under the white’s real body. Tasuki gaps are rare.

Three Buddha pattern - A three Buddha top is the same as the Western head and shoulders top. In Japanese terms, the three Buddha top is a three-mountain top in which the central mountain is the tallest. An inverted three Buddha is the same as the Western inverted head and shoulders. In Japanese terminology, it is a three-river bottom in which the middle river is the longest.

Three crows - three relatively long consecutive black candlestick, which close near or on their lows. A top reversal at a high price level after an extended rally.

Three gaps- if a bearish [bullish] candlestick indicator appears after three gaps higher [three gaps lower], buying force [selling pressure] should be exhausted.

Three methods- there are two types. The first is the falling three methods, which is a bearish continuation pattern. It is comprised of five lines. A long black real body is followed by three small, usually white, real bodies, which hold within the first session’s range.  Then a black candlestick closes at a new low for the move. The second is the rising three methods which is a bullish continuation pattern. A tall white candlestick precedes three small, usually black, real bodies that hold within the candlestick’s range. The fifth line of this pattern is a strong white candlestick that closes at a new high for the move.

Three-mountain top- a longer-term topping pattern in which prices stall at, or near, the same highs. It is also sometimes viewed as three waves up.

Three-river bottom - when the market hits a bottom an intervening valley is exceeded by a white candlestick or with a gap it is confirmation that a bottom has been put in place.

Three white or three advancing solders - this is a group of three white candlesticks with consecutively higher closes [with each of the closes near the highs of the session].  These three white candlesticks presage more strength if they appear after a period of stable prices and at a low price area.

Thrusting line - a white candlestick that closes in the prior black real body, but still under the middle of the prior session’s real body. The thrusting line is stronger than an in neckline, but not as strong as a piercing line. In a downtrend, the thrusting line is viewed as bearish [unless two of these patterns appear within a few days of each other]. As part of a rising market it is considered bullish.

Tower - there is a tower top and tower bottom. The tower top, a top reversal formation, is comprised of a tall white candlestick followed by congestion and then one or more long black candlestick. It is a pattern, which looks like it has towers on both sides of the congestion band. A tower bottom is a bottom reversal patter. A long black candlestick is followed by lateral action. Then the market explodes to the upside via on or more long white candlesticks.

Tri-star - three dojis that have the same formation as a morning or evening star pattern. An extraordinarily rare pattern and a major reversal signal.

Tweezers top and bottom - when the same highs or lows are tested the next session or within a few sessions. They are minor reversal signals that take on extra importance if the two candlesticks that comprise the tweezers pattern also form another candlestick indicator. For example, if both sessions of a hirami cross have the same high it could be an important top reversal since there would be a tweezers top and a bearish hirami cross made by the same two candlestick lines.

Unique three-river bottom - a rare type of bottom comprised of three lines. The first is a long black real body, the second is a hammer like session with a black real body, which   makes a new low, and the third candlestick is a small real body.

Upper shadow - see ‘shadows’.

Upside gap tasuki -‘see Tasuki gaps’.

Upside gap two crows - a three-candlestick pattern. The first line is a long white candlestick, which is followed by a black real body that gaps higher. The third session is another black real body, which opens above the second sessions open and closes under the second session’s close. It is a top reversal signal.

Window – the same as a Western gap. Windows are continuation patterns. When the market rallies and opens a window, there should be a pullback to that window. The window should be support.  If a window opens in a sell off, there should be a rally to the window. The window should be resistance.  The Japanese expression is that ‘the market goes to the window.’

Yin and Yang- the Chinese name of the black [Yin] and white [Yang] candlesticks.

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Hi, Welcome to this edition of the Trade Tutor newsletter.  This week's lesson comes to us from Jay DeVincentis's Explosive Stock Alert.  This lesson is all about candlesticks.  Jay has written a brief description of just over 30 candlesticks and also included pictures of each of the patterns he described. If you would like to try Jay's Explosive Stock Alert newsletter click here to receive a 4 week no cost trial.  To receive this great offer, simply click the proceed to checkout button, enter your billing information and use the code MM1001 in the message and comments field. Enjoy! Rebecca rebecca@stockbarometer.com Japanese Candlesticks 9/27/2007 7:02:53 AM Japanese Candlesticks   A great place to identify reversals is through the use of Japanese candlestick patterns.  And that's today's lesson.   Now there are many candlestick patterns - and not just bearish ones. Let me go through a few of the bearish ones here:  This is a good email to save and reference later as you learn your patterns.     Abandoned Baby   Like most of the three day star patterns, the scenarios are similar. The primary difference is that the star (second day) can reflect greater deterioration in the prior trend, depending on whether it gaps, is a Doji, and so on.   Advance Block   The Advance Block pattern is a derivative of the Three White Soldiers. However, it must occur in an uptrend, whereas the Three White Soldiers pattern must occur in a downtrend. Unlike the Three White Soldiers, the second and third days of the Advance Block show weakness.   Belt Hold   The market is trending when a significant gap in the direction of trend occurs on the open.   From that point, the market never looks back: all further price action that day is the opposite of the previous trend. This causes much concern and many positions will be covered or sold, which will help accentuate the reversal.   Break Away   It is important to realize what is being accomplished here. The trend has accelerated with a big gap and then starts to fizzle, but it still moves in the same direction. The slow deterioration of the trend is quite evident from this pattern. Finally, a burst in the opposite direction completely recovers the previous three days’ price action. What causes the reversal implication is that the gap has not been filled. A short-term reversal has taken place.   Dark Cloud Cover   The market is an uptrend. Typical in an uptrend, a long white candlestick is formed. The next day the market gaps higher on the opening, however, that is all that is remaining to the uptrend. The day after, the market drops to close well into the body of the white day, in fact, below its midpoint. Anyone who was bullish would certainly have to rethink their strategy with this type of action. Like the Piercing Line, a significant reversal of trend has occurred.   Deliberation   This pattern exhibits a weakness similar to the Advance Block pattern in that it gets weak in a short period of time. The difference is that the weakness occurs all at once on the third day. The Deliberation pattern occurs after a sustained upward move and shows that trends cannot last forever. As with the Advance Block, defining the deterioration of the trend can be difficult.   Downside Gap Three Methods   The market is moving strongly downward. This move is extended further by another day that gaps even more in the direction of the trend. The third day opens well into the body of the second day, then completely fills the gap. This gap-closing move should be looked upon as supporting for the current uptrend. Gaps normally provide excellent support and/or resistance points when considered after a reasonable period of time. Because this gap is filled within one day, some other considerations should be made. If this is the first gap of a move, then the reaction (third day) can be considered as profit taking.   Downside Tasuki Gap   The psychology behind a Tasuki Gap is quite simple: Go with the trend of the gap. The correction day (the third day) did not fill the gap and the previous trend should continue. This is looked upon as temporary profit taking. The Japanese widely follow gaps (windows). Therefore, the fact that the gap does not get filled or closed means that the previous trend should continue.   Engulfing   An uptrend is in place when a small white body day occurs with not much volume. The next day, prices open at new highs and then quickly sell off. The sell-off is sustained by high volume and finally closes below the open of the previous day. Emotionally, the uptrend has been damaged. If the next third) days prices remain lower, a major reversal of the uptrend has occurred.   Evening Star   An uptrend has been in place which is assisted by a long white candlestick. There is little doubt about the uptrend continuing with this type of action. The next day prices gap higher on the open, trade within a small range and close near their open. This small body shows the beginning of indecision. The next day the prices gap lower on the open and then close still lower. A significant reversal of trend has occurred.   Evening Doji Star   The psychology behind this pattern is similar to that of the Evening star, except that the Doji Star is more of a shock to the previous trend and, therefore, more significant.   Falling Three Methods   The Falling Three Methods pattern is considered a rest from trading. The psychology behind a move like this is that some doubt creeps in about the ability of the trend to continue. This doubt increases as the small-range reaction days take place. However, once the bears see that a new high cannot be made, the bearishness is resumed and new lows are set quickly.   Hanging Man   For the Hanging Man, the market is considered bullish because of the uptrend. In order for the hanging man to appear, the price action for the day must trade much lower than where it opened, then rally to close near the high. This is what causes the long lower shadow which shows how the market just might begin a sell-off. If the market opens lower the next day, there would be many participants with long positions that would want to look for an opportunity to sell. Steve Nison claims that a confirmation that the hanging man is bearish might be that the body is black and the next day opens lower.   Harami   An uptrend is in place and is perpetuated with a long white day and high volume. The next day, prices open lower and stay in a small range throughout the day, closing even lower, but still within the previous day’s body. In view of this sudden deterioration of trend, traders should become concerned about the strength of this market, especially if volume is light. It certainly appears that the trend is about to change. Confirmation on the third day would be a lower close.   Harami Cross   The Harami Cross starts out the same as that for the basic Harami pattern. A trend has been in place when, all of a sudden, the market gyrates throughout a day without exceeding the body range of the previous day. What is worse, the market closes at the same price as it opened. Volume of this a Doji day also dries up, reflecting the complete lack of decision of traders. A significant reversal of trend has occurred.   Identical Three Crows   This pattern resembles a panic selling that should cause additional downside action. Each day’s close sets a benchmark for opening prices the next trading day. There is a total absence of buying power in this pattern.   In Neck   The scenario is almost identical to the On Neck Line, except that the downtrend may not continue quite as abruptly because of the somewhat higher close.   Long Legged Doji   The Long Legged Doji has long upper and lower shadows with the open and the close very close or the same. This pattern reflects the indecision of buyers and sellers. The open and the close of the day are very close or are the same. The lower and upper shadows are very long. The high of the day is very high and at the top of the trend.   Low Price Gapping Play   The Low Price Gapping Play is the bearish counterpart of the High Price Gapping Play, and leads a renewed fall out of a stalled downtrend. The pattern this forms is a downside window from a low-price congestion band. After a sharp decline the market consolidates via a series of real small bodies near the recent lows. If prices gap under this consolidation it is a sell signal.   Meeting Lines   There exists an almost opposite relationship for the bearish Meeting Line relative to the Dark Cloud Cover pattern. The bearish Meeting Line opens at a new high and then closes at the same close of the previous day, while the Dark Cloud Cover pattern drops to below the midpoint.   On Neck   The On Neck Line usually appears during a decline. Bearishness is increased with the long black first day. The market gaps down on the second day, but cannot continue the downtrend. As the market rallies, it is stopped at the previous day’s low price. This must be uncomfortable for the bottom fishers who go into the market that day. The downtrend should continue shortly.   Separating Lines   While the market is in a downtrend, the forming of a long white body should be cause for concern for the bears, since this shows signs of a possible rally. However, the next day opens much lower, in fact, it opens at the previous white days opening price. Prices then move lower for the rest of the day and close lower, which suggests that the prior downtrend should continue.   Shooting Star   During an uptrend, the market gaps open, rallies to a new high, and then closes near its low. This action, following a gap up, can only be considered as bearish.  Certainly, it would cause some concern to any bulls who have profits.   Side By Side White Lines   A downtrend is further enhanced with a long black candle line followed by a large downward gap open on the next day. The market trades higher all day, but not high enough to close the gap. The third day opens lower, at about the same open as the second day. Because of the resistance to further downside action, shorts are covered, causing the third day also to rally and close higher, but again not high enough to close the gap. If enough short covering was accomplished and the rally attempt was not very convincing, the downtrend should continue.   Three Black Crows   The market is either approaching a top or has been at a high level for some time. A decisive trend move to the downside is made with a long black day. The next two days are accompanied by further erosion in prices caused by much selling and profit taking. This type of price action has to take its toll on the bullish mentality.   Three Inside Down   This pattern, being a confirmation for the Bearish Harami, can only show the success of the forecast. The Bearish Three Inside Down is a confirmation pattern for the Bearish Harami. Its pattern is defined by the first two days of the three day pattern forming a Bearish Harami, and the third day giving support to the suggested reversal of the Harami, by being a black candle closing with a new low for the three days.   Three Line Strike   The market has continued in its trend, aided by the recent Three Black Crows pattern. The fourth day opens in the direction of the trend, but profit taking or short covering causes the market to move strongly in the opposite direction. This action causes considerable soul searching, but remember that this move completely eradicated the previous three days. This surely dried up the short-term reversal sentiment and the trend should continue in its previous direction.   Three Outside Down   These patterns, representing the confirmation of the Bearish Engulfing pattern, can only show the success of the forecast.   Thrusting   Much like the On Neck and In Neck Lines, the Thrusting Line represents a failure to rally in a down market. Because of this failure, the bulls will be discouraged and a lack of buying will let the downtrend continue.   Tri Star   The market has probably been in an uptrend for a long time. With the trend starting to show weakness, bodies probably are becoming smaller. The first Doji would cause considerable concern. The second Doji would indicate that there was no direction left in the market. Finally, the third Doji would put the last nail in the coffin of the trend. This is essentially because this pattern indicates too much indecision, and everyone with any conviction would be reversing positions.   Two Crows   The market has had an extended up move. A gap higher followed by a lower close for the second day shows that there is some weakness in the rally. The third day opens higher, but not above the open of the previous day, and then sells off. The sell-off closes well into the body of the first day. This action fills the gap after only the second day. The bullishness has to be eroded quickly.   Upside Gap Two Crows   Like the beginning of most bearish reversal patterns a white body day occurs in an uptrend. The next day opens with a higher gap, fails to rally and closes lower forming a black day. This is not too worrisome because it still did not get lower than the first days close. On the third day prices gap to a higher open and then drop to close lower than the previous days close. This closing price, however, is still above the close of the white first day. The bullishness is bound to subside. How can you have two successively lower closes and still be a raging bull?       I don't scan for all these candlestick patterns.  That would result in too many trades.  I scan for about 17 - and also require more than 100k shares traded per day.  Unlike my explosive stock picks where I target around 25-50M shares outstanding, I like even more volume when I candle trade - since the volume represents traders and the more traders the more intent that can be read through the candles.  Too little volume and the gaps (or windows) aren't real.  And windows are in almost every single pattern you see.  So learn them well.   Next article will cover some trading ideas.   If you would like to try the Explosive Stock Alert newsletter click here to receive a 4 week no cost trial.  To take advantage of this great offer, simply click the proceed to checkout button, enter your billing information and use the code MM1001 in the message and comments field.   Regards,   Jay DeVincentis There is a very high degree of risk involved in trading. Past results are not indictive of future returns. Stock Barometer and all individuals affiliated with Stock Barometer assume no responsibility for your trading or investment results.

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