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Candlestick patterns

Doji

This model includes candles, in which opening and clothing price levels are the same or the size of their body is very small. Doji has so short body, and it looks like a thin line.

The appearance of a doji is an indicator of the struggle between the bulls and the bears, but that fight did not determine the winner. Prices moved up and down throughout the session, but stayed at the opening level or near it.

There are 4 types of doji. The length of the upper and lower shadows may vary, so the resulting candle looks like a cross, inverted cross or a “plus”.

When doji appears on the chart, you need to special attention to the previous candle.

If a doji was formed after a series of candles with long empty bodies (like white marubozu), such doji signals that the buyers were exhausted and weak. In order to make the prices increased, the buyers are needed, but there are no buyers at the market. Sellers look out for a convenient way to enter the market and decrease prices.

It should be remembered that the formation of the doji does not automatically mean a change of direction. The confirmation is needed. We have to wait for a bearish candle, the closing of which should be below the level of the long white candle opening.

doji

Hammer and hanging man

Hammer and Hanging man models are similar in appearance, but interpreted differently, depending on the prices behavior. In both cases – these candles have short bodies, long lower shadows and short or non-existent upper shadows.

Hammer is bullish reversal pattern that forms during a downward movement. It is called so because the market bounces off the bottom line.

When the price falls, the hammer gives the signal that the bottom is close and the price is going to rise again. The long bottom shadow reports that sellers pressed through the price down, but buyers overcome this pressure and raise the level of closing to the opening level.

Features to determine the model:

  • The length of the bottom shadow is longer than the body in 2-3 times.
  • Short or absent top shadow.
  • The body is located at the top of the candle.
  • Body color does not matter.

Hammer

Engulfing

Engulfing is a common reversal pattern on the candlestick chart, which consists of two candles. The body of the second candle should completely cover the body of the first candle, and the direction of the price after the figure depends on the previous trend and candles color.

The engulfing consists of 2 candlesticks and always expands the previous trend, i.e. this is a reversal pattern. The first candle, which should not be a doji,  has a smaller body than the second candle. The body of the second candle must engulf the body of the first one.

These two candles should have a different color, depending on the order in which the direction of the reverse is going to be.

Engulfing

Three inside up and down

Candlestick patterns Three inside up/down is a proof model of Harami pattern. It is strong reversal pattern, depended of their location on the maximums/lows.

Three inside down and Three inside up models were firstly described by Gregory Morris in order to improve the performance of Harami model. A necessary identification condition of the figure is the first candle clothing below the opening price of the third candle for Three inside down model, and above – for Three inside up model. A bullish Hammer is formed for the reduction of Three inside up model, and a bearish Shooting star is formed in the reduction of Three inside down.

Three inside down

 

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