Metatrader 5 Overview

Candlesticks Vol 2 - Candlestick Sentiment

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Real Body and Upper and Lower Shadows


The rectangular area between the opening and the close of a session of trading is called the real body. The thin lines that look like candle wicks above and below the real body are called shadows. The shadow above the real body is called the upper shadow, the top end of the upper shadow corresponding to the high of the session of trading, and the shadow below the real body is called the lower shadow, where the bottom end of the lower shadow corresponds to the low of the session of trading.

Bullish Candlestick




When discussing trading sessions based on a trading day (morning to afternoon), generally speaking the two most significant times of the trading day are the opening and the close. The opening and the close create the real body of the candlestick; hence, the most important part of a candlestick is the real body. By looking at a candlestick, a person can quickly tell whether traders were eagerly buying throughout the day (bulls were in charge for the trading day) - the candlestick is green, or whether traders were eagerly selling throughout the day (bears dominated the trading day) - the candlestick is red. By looking at the size of the real body of the candlestick, a trader can tell if the bulls were significantly in charge of the trading day (a tall green candlestick) or only moderately in charge of the trading day (a small green candlestick). Similarly, if a trader sees a large red candle, he or she can assume that the selling pressure of the bears overpowered the bulls for the day; however, if the candlestick is very small and red, then the trader can see that the bears were only slightly more powerful that day than the bulls. In summary, the real body of a candlestick can summarize the outcome of a period of trading in an easy to see way – green = bulls win the trading session, red = bears win the trading session; and the height of the candle equals the margin of victory for the bulls or the bears.




Steve Nison (1994) states that “for a [bullish] candle to have meaning, some Japanese candlestick traders believe that the real body should be at least three times as long as the previous day’s real body.” (p. 20). Roads (2008) suggests the following: “determine the area covered by the difference between the close and the open. If it’s at least 90 percent of the area covered by the difference between the high and low, you have a long white candle” (p. 76). An example of a computer charting package’s definition is: “Its Close price is higher than the Open price; Its body is longer than each shadow; Its body is longer than the average body size calculated for the specified number of preceding candles” (ThinkorSwim, 2011).




Bullish Marubozu

There are specific versions of the bullish candle. The first is a very bullish candlestick called the bullish marubozu. The rough translation of marubozu is “bald or little hair” (Rhoads, 2008, p. 74). A marubozu is bald or has little hair because a marubozu has no upper or lower shadow, or at least a very small upper and/or lower shadow. This is the most extreme form of the bullish candlestick because bulls were in charge from the opening to the close; bears were unable to push prices below the opening price and the trading session ended with bulls still buying pushing prices upward until the close.

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Candlesticks Vol 3 - Candle Development

Candlesticks - Vol 4 - Candle Pattern Stages

Candle Pattern Stages :

1. Trend
2. pattern
3. Confirmation

Candlesticks - Vol 5 - Shooting Star

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The Shooting Star candlestick formation is a significant bearish reversal candlestick pattern that mainly occurs at the top of uptrends.





The Shooting formation is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, generally defined as at least twice the length of the real body.

When the low and the close are the same, a bearish Shooting Star candlestick is formed and it is considered a stronger formation because the bears were able to reject the bulls completely plus the bears were able to push prices even more by closing below the opening price.

The Shooting Star formation is considered less bearish, but nevertheless bearish when the open and low are roughly the same. The bears were able to counteract the bulls, but were not able to bring the price back to the price at the open.

The long upper shadow of the Shooting Star implies that the market tested to find where resistance and supply was located. When the market found the area of resistance, the highs of the day, bears began to push prices lower, ending the day near the opening price. Thus, the bullish advance upward was rejected by the bears.

Shooting Star Candlestick Chart Example

The chart below of Cisco Systems (CSCO) illustrates a Shooting Star reversal pattern after an uptrend:





In the chart above of CSCO, the market began the day testing to find where supply would enter the market. CSCO's stock price eventually found resistance at the high of the day. In fact, there was so much resistance and subsequent selling pressure, that prices were able to close the day significantly lower than the open, a very bearish sign.

The Shooting Star is an extremely helpful candlestick pattern to help traders visually see where resistance and supply is located. After an uptrend, the Shooting Star pattern can signal to traders that the uptrend could be over and that long positions should probably be reduced or completely exited.

However, other indicators should be used in conjunction with the Shooting Star candlestick pattern to determine sell signals, for example, waiting a day to see if prices continued falling or other chart indications such as a break of an upward trendline.

For aggressive traders, the Shooting Star pattern illustrated above could be used as the sell signal. The red portion of the candle (the difference between the open and close) was so large with CSCO, that it could be considered the same as a bearish candle occuring on the next day. However, caution would have to be used because the close of the Shooting Star rested right at the uptrend support line for Cisco Systems.

Generally speaking though, a trader should wait for a confirmation candle before entering.

The bullish version of the Shooting Star formation is the Inverted Hammer formation that occurs at bottoms. Another similar candlestick pattern in look and interpretation to the Shooting Star pattern is the Gravestone Doji

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Candlesticks - Vol 6 - Hanging Man

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Hanging Man

The Hanging Man candlestick formation, as one could predict from the name, is a bearish sign. This pattern occurs mainly at the top of uptrends and is a warning of a potential reversal downward. It is important to emphasize that the Hanging Man pattern is a warning of potential price change, not a signal, in and of itself, to go short.


The Hanging Man formation, just like the Hammer, is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, which should be at least twice the length of the real body.
When the high and the open are the same, a bearish Hanging Man candlestick is formed and it is considered a stronger bearish sign than when the high and close are the same, forming a bullish Hanging Man (the bullish Hanging Man is still bearish, just less so because the day closed with gains).

After a long uptrend, the formation of a Hanging Man is bearish because prices hesitated by dropping significantly during the day. Granted, buyers came back into the stock, future, or currency and pushed price back near the open, but the fact that prices were able to fall significantly shows that bears are testing the resolve of the bulls. What happens on the next day after the Hanging Man pattern is what gives traders an idea as to whether or not prices will go higher or lower.

Hanging Man Candlestick Chart Example

The chart below of Alcoa (AA) stock illustrates a Hanging Man, and the large red bearish candle after the Hanging Man strengthens the bears thinking that a downward reversal is coming:


In the chart above of Alcoa, the market began the day testing to find where demand would enter the market. Alcoa's stock price eventually found support at the low of the day. The bears' excursion downward was halted and prices ended the day slightly above the close.

Confirmation that the uptrend was in trouble occured when Alcoa gapped down the next day and continued downward creating a large bearish red candle. To some traders, this confirmation candle, plus the fact that the upward trendline support was broken, gave the signal to go short.

It is important to repeat, that the Hanging Man formation is not the sign to go short; other indicators such as a trendline break or confirmation candle should be used to generate sell signals.
The bullish version of the Hanging Man is the Hammer formation

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Candlesticks - Vol 7 - Hammer

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Hammer

The Hammer candlestick formation is a significant bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends.


The Hammer formation is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, twice the length as the real body.

When the high and the close are the same, a bullish Hammer candlestick is formed and it is considered a stronger formation because the bulls were able to reject the bears completely plus the bulls were able to push price even more past the opening price.

In contrast, when the open and high are the same, this Hammer formation is considered less bullish, but nevertheless bullish. The bulls were able to counteract the bears, but were not able to bring the price back to the price at the open.

The long lower shadow of the Hammer implies that the market tested to find where support and demand was located. When the market found the area of support, the lows of the day, bulls began to push prices higher, near the opening price. Thus, the bearish advance downward was rejected by the bulls.

Hammer Candlestick Chart Example

The chart below of American International Group (AIG) stock illustrates a Hammer reversal pattern after a downtrend:


In the chart above of AIG, the market began the day testing to find where demand would enter the market. AIG's stock price eventually found support at the low of the day. In fact, there was so much support and subsequent buying pressure, that prices were able to close the day even higher than the open, a very bullish sign.

The Hammer is an extremely helpful candlestick pattern to help traders visually see where support and demand is located. After a downtrend, the Hammer can signal to traders that the downtrend could be over and that short positions should probably be covered.

However, other indicators should be used in conjunction with the Hammer candlestick pattern to determine buy signals, for example, waiting a day to see if a rally off of the Hammer formation continues or other chart indications such as a break of a downward trendline. But other previous day's clues could enter into a traders analysis. An example of these clues, in the chart above of AIG, shows three prior day's Doji's (signs of indecision) that suggested that prices could be reversing trend; in that case and for an aggressive buyer, the Hammer formation could be the trigger to go long.

The bearish version of the Hammer is the Hanging Man formation

Another similar candlestick pattern to the Hammer is the Dragonfly Doji

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Candlesticks - Vol 8 - Inverted Hammer

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The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and is a warning of a potential reversal upward. It is important to note that the Inverted pattern is a warning of potential price change, not a signal, in and of itself, to buy.


The Inverted Hammer formation, just like the Shooting Star formation, is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, which should be at least twice the length of the real body.
When the low and the open are the same, a bullish Inverted Hammer candlestick is formed and it is considered a stronger bullish sign than when the low and close are the same, forming a bearish Hanging Man (the bearish Hanging Man is still considered bullish, just not as much because the day ended by closing with losses).
After a long downtrend, the formation of an Inverted Hammer is bullish because prices hesitated their move downward by increasing significantly during the day. Nevertheless, sellers came back into the stock, future, or currency and pushed prices back near the open, but the fact that prices were able to increase significantly shows that bulls are testing the power of the bears. What happens on the next day after the Inverted Hammer pattern is what gives traders an idea as to whether or not prices will go higher or lower.

Inverted Hammer Candlestick Chart Example

The chart below of the S&P 500 Futures contract shows the Inverted Hammer foreshadowing future price increases:


In the chart above of e-mini future, the market began the day by gapping down. Prices moved higher, until resistance and supply was found at the high of the day. The bulls' excursion upward was halted and prices ended the day below the open.
Confirmation that the dowtrend was in trouble occured the next day when the E-mini S&P 500 Futures contract gapped up the next day and continued to move upward, creating a bullish green candle. To some traders, this confirmation candle, plus the fact that the downward trendline resistance was broken, gave the signal to go long.
It is important to repeat, that the Inverted Hammer formation is not the signal to go long; other indicators such as a trendline break or confirmation candle should be used to generate the actual buy signal.
The bearish version of the Inverted Hammer is the Shooting Star formation

Candlesticks - Vol 9 - Doji

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Dragonfly Doji

The Dragonfly Doji is a significant bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends.


The Dragonfly Doji is created when the open, high, and close are the same or about the same price (Where the open, high, and close are exactly the same price is quite rare). The most important part of the Dragonfly Doji is the long lower shadow.
The long lower shadow implies that the market tested to find where demand was located and found it. Bears were able to press prices downward, but an area of support was found at the low of the day and buying pressure was able to push prices back up to the opening price. Thus, the bearish advance downward was entirely rejected by the bulls.

Dragonfly Doji Candlestick Chart Example

The chart below of the mini-Dow Futures contract illustrates a Dragonfly Doji occuring at the bottom of a downtrend:


In the chart above of the mini-Dow, the market began the day testing to find where demand would enter the market. The mini-Dow eventually found support at the low of the day, so much support and subsequent buying pressure, that prices were able to close the day approximately where they started the day.
The Dragonfly Doji is an extremely helpful Candlestick pattern to help traders visually see where support and demand is located. After a downtrend, the Dragonfly Doji can signal to traders that the downtrend could be over and that short positions should probably be covered. Other indicators should be used in conjunction with the Dragonfly Doji pattern to determine buy signals, for example, a break of a downward trendline.
The bearish version of the Dragonfly Doji is the Gravestone Doji

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Gravestone Doji

The Gravestone Doji is a significant bearish reversal candlestick pattern that mainly occurs at the top of uptrends.


The Gravestone Doji is created when the open, low, and close are the same or about the same price (Where the open, low, and close are exactly the same price is quite rare). The most important part of the Graveston Doji is the long upper shadow.
The long upper shadow is generally interpreted by technicians as meaning that the market is testing to find where supply and potential resistance is located.
The construction of the Gravestone Doji pattern occurs when bulls are able to press prices upward.
However, an area of resistance is found at the high of the day and selling pressure is able to push prices back down to the opening price. Therefore, the bullish advance upward was entirely rejected by the bears.

Gravestone Doji Example

The chart below of Altria (MO) stock illustrates a Gravestone Doji that occured at the top of an uptrend:


In the chart above of Altria (MO) stock, the market began the day testing to find where support would enter the market. Altria eventually found resistance at the high of the day, and subsequently fell back to the opening's price.
The Gravestone Doji is an extremely helpful Candlestick reversal pattern to help traders visually see where resistance and supply is likely located. After an uptrend, the Gravestone Doji can signal to traders that the uptrend could be over and that long positions should probably be exited. But other indicators should be used in conjunction with the Gravestone Doji pattern to determine an actual sell signal. A potential trigger could be a break of the upward trendline support.
The reverse of the Gravestone Doji is the bullish Dragonfly Doji

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Candlesticks - Vol 10 - Harami

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Harami

The Harami (meaning "pregnant" in Japanese) Candlestick Pattern is a reversal pattern. The pattern consists of two Candlesticks:

• Larger Bullish or Bearish Candle (Day 1)
• Smaller Bullish or Bearish Candle (Day 2)

The Harami Pattern is considered either bullish or bearish based on the criteria below:

Bearish Harami: A bearish Harami occurs when there is a large bullish green candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. The most important aspect of the bearish Harami is that prices gapped down on Day 2 and were unable to move higher back to the close of Day 1. This is a sign that uncertainty is entering the market.

Bullish Harami: A bullish Harami occurs when there is a large bearish red candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. Again, the most important aspect of the bullish Harami is that prices gapped up on Day 2 and price was held up and unable to move lower back to the bearish close of Day 1.

Harami Candlestick Chart Example

The chart below of the Nasdaq 100 E-mini Futures contract shows an example of both a bullish and bearish Harami candlestick pattern:


The first Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a bullish reversal Harami. First there was a long bearish red candle. Second, the market gapped up at the open. In the case above, Day 2 was a bullish candlestick, which made the bullish Harami even more bullish.

Harami Candlestick Buy Signal

A buy signal could be triggered when the day after the bullish Harami occured, price rose higher, closing above the downward resistance trendline. A bullish Harami pattern and a trendline break is a potent combination resulting in a strong buy signal.

The second Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a bearish reversal Harami. The first candle was a long bullish green candle. On the second candle, the market gapped down at the open. The chart above of the e-mini shows that Day 2 was a bearish candlestick; this made the bearish Harami even more bearish.

Harami Candlestick Sell Signal

A sell signal could be triggered when the day after the bearish Harami occured, price fell even further down, closing below the upward support trendline. When combined, a bearish Harami pattern and a trendline break is a strong indication to sell.

A somewhat opposite two candlestick reversal pattern is the Bearish Engulfing Pattern

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Candlesticks - Vol 11 - Dark Cloud Cover

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Dark Cloud Cover is a bearish candlestick reversal pattern, similar to the Bearish Engulfing Pattern (see: Bearish Engulfing Pattern). There are two components of a Dark Cloud Cover formation:

• Bullish Candle (Day 1)
• Bearish Candle (Day 2)

A Dark Cloud Cover Pattern occurs when a bearish candle on Day 2 closes below the middle of Day 1's candle.

In addition, price gaps up on Day 2 only to fill the gap and close significantly into the gains made by Day 1's bullish candlestick.

The rejection of the gap up is a bearish sign in and of itself, but the retracement into the gains of the previous day's gains adds even more bearish sentiment. Bulls are unable to hold prices higher, demand is unable to keep up with the building supply.

Dark Cloud Cover Candlestick Chart Example

The chart below of Boeing (BA) stock illustrates an example of the Dark Cloud Cover Pattern:




Dark Cloud Cover Sell Signal

Traders usually suggest not selling exactly when one sees the Dark Cloud Cover Pattern (Day 1 & Day 2) until other confirming signals are given such as a break of an upward trendline or other technical indicators. One reason for waiting for confirmation is that the Dark Cloud Cover Pattern is a bearish pattern, but not as bearish as it could be: part of the gains from Day 1 have still been preserved.


A more bearish reversal pattern is the Bearish Engulfing Pattern that completely rejects the gains of Day 1 and usually closes below the lows of Day 1.

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