We will consider a number of patterns which comprise of two or more Japanese candlesticks. It should be noted, that they are of limited use on Forex as they presuppose that the closing price of the prior trading period and the opening price of the next trading period do not correspond.
Let us consider the Bullish Engulfing pattern and Bearish Engulfing pattern. These patterns emerge when a long candlestick follows a short one of the opposite color as if engulfing it. These patterns forecast the trend change when seen on the distinct downtrend or uptrend correspondingly. For the trend type definition the instruments discussed in the relevant chapter should be used.
The next pattern is called Harami. It can also be bullish or bearish, depending on the candlestick type and the previous trend. These patterns emerge, when a candlestick with a small body follows a candlestick with a big body of the opposite color, and symbolizes the weakening of the trend.
The Piercing Line patterns and the Dark Cloud Cover are also the precursors of the decreasing and increasing trend accordingly. The Piercing Line is formed amid the downtrend when a long dark candlestick is followed by a long fair one. Meanwhile, the empty candlestick opens lower than the level of the dark candlestick closing and closes above its middle. The Dark Cloud Cover pattern emerges amid the uprising trend when a long empty candlestick is followed by a long dark candlestick. And the dark candlestick opens above the empty candlestick closing level and closes below its middle.
The next patterns consist of three candlesticks following each other. They are called a Morning Star and an Evening Star. A star in this context is the short candlestick which is situated apart from the neighboring candlesticks and does not overlap with their bodies, though their shadows can lap over.
Such patterns signal the market reverse. The star color (fair or dark) has no importance. If the star is excluded from the pattern, they will be identical with the patterns a Piercing Line and a Dark Cloud Cover.
And the last patterns, which will be discussed in the frames of Forex education course, are called White Soldiers and Three Black Crows.
If these patterns are formed on the clear-cut downfalling and the uprising trend correspondingly, they signal the possible trend reverse. These patterns comprise three candlesticks. Each following candlestick should open within the limits of the prior candlestick body, and close beyond its maximum or minimum.
Though various types of patterns are likely to signal the trend change, one should treat them a little skeptically. At first, the Japanese candlesticks theory works well only on exchange markets, such as stock market or futures market. Secondly, in the process of the Japanese candlesticks patterns analysis, as a rule, only daily and weekly charts are used. Thirdly, the chart’s behaviour inside one and the same candlestick can vary.
The trade session, which is symbolized by one and the same candlestick, can contain different price variations. We can observe a moderate, as well as a volatile market.
Therefore, it is unwise to be abrupt stating, that a certain pattern of the Japanese candlesticks denotes the reverse or the trend continuation.
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