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Candlestick Reversal Patterns

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Candlestick Reversal Patterns How to Read the Stock Chart Stock charts There are several different kinds of charts: ‐ line chart ‐ OHLC chart ‐ candlestick Line charts The line chart is a single line with starting and ending points. The points may be a session’s opening or closing price. The line chart is limited because it does not provide enough details to judge a stock’s performance. Chart courtesy of StockCharts.com OHLC chart “OHLC” stands for “open, high, low, close.” The daily entry to the chart has three attributes: ‐ a vertical line stretching from the day’s high to low price ‐ a small horizontal line attached to the left of the vertical line, representing the session’s opening price ‐ a small horizontal line attached to the right of the vertical line, representing the session’s closing price Chart courtesy of StockCharts.com Candlestick charts The most useful of all charts is the candlestick. This chart has a rectangular real body. A white real body appears when the price moved up A black real body appears when the price moved down. The top and bottom of the rectangle represent the session’s opening and closing prices. Sticking out from the top and bottom are the shadows. These represent the range of trading during the session, from highest to lowest price. Chart courtesy of StockCharts.com Candlestick Some candlestick reversals reversal patterns Reversal indicators may be only one session: Among the many useful patterns are ‐ doji single‐session, two‐session and three‐ session reversal signals. ‐ spinning top These predict a change of direction in They may consist of two consecutive sessions: price. However, all reversal signals should be confirmed before they are ‐ engulfing acted on. ‐ harami Confirmation may consist of other candlesticks and many other reversal Reversals can also be found in three indicators. consecutive sessions: Hundreds of different candlestick signals may be found. This section ‐ three white soldiers explains only a few of these. ‐ three black crows ‐ abandoned baby Western Some technical signals technical analysis Technical signals may relate to the trading range: Traditional Western technical analysis ‐ resistance is based on price patterns that signal reversal. ‐ support There are dozens of signals. Some of They may consist of tests of the border and the most useful include only a few reversal: demonstrated here. ‐ head and shoulders Western signals may confirm ‐ inverse head and shoulders candlestick reversal indicators, such as candlesticks may serve as confirmation Technical signals also appear when the prior for Western signals. trading range changes and price breaks out to form a new range: ‐ gaps ‐ breakouts Volume indicators and Other technical signals momentum oscillators A volume indicator is any test of Volume: volume in relation to price. Volume indicators work as confirmation of ‐ indicators include calculated reversal. volume tests One of the best confirmation signals is ‐ volume spikes are also good the volume spike, a one‐day or two‐ confirmation signals. day rise in volume, followed by a return to normal levels. Momentum: A momentum oscillator is a calculation of price averages. It tests the strength ‐ among the many volume indicators or weakness of a trend, as well as its speed of movement. is the Relative Strength Index (RSI), which creates an index from 1 to As momentum begins to slow down, the index of a momentum oscillator is 100. Above 70 indicates overbought; likely to move into overbought or below 30 indicates oversold. oversold range. This foretells a likely reversal. Conclusion Candlestick charts are the most useful format, as they summarize all price information in a visual manner. Candlestick reversals may be confirmed with traditional Western signals and price tests. Further confirmation comes from volume signals and from momentum oscillators..
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