Candlestick Forex Strategies
Bearish Reversal Candlestick Patterns
One of the most significant goals of technical analysis is to identify changes in direction of price action. Because candlesticks give visual insight into what the market is market psychology, one of the most useful aspects of candlestick analysis is its ability to suggest changes in the sentiment of the market, and reversals in trend. We call these candle formations Reversal Patterns.
The actual reversal indicates that selling pressure overwhelmed buying pressure for one or more days, but it remains unclear whether or not sustained selling or lack of buyers will continue to push prices lower. Without confirmation, many of these patterns would be considered neutral and merely indicate a potential resistance level at best.
Bearish confirmation means further downside follow through, such as a gap down, long black candlestick or high volume decline. Because candlestick patterns are short-term and usually effective for 1-2 weeks, bearish confirmation should come within 1-3 days.
To be considered a bearish reversal, there should be an existing uptrend to reverse. It does not have to be a major uptrend, but should be up for the short term or at least over the last few days.
A dark cloud cover after a sharp decline or near new lows is unlikely to be a valid bearish reversal pattern. Bearish reversal patterns within a downtrend would simply confirm existing selling pressure and could be considered continuation patterns.
There are many methods available to determine the trend. An uptrend can be established using moving averages, peak/trough analysis or trend lines. A security could be deemed in an uptrend based on one or more of the following:
The security is trading above its 20-day exponential moving average (EMA).
Each reaction peak and trough is higher than the previous.
The security is trading above a trend line.
These are just three possible methods. Some traders may prefer shorter uptrends and qualify securities that are trading above their 10-day EMA. Defining criteria will depend on your trading style, time horizon and personal preferences.
Bullish Reversal Candlestick Pattern
There are dozens of bullish reversal candlestick patterns.Patterns
can form with one or more candlesticks; most require bullish confirmation. The actual reversal indicates that buyers overcame prior selling pressure, but it remains unclear whether new buyers
will bid prices higher. Without confirmation, these patterns would be considered neutral and merely indicate a potential support level at best. Bullish confirmation means further upside follow through
and can come as a gap up, long white candlestick or high volume advance. Because candlestick patterns are short-term and usually effective for only 1 or 2 weeks, bullish confirmation should come
within 1 to 3 days after the pattern.To be considered a bullish reversal, there should be an existing downtrend to reverse. A bullish
engulfing at new highs can hardly be considered a bullish reversal pattern. Such formations would indicate continued buying pressure and could be considered
a continuation pattern.
In the Ciena example below, the pattern in the red oval looks like a bullish engulfing, but formed near resistanceafter about a 30 point advance. The pattern does show strength, but is more
likely a continuation at this point than a reversal pattern.The existence of a downtrend can be determined by using moving averages, peak/trough analysis or tren
A security could be deemed in a downtrend based on one of the following:
The security is trading below its 20-day exponential moving average (EMA).
Each reaction peak and trough is lower than the previous.
The security is trading below its trend line.
These are just examples of possible guidelines to determine a downtrend. Some traders may prefer shorter downtrends and consider securities below the 10-day EMA. Defining criteria will depend on your trading style and personal preferences.
Continuation Candlestick Patterns
Continuation Patterns - Continuation patterns suggest the market will maintain an established trend. Often the direction of the candlesticks themselves are in the opposite direction of trend in continuance. Continuation patterns help traders differentiate between a price action that is in full reversal and those merely taking a pause. Most traders will tell you there is a time to trade and a time to rest. The formation of continuation candlestick patterns imply consolidation, a time to rest and watch.
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Candlestick Forex Strategies