Candlestick patterns are very important tools in an investors tool box as a single candlestick pattern can indicate the end of a trend and alert investors that action is warranted (either buying or selling).
Similar to other types of technical analysis, candlestick patterns work well on 5 minute candlestick charts, monthly candlestick charts and every length of chart in between.
Since candlestick charting originated in Japan and has been used for over 200 years there, I tend to prefer Japanese candlestick patterns rather than the "westernized" candlestick patterns that were brought back to the western world less than 30 years ago. Call me a traditionalist.
Most Japanese candlestick patterns make war references in either the name of the pattern itself or when a candlestick pattern's action is being described. I think the unconventional names and war references used with Japanese candlestick patterns are pretty cool, which are all deeply rooted in Japanese history.
Let me leave you with an old Japanese proverb before you start looking at some candlestick pattern illustrations:
"One seeing is better than a hundred hearings"
Benefits of Candlestick Patterns
Having an in-depth knowledge of the requirements and characteristics for the bullish and bearish candlestick patterns will give you an edge over not only other retail investors but also large institutions.
Large institutions know that selling a lot of their shares rapidly will drive down the share price however as a retail investor we can be more nimble than the large institutions because we typically hold fewer shares.
Candlestick patterns are extremely useful trading tools to help outwit these large institutions because they:
- warn investors on quick notice that a trend (uptrend or downtrend) may have ended
- are flexible and can be used in all kinds of charts - hourly, daily, weekly and monthly charts
- provide a visual perspective to help identify their pattern
Using candlestick patterns alone can lead to successful results, however when candlestick patterns are combined with other methods of technical analysis, they become excellent technical analysis tools with better predictive results.
Types of Candlestick Patterns
There are 2 main types of candlestick patterns, reversal candlestick patterns and continuation patterns. Reversal and continuation candlestick patterns have both bullish and bearish candlestick types.
- Reversal candlestick patterns
- Continuation candlestick patterns
Reversal Candlestick Patterns
Reversal candlestick patterns indicate that the trend is over. Whatever the trend was right before the reversal candlestick pattern, that trend is now over or close to over. The Dark Cloud Cover candlestick pattern is an example of a bearish reversal candlestick pattern. It indicated that the uptrend was over.
Some reversal candlestick patterns represent a greater probability of reversing the trend than others. The great thing about reversal candlestick patterns is that they can be used by both traders and investors alike since they can develop on 5 minute charts, daily charts, weekly and even monthly charts.
Bullish Reversal Candlestick Patterns
look for bullish reversal candlestick patterns at the bottom of downtrends. The downtrends can be on 5 minute charts, daily charts, weekly charts, monthly charts or anything in between.
Bearish Reversal Candlestick Patterns
Look for bearish reversal candlestick patterns at the top of uptrends. The uptrends can be on 5 minute charts, daily charts, weekly charts, monthly charts or anything in between.
Continuation Candlestick Patterns
Continuation candlestick patterns continue the trend that was in place before the development of the pattern. Similar to reversal candlestick patterns, look for continuation candlestick patterns on 5 minute charts, daily charts, weekly and even monthly candlestick charts.
- Bullish Continuation Candlestick Patterns - typically look for bullish continuation candlestick patterns in the middle of an uptrend. The uptrend can be on a 5 minute chart, a daily chart, a monthly chart or anything in between.
- There are occasions where bullish continuation candlesticks appear at either the beginning of an uptrend or near the top of an uptrend. Therefore, it is always important to keep in mind the trend of one larger degree.
- The Three White Soldiers candlestick pattern is an example of a bullish continuation candlestick pattern.
- Bearish Continuation Candlestick Patterns - typically look for bearish continuation candlestick patterns in the middle of a downtrend. The downtrend can be on a 5 minute chart, a daily chart, a monthly chart or anything in between.
- There are occasions where bearish continuation candlesticks appear at either the beginning of a downtrend or near the final stages of a downtrend. Therefore, it is always important to keep in mind the trend of one larger degree.
Join Trendy Stock Charts
So now that you have a grasp on what some of the more common candlestick patterns look like, do you think you are ready to "wage war" against Wall Street?
Do you currently have a 401(k) or IRA? If so, then without you even realizing it you are "waging war" against Wall Street at this very moment. Wall Street is fighting you each and every day that you stay invested with your money because they want most of your profits if not your capital too.
It might be time to call in those "Three White Soldier" reinforcements to help you start winning a couple of battles in the candlestick war. Before you know it, your portfolio just may have turned the tides of the war in your favor! Strike a blow against Wall Street! Hoorah!