Charting & TA Ch5: Formations Flashcards
The TRI Star
The Tri-Star is another type of candlestick pattern that signals a reversal in the current trend, be it bullish or bearish. This pattern is formed when three consecutie DOJI candlesticks appear after the stock has experienced an advance in price.
A tri-star pattern near a significant support or resistance level increases the probability of a successful trade.
A single doji candlestick is an infrequent occurrence that is used by traders to suggest market indecision. Having a series of three consecutive doji candles is extremely rare, but when discovered, the severe market indecision usually leads to a sharp reversal of the given trend. Traders can use stock market scanning software to help them locate the pattern. The ‘three stars’ pattern can also be used to signal the reversal of downward momentum when the pattern is formed at the end of a prolonged downtrend.
- Entry: Traders could place a sell stop-limit order just below the third doji candle’s low. This entry confirms that the market is moving in the trader’s intended direction. Entering the market when the third doji candle closes may suit aggressive traders. This entry allows traders to set a tighter stop, but not confirm the trend.
- Stop: The high of the second doji is the top of the tri-star pattern and a logical place for a stop-loss order. Aggressive traders could set their stop above the high of the third doji, but risk getting stopped out by minor price spikes.
- Exit: A profit target could be set using a multiple of the initial risk taken. For instance, if a trader uses a $2 stop loss, they could place an $8 profit target. Traders might also use a certain retracement of the trend that precedes the tri-star pattern to take profits. For example, profits may be taken if prices retrace 10% of the previous move.
The Bearish Harami
The Bearish Harami is a pattern that forms at the top after an advance. It is indicated by a large dark candlestick that forms on a negative trading day signaling a change may be in store. It is then followed by a much smaller candlestick with a body that is located within the vertical range of the larger candle’s body. Such a pattern is an indication that the previous upward trend is coming to an end.
When you think about it, the lower close of the Bearish candle is an early warning sign. When this candle forms after an advance, you know the sellers have stepped in. Even before the next candle forms you should be on high alert if you are holding this stock. Then when the next candle is formed showing the price cannot penetrate the upper area of the previous candle, this sometimes indicates a top has been reached and often times reverse in direction will soon take place.
- A bearish harami is a candlestick chart indicator for reversal in a bull price movement.
- It is generally indicated by a small decrease in price (signified by a black candle) that can be contained within the given equity’s upward price movement (signified by white candles) from the past day or two.
- Traders can use technical indicators, such as the relative strength index (RSI) and the stochastic oscillator with a bearish harami to increase the chance of a successful trade.
The Bullish Harami
The Bullish Harami pattern is a candlestick chart pattern in which a large candlestick is followed by a smaller candlestick whose body is located within the vertical range of the larger body candle on the previous day. In terms of candlestick colors, the bullish harami is a downtrend of negative-colored candlesticks engulfing a small positive (white) candlestick, giving a sign of a reversal of the downward trend.
- A bullish harami is a candlestick chart indicator used for spotting reversals in a bear trend.
- It is generally indicated by a small increase in price (signified by a white candle) that can be contained within the given equity’s downward price movement (signified by black candles) from the past couple of days.
The Harami Cross
The Harami Cross is like the previous Bullish/Bearish Harami formations except the small body candle is a DOJI. This indicates that the previous trend is about to reverse.
- A bullish harami cross is a large down candle followed by a doji. It occurs during a downtrend.
- The bullish harami cross is confirmed by a price move higher following the pattern.
- A bearish harami cross is a large up candle followed by a doji. It occurs during an uptrend.
- The bearish pattern is confirmed by a price move lower following the pattern.
The Bullish Engulfing Pattern
The Bullish Engulfing Pattern is a chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses or “engulfs” the previous day’s candlestick. The previous day’s candle can be negative or positive, it really doesn’t matter that much. What matters is the large positive candle is saying the selling may be over.
When this pattern forms after a downward trend, a trader sees this as a signla that the decline is ending and a reversal is about to take place.
After a decline, the Bullish Engulfing Candle tells us the buyers have started buying and further decline may not be likely.
- A bullish engulfing pattern is a candlestick pattern that forms when a small black candlestick is followed the next day by a large white candlestick, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.
- Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or more black candlesticks.
- Investors should look not only to the two candlesticks which form the bullish engulfing pattern but also to the preceding candlesticks.
The Bearish Engulfing Pattern
Simply the opposite of the Bullish Engulfing pattern; it forms after an advancing trend and signals that a reversal is about to take place.
When you see the Bearish Engulfing pattern form after a stock has been trending up, then there is a pretty clear signal that change in direction is in the air.
After an advance in price, the Bearish Candle certainly signiies the sellers have stepped in.
- A bearish engulfing pattern can occur anytime, but it is more significant if it occurs after a price advance. This could mark the end of the uptrend or a pullback from an upswing to a more significant downtrend.
- Ideally, both candles are of decent size relative to the price bars around them. Two very small bars may create an engulfing pattern, but it is far less significant than if both candles are large, showing more volatility.
- The pattern has less significance in choppy sideways markets when there’s volatility but no clear trends have emerged.
The Rising Three Methods
The Rising Three Methods is a bullish candlestick pattern that is used to predict the continuation of the current uptrend. One notices that the trend has been advancing but there are 3 negative days in a row. However, notice the trading range of the negative days never trades below the large positive candle to the left. This indicates the advance will likely continue.
Another way to look at this formation is that the stock is taking a rest, or a breather, so to speak. Just a slight pullback before it marches higher.
- Rising three methods is a bullish continuation candlestick pattern that occurs in an uptrend and whose conclusion sees a resumption of that trend.
- The decisive (fifth) strongly bullish candle is proof that sellers did not have enough conviction to reverse the prior uptrend and that buyers have regained control of the market.
- The rising three methods may be more effective if the initial bullish candlestick’s wicks, denoting the high and low traded price for that period, are shallow.
The Falling Three Methods
Pretty much the opposite of the Rising Three Methods; it’s a bearish candlestick pattern that tells us the current downtrend will probably continue.
- The “falling three methods” is a bearish, five-candle continuation pattern that signals an interruption, but not a reversal, of the current downtrend.
- A falling three methods pattern is characterized by two long candlesticks in the direction of the trend, one at the beginning and end, with three shorter counter-trend candlesticks in the middle.
- The falling three methods pattern shows traders that the bulls still don’t have sufficient conviction to reverse the trend.
- It can be used by active traders as a signal to initiate short positions.
The Bearish Abandoned Baby
The Bearish Abandoned Baby is a candlestick pattern that usually tells us a reversal in the current uptrend is on its way.
First of all, the previous advance is eclipsed by a DOJI. That in itself is our first signal, but the confirmation comes the next day with a bearish engulfing candle. When you look at an advance in a stock’s price while viewing a chart and see the DOJI and then see heavy selling the following day that should be enough to get your attention.
In fact, experiend traders who see this pattern form and are holding the stock, usually begin to look back on a longer term chart to see where support might be found for the stock’s price. If it is very far below the current price, they would exit the trade.
- A bearish abandoned baby is a rare pattern that has a fairly strong track record for forecasting a short-term downward trend.
- The key item of the bearish abandoned baby is the middle day, which should have a gap in front of it and following it, and which should close the session with price unchanged.
- The bullish variation of the pattern is the bullish abandoned baby which is equally rare and also has a good track record for forecasting a reversal towards an upward trend.
The Bullish Abandoned Baby
The mirror image of the Bearish Abandoned Baby. Traders watch for bullish abandoned baby patterns to signal the potential end of a downtrend. The pattern is fairly rare as the price movements need to meet specific criteria in order to create the pattern.
The first bar is a large down candlestick located within a defined downtrend.
The second bar is a doji candle (open is approximately equal to the close) that gaps below the close of the first bar.
The third bar is a large white candle that opens above the second bar.
The psychology or idea behind the pattern is that the price has been dropping aggressively and just had a big sell-off again (first down candle). The price then forms a doji, which shows selling is leveling off as the open and close prices of the doji are nearly the same.
Dojis are commonly associated with indecision. In this case, the doji means that sellers may be losing momentum and buyers are starting to step in. The doji, or dojis, are followed by a strong advancing candle that typically gaps higher from the doji. This shows that buyers have regained control and that the selling has at least temporarily been exhausted.
- The bullish abandoned baby is a three-bar pattern following a downtrend.
- It consists of a strong down candle, a gapped down doji, and then a strong bullish candle that gaps up.
- This pattern signals the potential end of a downtrend and the start of a price move higher.
- Some traders allow for slight variation. There may be more than one doji, or gaps may not be present after the first or second candle. But the overall psychology of the pattern should still be present.
