Japanese Candlestick Patterns – Dual Patterns
In this third post about Japanese candlestick patterns we will be looking at how dual and triple patterns can help us understand the direction of a trending market and when to prepare for a reversal. These Japanese candlestick patterns are strong signals which can help us set the perfect trade.
Tweezer Tops and Bottoms Japanese Candlestick Patterns
When looking for the perfect trade set-up we are always searching for the right entry time. Therefore finding a strong reversal pattern is the signal we need to pay special attention to.
The “tweezers” are dual candlesticks which show us a reversal pattern. After an long set of candlesticks which will have set an uptrend or downtrend, spotting a pair of tweezer top or bottoms candlesticks may well signify that there is going to be a reversal in pattern.
The shape of the candlesticks are literally like a pair of tweezers and when they form their function is to tweeze off the direction of the previous trend.
Here are some characteristics that can help us spot tweezer tops and bottoms formation in Japanese candlestick patterns:
• The first candlestick has in the same behaviour pattern as the general trend. Therefore, if it is an uptrend then the first candlestick will also be a blue candlestick or a buyer’s candlestick.
• The candlestick that forms immediately after the first candlestick will have the same shape but will be in the opposite direction. If the previous candlestick was a bullish candlestick, then the subsequent one will be a bearish candlestick.
• The shape of the candlesticks will be almost identical. Their shadows should be of equal length. Their bodies should also have the same volume. The difference stands only that Tweezer Tops will have the same highs whilst the Bottoms will have the same lows.
Bullish and Bearish Engulfing Candlesticks
From the visuals above we can see that a bullish engulfing pattern occurs when a large red candlestick forms after a negative (red) candlestick of lower value. The larger bullish candle is literally engulfing the previous bearish candle. This signals that the bulls are coming on strong and may see a reversal and uptrend.
Alternatively a bearish engulfing pattern occurs when a large negative candle (red) forms after a weaker bullish (blue) candlestick. This bearish candle “engulfs” the bullish candle, which signifies that the buyers are loosing their power, and it is probably time for the buyers to take over the market and reverse the trend.
These dual Japanese candlestick patterns are crucial for us to learn and understand how they influence price.
Harami Candlestick – Japanese Candlestick Patterns
Harami, in Japanese, where the candlesticks originated from means pregnant. A Harami candlestick pair resemble a mother and its child.
If we have a look at the graphic below we see that the body of the second candlestick is well within the body of the first. Here we have a mummy body and a baby body.
In the case of a bullish Harami, the first candlestick has a long body closing well below its opening price. The baby bar will typically be a bearish candle which will close higher than its opening price. The opposite is true for a Bearish Harami.
What do these Harami Pair of Japanese Candlestick Patterns mean?
It means that either the Bears in a downtrend or the Bulls in an uptrend are getting exhausted and that the market has come to a muted reversal. The smaller candle is the candle that is determining the real an conclusive movement. It is decreasing the volatility. That is why a Harami is called an inside bar.
A Harami is not a very strong signal of pattern reversal – however it pays to watch out for it because it signifies that a change is about to happen. Our analysis and understanding where a market is heading will be even more clear once we start understanding triple Japanese candlestick patterns.
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Japanese Candlestick Patterns – Triple Patterns
Morning Star and Evening Star Triple Formation
This triple Japanese candlestick pattern usually forms around the end of a trend. The way they shape up could be a strong indicator that a reversal is about to happen, and this will be our set-up to grab some pips or enter into a binary options trade.
How will be know that an Evening Star or a Morning Star is forming? How can we use this for a trade set-up?
Evening Star patterns form when the first candle is a strong bullish candle in a strong uptrend. The second candle which forms right after that will confirm the uptrend but will be small and with a very short body. Pretty much the shape of the “spinning top”. This formation tells us that the market is getting tired and the buyers are loosing their power. The third and last candlestick will be a bearish candlestick which has a long a strong body. The sellers will have taken control of the market and are ready to tear of the buyers limb by limb.
The formation of the Morning Star is identical to the Evening Star but in a different trend setting. In this case a strong bearish candlestick in a downtrend is followed by a bearish “spinning top” , which is then followed by a strong bullish candlestick. The trio tell us that the bears or the sellers are now exhausted and loosing ground, whilst the sellers are itching to buy in at a good price and make some serious money.
These set ups in binary option trading can be used to our advantage as follows:
• Depending on the value of the Japanese candlesticks, we set up our time scale. Therefore if we are looking at a five minute chart, we should be setting up a trade which is in a 15 or 30 minute time frame.
• As soon as we have confirmation of the change in trend with a second or third candlestick we enter the market with a low value trade. If the market re-confirms the reversal, we can enter into a second trade for a larger value with the next 15 or 30 minute expiry.
Three White Soldiers and Three Black Crows
When three consecutive long candlesticks follow each other, in the opposite direction after an uptrend or a downtrend, we understand that a reversal has just occurred.
This trio of Japanese candlestick patterns are considered very fortuitous. They are possibly the strongest signal to indicate a reversal in a trend, and therefore it is a perfect time for traders to make some money.
Three White Soldiers – a Strong Japanese Candlestick Patterns indicator.
In this triple formation we see that this set of candlesticks form after a strong downtrend. The first candlestick is called the “reversal candle” This reversal is further confirmed by the second candlestick. The second candlestick should have an even longer and stronger body than the reversal candlestick. It usually has very little or no shadow at all implying that the buyers have taken over the market.
Finally the third candlestick forms. This should have an equally strong body and ought to be as long and strong as the second candlestick. The longer the third candlestick is, the better for a confirmation that the trend has fully reversed. This candlestick as the previous one ought to have very little in terms of shadows. This shows that the buyers are now in full control of the market.
The soldiers are marching in!
The three black crows are Japanese candlestick patterns which act out the opposite situation from the three white soldiers. When this formation occurs after a strong uptrend we know that the dark and sinister crows will be ruling the market and a reversal has occurred which sinks the price to a new downtrend.
Three Inside Up and Down – A Trio of Japanese Candlestick Patterns
As with the previous trios of Japanese candlestick patterns, a three inside up formation signifies as strong reversal of a bearish market. Although not as strong as “the three white soldiers” it is a good indictor and eye opener that the downtrend is possibly over.
What are the Characteristics of a Trio of Three Inside Up Candlesticks?
• The first candlestick which is at the bottom of a downtrend is a long bearish or red candlestick.
• The second candlestick is a bullish or blue candlestick and this should be at least as high as midpoint of the previous candlestick
• The last bullish or blue candlestick should close above the first and bearish candlestick’s low thereby confirming that the buyers are now stronger and have control of the market.
A three inside down trio will form in an opposite scenario. This trio form at the top of an uptrend and indicates that the trend is probably about to reverse.
These are the Characteristics of Three Inside Down Trio!
• The first candlestick is a Bullish candlestick which is quite long and strong
• The second candlestick is the first reversal candlestick and will be short and stout but in a Bearish direction.
• The third and last candlestick is strong and long and closes below the first candlestick’s low – therefore signifying that the sellers have taken over the market!
Conclusion on Japanese Candlestick Patterns
This study on Japanese candlestick patterns should help us with successful trading habits. Waiting for Japanese candlestick patterns to form can require patience. But the wait will be well worth it. However one word of warning! Before entering a trade based on technical analysis in a trending market, a trader should always check the Economic Calendar for any unexpected volatility, which may ruin the “perfect set-up”