We already discussed simple candlestick formations in a separate article. While these formations already allow quality predictions of future market movements, it is when you combine these simple formations to more complex patterns that candlestick strategies become incredibly effective. This article is about those complex candlestick formations.
Let’s take a look at some of the most common more complex candlestick formations. Be aware, though, that this by far isn’t the end of the line when it comes to candlestick formations. Some formations are as big as 30, 50 or more candlesticks. We will save these for a different article. For now, let’s start with the more complex candlestick formations you will encounter most in your daily trading.
The Bearish Harami consists of a white Big Candle and a smaller black candlestick contained within the Big Candle. In an uptrend, the Bearish Harami is considered a bearish formation. The second candlestick can also be a Doji.
The exact opposite of a Bearish Harami is considered a bullish pattern.
A black Big Candle followed by a number of smaller candlesticks contained within the Big Candle and another black Big Candle that breaks out of the first. This is considered a bearish continuation pattern in a downtrend.
The opposite of the Bearish 3-Method Formation is considered a bullish continuation pattern in an uptrend.
The Dark Cloud Cover consists of a white Big Candle followed by a dark candlestick opening above the high of the Big Candle, but closing well within its body. After an upwards movement this is considered a reversal pattern.
The Engulfing Bearish Line consists of a small white candlestick contained within a black Big Candle. Near the top of a movement it is a very important reversal signal.
The exact opposite of the Engulfing Bearish Line is considered a strong signal for a reversal when near the bottom of a movement.
The evening star is one white big candle followed by a smaller candlestick in either direction and a black Big Candle closing well within the range of the white Big Candle. The evening star is considered a reversal signal starting a bearish movement.
The exact opposite of the Evening Star, the Morning Star indicates a reversal pattern to a bullish movement after a bearish movement.
The Falling window consists of a candlestick opening significantly below the low of the preceding candlestick. The occurring gap can be traded with the Gap Strategy. As the Gap Strategy implies, any gap in the market has the tendency to close. A trader can use this knowledge and invest in a closing gap. Other than the closing of the gap, the Falling window has no implications for longer market direction.
Three black Big Candles with consecutively lower closing prices indicate a bearish reversal when they appear near the top of a movement.
Three white Big Candles with consecutively higher closing prices indicate a bullish reversal when they appear near the bottom of a movement.
The Piercing Line is a black candlestick followed by a white candlestick that opens lower but closes within the black candlestick. Near the bottom of a downwards movement it is considered a reversal sign to a bullish movement.
All of these signals can help you predict future market movements. By themselves, however, they are much less significant than when you combine them with a solid trend analysis. For example, many of these formations are reversal signals that are especially significant when they occur at the top or the bottom of a movement.
The only way to identify bottoms and tops is trend analysis. With trend analysis you can see the big picture and find the most profitable trading opportunities. Therefore, we will dedicate another article to a closer look at what a trend is, how you can combine it with candlestick patterns, and how you can use both to create a profitable trading strategy. Read the article about trend analysis here.