The Power & Strength of a Candlestick Pattern Signal by Mark Deaton

 

The strength of a candlestick chart signal often depends on interpretations that the novice trader is not likely to understand or appreciate. As you become a true professional, you will learn to make judgment calls that take these nuances into account. The subtle distinction between certain similar patterns can reveal how strong a particular price swing is likely to be. Combine this with a significant volume of trade, and you can get a better sense of how strong the sentiment is on the market for that particular trend.

Continuation patterns are good indicators for whether support or resistance points will hold up on the chart or break down so that the trend will continue. They will tell you whether you need to hold your position or consider selling it. You should understand where these decision points will be before you buy into a position in the first place.

Strength of the Pattern

The following continuation candlestick chart signals are similar to one another but have different strengths associated with the predicted price movement.

In Neck - This is a 2 day gap-filling pattern. In a downtrend, a long black candle forms. This creates more downward pressure and the next day gaps down at the opening. This 2nd day is a white candle that barely closes inside the body of 1st day. The filled gap indicates that the trend is ready to continue.

On Neck - This 2 day gap pattern is very similar to In Neck, except the shadows of the candles are distinctive features. The 2nd day fills the gap but the close for the day is only at the level of the 1st day's low. This signals that the downward pressure is much more significant with this formation than In Neck. The strength of the move to come will be greater.

Thrusting - This is similar to In Neck as well. The gap down on the 2nd day is completely filled and the price continues to rise for a close well within the body of the 1st day but not quite to the midpoint. This is weaker than the previous two candlestick patterns. However, it is still reliable.

Placement of the Pattern

Separating of the Lines - This 2 day signal looks sort of like a Kicker pattern except the prior trend is different. The placement on the chart tells the true story. In an upward market, a long black candle forms (suggesting weakness). The 2nd day opens again near the 1st day's opening price but instead trades upward dramatically. This is a strong bullish continuation pattern.

Tweezers Bottom - This reversal is analogous to a double bottom on a regular bar chart but on a much shorter time scale. This rare candlestick chart signal occurs in a downtrend. Basically, it is created when two candle bodies or shadows (or a combination of the two) hit the same low for each day. It does not matter what color the candles are. Two matching lows for the day signal a possible reversal. This differs from the norm in that the 2 candles in the formation do not have to be consecutive. However, they should not be more than a few days apart. If they are nearing 15 days apart, then this creates a real double bottom.

Tweezers Top - This is similar to Tweezers Bottom, except that it deals with two identical highs instead. It is like the Double Top reversal pattern on the regular bar chart. These highs should also not be more than a few days apart.

Advanced Patterns

For some patterns, the prior trend isn't relevant. They will reverse regardless of the trend. Here are a few of the strongest (but rarest) known reversal patterns:

Island Reversal - This is similar to the Abandoned Baby but does not rely on type or size of the candles, just their placement. A single candlestick is isolated by gaps first in one direction and then in the opposite direction.

Hook Reversal - This is like a special case Harami but is more reliable. The two candles that form the Hook are virtually identical in size but opposite in color. The 2nd day is barely engulfed by the 1st day's trading range.

San Ku Triple Gap Reversal - This is created by 3 consecutive gaps in trading formed between 3 consecutive candlesticks regardless of size. All form in the same direction as the trend. It is a highly reliable indicator that the trend is about to reverse within a day or two. The nice thing about this candlestick chart signal is that it is an early indicator that gives you plenty of time to respond.

 

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