How to Find High Profit Japanese Candlestick Patterns and Turn Them Into Cold Hard Cash by Mark Deaton

 

When you want to identify high profit candlestick patterns, look for recent reversal and continuation patterns first. Start by reviewing the most recent candles (the last day or so on a daily chart) and work your way back in time. These recent candles are the most relevant and are the best predictors for what is likely to happen next.

Once you have identified a specific recent pattern, look back in the chart history and find similar patterns. Note how the stock or currency responded during those time periods. This will give you a clue as to the potential strength/relevance of the current signal.

Simple 1 and 2 day patterns tend to occur frequently in many different stocks. Although some of these patterns don't have the highest degree of reliability, their frequency offers you a large number of trading opportunities. If 60 to 70 percent of your trades are profitable, then your overall profit potential is high. Additionally, these tend to be part of larger patterns. This means it is to your advantage to spot them quickly. Here are a few of the most reliable patterns:

* Hammer - 1 candle with a small body near the top & a long shadow at the bottom, bullish; color is irrelevant
* Inverted Hammer - small body at the bottom & long shadow at the top instead, bearish
* Dragonfly Doji - open & close the same with long shadow at the bottom, usually bullish; least common of the four doji
* Rising Windows - two white bodies with short or no shadows separated by a gap

Others that occur frequently but are less reliable include:

* Spinning Top - 1 candle signifying indecision; very small body with longer shadows on top and bottom; important because it is often part of larger pattern
* Harami - weak to moderate signal depending on 4 combinations, 2nd day's body completely within the body of 1st; bearish when 1st candle is white; bullish when 1st candle is black
* Engulfing - moderate reversal signal, 2nd day engulfs or extends beyond both ends of the 1st day & is the opposite color

Reversal Patterns - Anticipation

The highest profit candlestick patterns for a single trade tend to be reversal patterns that have some sort of additional confirmation. Candlestick analysis has a method for confirmation embedded as part of the end of the relevant pattern (basically the last candle signals the new trend).Of course, this means that if you wait for that confirmation candle you may miss most of the price move.

So, you need to learn to anticipate what the completed pattern will look like. That's why it is important to know the patterns so well that you can recognize them while still forming or half completed. Use other technical analysis matrixes (for example, negative divergence on MACD with weak money flow) beyond normal candlestick charts to gain confirmation. This will help you gain confirmation in the midst of the pattern itself rather than catching the tail end of the new trend.

The Kicker - High Profits Ahead

One of the most profitable candlestick chart patterns on the market is the Kicker. It is a 2 day reversal pattern that happens at the end of a long trend. Basically, a Kicker is a failure of that continuation and creates a strong reversal.

For example, it might happen immediately after a Three White Soldiers (bullish) or Three Black Crows (bearish) pattern. Both of these patterns are normally continuation signals when three long candles of approximately the same length form during a trend. Normally these two strong patterns tend to be most reliable when they are perfectly formed. In other words, there is no gap and the candles are all the same length. Imperfection in the pattern creates a scenario where a Kicker is more likely to happen.

The old trend line is clearly broken when another long candlestick shoots abruptly in the opposite direction below the opening of the previous day. The opening of the second day might create a gap in the opposite direction of the prior trend. When bearish, it looks like a vertical cliff on the chart. This normally happens when significant and unexpected news is announced contrary to the old trend. This is more likely to happen the longer a specific trend continues - it eventually becomes ripe for exhaustion.

Sometimes a high profit candlestick pattern similar to the Kicker will occur as the dominant bulls or bears in a market slowly lose confidence. This can be signaled by progressively shorter candles in the three day pattern. If this does emerge, expect a reversal to happen. It's not a sure thing, but you will know by the opposite position and direction of the next day's opening whether or not you anticipated correctly.

 

If you would like to read more articles from Mark Deaton click here

If you would like to read more articles on Candlesticks click here