Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

Figure 3.13
Bar charting technique and candlestick charting technique in
comparison.
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CANDLESTICK ANALYSIS
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Hammer and hanging man should both have a long shadow. Ide-
ally, the shadow should be about three times as long as the body. The
long shadow shows that the market price dropped very sharply after
the opening and then recovered at the end of the trading session. The
opening and closing price should be close together, which will result
in a small body on the candlestick chart.
At the end of an uptrend, the same candlestick chart pattern is
called a hanging man. The hanging man is also a reversal pattern. To
get a sell signal, the market price should trade below the lowest low of
the hanging man in the following days. It might be even safer to wait
until the close of a day is below the lowest low of the hanging man
candlestick pattern (see Figure 3.14).
Bullish and Bearish Belt-Hold
The bullish belt-hold is a candlestick formation with a white body,
which means that the opening price was very low, the market started a
rally, and the closing price is very high. The opposite holds true for the
bearish belt-hold. In this case, the opening price is very high and the
closing price is very low. The bigger the body in the belt-hold candlestick
pattern, the more important is this pattern for a trend reversal.
Figure 3.14
Hammer and hanging man.
Figure 3.15
Bullish and bearish belt-hold.
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BASIC PRINCIPLES OF TRADING STRATEGIES
If the opening price of the next day is higher than the bearish
belt-hold candlestick pattern, it is likely that the market will go higher.
On the other hand, if the opening price of the next day is below a bull-
ish belt-hold, traders can expect that the market will continue to go
lower (see Figure 3.15).
Bullish and Bearish Engulfing Pattern
While hammer and hanging man as well as bullish and bearish belt-
hold are single candlestick formations (consist of one candlestick), the
bullish and bearish engulf ing patterns always need a pair of candle-
sticks to complete the pattern.
The bullish engulf ing pattern is a reversal pattern at the end of
a downtrend. This formation is completed when a large white candle-
stick body completely covers a smaller black candlestick body from the
previous day. It is not important that the big, white candlestick body
covers the shadow of the previous day as well.
A bearish engulf ing pattern is important at the end of an up-
trend. In this case, a big black candlestick body covers a small white
candlestick body of the previous day (see Figure 3.16).
Harami Pattern and Harami Cross
The harami pattern needs two candlesticks and is the exact opposite
of the engulf ing pattern. In the traditional bar chart analysis, the
harami pattern is called an inside day.