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

Figure 3.16
Bullish and bearish engulfing pattern.
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CANDLESTICK ANALYSIS
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The harami pattern has a small body (black or white) that f its
completely into the big (black or white) body of the previous day. It is
not important whether the shadow of today’s small candlestick pattern
goes higher or lower than the previous candlestick shadow. The harami
pattern has greater importance if, at the end of a downtrend, today’s
small candlestick body is white, whereas the big candlestick body of the
previous day is black. The reversal signal is even stronger when today’s
candlestick body is very small. The harami pattern can be a bullish sig-
nal after a downtrend or a bearish signal at the end of an uptrend.
The harami cross is a special kind of harami pattern. In this
candlestick pattern, today’s candlestick body is very small, which
means that the opening and the closing price are almost identical
(see Figure 3.17).
Doji Pattern
The doji pattern identif ies when the momentum of markets is slow-
ing down. Doji candlesticks have a very small body (opening and clos-
ing prices of the day are almost identical), and there is a long shadow
either above or below the candlestick body.
Figure 3.17
Harami pattern and harami cross.
Figure 3.18
Doji pattern.
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BASIC PRINCIPLES OF TRADING STRATEGIES
Doji patterns are only interesting at the end of longer upswings
or downswings. They have more importance when there is an engulf-
ing pattern on the following day (see Figure 3.18).
Piercing Pattern and Dark-Cloud Cover
The piercing pattern looks much like the bullish engulf ing pattern
and is only valid at the end of a downtrend. While in the bullish en-
gulf ing pattern, the large white body of today’s candlestick covers the
small black candlestick body of the previous day; the piercing pattern
is similar.
A valid signal with a piercing pattern is generated when today’s
big, white candlestick body covers at least 50 percent of the previous
day’s black candlestick body. The more the body of the piercing pattern
covers the candlestick body of the previous day, the stronger is the re-
versal signal.
The candlestick formation of a dark-cloud cover is important as
a reversal signal at the end of an uptrend. In this case, the big, black
body of the dark-cloud cover has to cover at least 50 percent of the pre-
vious day’s white candlestick body. The more the candlestick body of
the dark-cloud cover pattern covers the candlestick body of the previ-
ous day, the stronger is the reversal signal (see Figure 3.19).
Morning Star and Evening Star
In a star candlestick formation, a small candlestick body (black or
white) is separated through a price gap from the candlestick body of
the previous day (see Figure 3.20).