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

Figure 3.19
Piercing pattern and dark-cloud cover.
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CANDLESTICK ANALYSIS
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The body of the star can touch the shadow of the previous day’s
candlestick pattern, but it does not touch the body. If the star does
not have a small body, but is a doji (opening and closing price are al-
most identical), the candlestick pattern is a doji star. Star and doji
star are warning signals for an imminent trend reversal.
A morning star is a bottom reversal pattern formed by three can-
dlesticks. The f irst candlestick has a big black body, for this is still a
downtrend. The second candlestick is a star with a very small body
that is below the previous candlestick and has no connection to the
previous body. The third candlestick has a big, white body that should
cover at least 50 percent of the big black body from two days ago. In
the ideal form, the third candlestick body should trade with a gap to
the body of the star of the previous day. Should the third candlestick
be an engulf ing pattern, this is also a valid trend reversal signal.
An evening star is a trend reversal pattern after a strong up-
trend. This formation also has three candlesticks. The f irst has a long
white body. The following candlestick is a star with either a black or
white body that has no connection with the previous candlestick body.
The third candlestick has a big black body that covers at least 50 per-
cent of the big black body from two days earlier. Between the body of
the star and the last big black body, there also should be a gap. If there
is a bearish engulf ing pattern, this constellation is a valid trend re-
versal signal as well.
Summary
When working with candlestick patterns, traders look for indications
of short-term trend reversals. The unique structure of candlesticks
makes them a convincing and easily managed charting technique.