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

Figure 4.23
Hammer and hanging man.
c04.qxd 6/16/03 4:17 PM Page 78

---

CANDLESTICK CHART PATTERNS
•
79
chart pattern if the low of the day with the hanging man is broken.
The stop-loss in this case is the high of the day at which the hanging
man pattern has occurred.
Bullish and Bearish Engulfing Patterns
Whereas hammer and hanging man are single candlestick formations
(consist of one candlestick), the bullish and bearish engulf ing patterns
need a pair of candlesticks to complete the pattern (see Figure 4.24).
The bullish engulf ing pattern often occurs at the end of a down-
trend and indicates a trend reversal. We buy at the high of the day
with the big, white candlestick. The stop-loss is placed below the low-
est low of the small or big candlestick, whichever is lower.
The bearish engulf ing pattern often occurs at the end of an up-
trend. The sell signal is at the low of the long black candlestick. The
stop-loss is placed above the highest high of the small or big candle-
stick, whichever is higher.
Harami Pattern
The harami pattern is only an indication of a trend change at the end
of an uptrend or downtrend. Harami patterns do not have relevance in
sideways market conditions. Harami patterns always include two can-
dlesticks, which can be compared with inside days in the regular chart
analysis.
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
Figure 4.24
Bullish and bearish engulfing pattern.
c04.qxd 6/16/03 4:17 PM Page 79

---

80
•
APPLICATIONS OF TRADING STRATEGIES
unimportant whether the shadow of today’s small candlestick pattern
goes higher or lower than the shadow of the previous candlestick (see
Figure 4.25).
At the end of a downtrend, we get a buy signal if the high of the
candlestick with the big white body is broken. The stop-loss is placed
at the low of that particular day.
If the low of the candlestick with the big black body is broken, we
receive a sell signal at the end of an uptrend. The stop-loss is placed
at the high of that particular day.
Morning Star and Evening Star
Morning star and evening star are chart patterns that comprise three
candlesticks (see Figure 4.26).
The morning star pattern indicates an uptrend market move-
ment. We buy at the high of the right candlestick with the long white