Education

Candlestick patterns that signal that a trend run is on

Five patterns to look for

Japanese
candlesticks are the building bricks of the market. It’s necessary to train
your eyes
to distinguish their patterns so that you can look beyond
the piles of price blocks and be able to read and foresee the movements of the
price.

Traders
often focus on reversal candlestick patterns, although continuation ones are
also worth considering. Here are some tips you may find useful.

Who needs continuation patterns?

Trend
traders do. Once you have embarked upon a trend, you want to stay in it, the
longer the better, but walk away when the market starts smelling of a reversal.
Continuation patterns reflect the natural periods of correction and
consolidation which take place during a trend. If you locate such pattern, you
will be able to join the trend. The important thing is to make sure that you
have the young trend that still has potential and not the aging one.

Continuation patterns you can track

There
are many various continuation patterns with more or less subtle features. We’ll
focus on those that are easier to make out and explain.

1)Marubozu

If you spotted a
candlestick with a sizeable body but without shadows at the breakout of a
support/resistance, it’s an indication that the market aims to continue moving
in the chosen direction and has momentum for it.

2) Windows

Notice
that a “gap” is called a “window” in the language of Japanese candlesticks. Japanese
approach involves trading in the direction of the window. Thus, a window during
an uptrend implies a further price rise. Windows also become support and resistance
areas. A retracement back to the window during a rally allows to consider
entering a buy trade.

3) Three
black crows/Tree white soldiers

A bearish
version of the pattern consists of 3 solid candlestick (black or red – whatever
your color scheme), more or less equal in size, each opening within the
previous candle’s body and closing below the closing price of the previous
candle. The pattern signals a healthy bearish market which has strength to
carry on.

4) Falling
three method/Rising three method

The
bearish continuation pattern involves a long bearish candlestick, then 2-3
small bullish or bearish candlesticks inside the range of the first candlestick
and the final bearish candlestick that makes a new low.

The
logic is that this structure is like a “flag” chart formation. The candlesticks
allow to have a close-up view of the price and act at a “micro” level. No
confirmation is needed upon the formation of this pattern.

5) A
series of 2-candlestick continuation patterns

Such
bearish patterns include on-neck, in-neck and thrusting. The key is that after
a bearish candlestick in a downtrend, there’s a gap (window) down. The bullish
candlestick that tries to close this gap, fails to close above the middle of
the first candlestick. The lower it closes, the stronger is the downtrend
continuation signal. For the uptrend, the similar situation is with separating
line pattern.

Additional tips

-Reversal
as continuation

The
absence of reversal patterns is itself a sign of a trend’s continuation. At the
same time, if some reversal patterns appear at the end of correction, they may
mean a resumption of the main trend.

-The
size of candlesticks is an invaluable source of information

Candlesticks
usually become smaller as the market is getting ready for a breakthrough. In a
strong trend, corrections and consolidations are small and the break will be in
the direction of a trend. If candlesticks which appear in a trend are extremely
big, a correction is very likely. Candlesticks of medium size signal
continuation of a trend. In an uptrend, the middle of a long bullish
candlestick will act as support.

-The
trend is the king

If
you see a continuation pattern formed during a correction, be cautious about
it. Use the continuation patterns which form within the main trend.

Remember
that there are no certain solutions in the market. The observation of
candlesticks helps to increase the probability of a good trade but doesn’t guarantee
it.

This
article was submitted by FBS

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