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How to Read Candlestick Patterns. Engulfing. Clouds. Sandwich. Harami.

6:10 AM Jul 24, 2020
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Forex trading

Some of the best technical analysis signals are based on specific Japanese candlesticks or a combination of them. This is the third article where we talk about such patterns. For the sake of completeness, I'll tell you about a few more useful candlestick combinations.

Engulfing

Another popular pattern that signals a market reversal that consists of two opposite candles and is of two types:

  1. Bullish engulfing has a bearish bar and a larger bullish bar. In this case, an upward candlestick completely covers the previous downward one. That is, the open and close prices of the ascending candle are located below and above the close and open prices of the descending candle respectively. When the pattern is located after a downtrend it signals a reversal to the upside.
  2. Bearish. This pattern is completely opposite to the previous one. It also consists of two candles but here the descending bar overlaps the ascending one. The bearish engulfing appears after the uptrend and indicates further development of the bearish sentiment.

Examples of Engulfing

The candlestick sizes in this pattern can vary. Unless the first bar is a Doji which is too easy to engulf. However, the higher the difference between the two candles the stronger the signal.

Search for this pattern around main price levels. Make sure to confirm the signal with an additional indicator of your choice and with the closure of the next candle. The larger the size of the next candle, the greater the chances for the continuation of the pullback.

Dark Cloud Cover and Piercing Line

These two patterns also signal a possible market reversal:

  1. The Dark Cloud Cover appears around the resistance and signals further price decline. The pattern can form after an upward or sideways movement. Consists of a descending candle with a large body and a descending candle. The second bar should open above the close price of the first bar. It should close somewhere between the open price and the middle of the previous candlestick. Moreover, the closer the second bar closes to the open price of the last bar, the stronger the signal. You can open a short trade immediately after the pattern is formed.
  2. The Piercing Line signals the transition of the bearish to the bullish trend. It is completely opposite to the previous pattern. Appears in the area of ​​support of the downtrend. Consists of two candles. The bullish bar open price is below the bearish close price. In this case, the candlestick must go beyond the middle of the previous bar.

Examples of Dark Cloud Cover and Piercing Line

Sandwich

Quite a rare pattern but it’s easy to spot it on the chart. It consists of three bars:

  1. In a bullish sandwich, a downward candle is between two upward ones. The pattern appears after a price drop and signals its further growth.
  2. In a bearish pattern, two descending candles surround the ascending one. The signal indicates a change in the bullish trend to the bearish one.

Example of Sandwich

The pattern will be complete if the middle candlestick is smaller than the other two bars.

Harami and Harami Cross

In Japanese, Harami means “pregnant”. It is called that way as it has two candles. The first one has a large body (this is the “mother”), and the second one is small (this is the “child”). The pattern resembles an engulfing, but in this case, the bar with a shorter body is in second place.

Harami Examples

If you find a harami on the chart, it means that the previous trend has come to an end. In this pattern, the colors of the candles don’t matter. They are not even always (but most often) opposite.

If harami appears around the resistance line, then the market will turn to the downside. If the pattern has formed around the support, the chart will turn up.

The smaller the body of the second candlestick, the stronger the pattern’s signal. If the second bar is a Doji, this indicates extreme indecision in the market. The trend is likely to reverse in the opposite direction. Harami with Doji forms the harami cross.

Belt Hold

Another rather rare but powerful reversal signal. There are two types as well:

  1. Bullish - an upward candlestick without a lower shadow with an open price at the low for a specified period.
  2. Bearish - a downward candlestick without an upper shadow with an open at the high for a specified period.

Belt Hold Examples

The absence of shadows indicates that the participants in the previous trend have stopped fighting and soon the market will move in the opposite direction.

In Addition

In the end, I would like to tell you about a few more patterns that can help you in your technical analysis.

Examples of Additional Patterns

  • Marubozu - Bullish or bearish candlestick with no shadows at all. It can signal both the continuation of the current trend and its change. It all depends on the type of marubozu.
  • Three Black Crows - Three consecutive bearish candlesticks. Their closing prices are lower than the previous ones while their opening prices are within the previous bars. The pattern indicates a possible beginning of a downtrend.
  • Upside Gap Two Crows - The pattern is similar to the engulfing, however, both candles are downward. The signal forecasts the formation of a bearish trend.

These are all the patterns I wanted to tell you about. Of course, there are additional models but in these articles, you’ve learned about the main ones. Try to find patterns even on old charts for practice. This way you can easily start to notice them in the live market and increase your success rate. Good luck with trading!

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terms Stop Loss news trading economical calendar major news release currency pair currency rate national currency trading journal trades profit/loss emotions news release positions size Expert Advisors platform trading robot cryptocurrency volatility day trading position size lot account types cent accounts Mini account ECN Copytrade ECN accounts swap-free minimum deposit order execution liquidity providers demo accounts real account low-risk trading EUR/USD economic calendar majors cross-currencies exotic currencies base currency quote currency quotes bid ask Brexit United Kingdom European Union GBP Euro GDP WTO price levels moving average 4-hour chart 1-hour chart bulls bears false breakout cross-currency USD price action pin bar trading inside bar trading hands off breakeven stop loss 50% stop loss pin bar high-frequency trading position trading swings breakout strategy trading style Entry order Take Profit hammer shooting star inside bar pinocchio bar head and shoulders harami risk 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