Candlestick BeginnersBrief

8/16/2019 Candlestick BeginnersBrief

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Traders Reserve

Candlestick TradingStrategies Beginner's Brief


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An Introduction to Japanese Candlestick Technical Analysis

Introduction

As a form of technical analysis, a Japanese chart and candlestick pattern analysis can

benefit anyone who wants to have another tool at their disposal. This is a tool that willhelp sort out and control the constant disruptions and continued outside influences tostocks, futures, and Forex market analysis.

What does a Japanese chart offer that typicalWestern high-low bar charts do not? As faras the actual data displayed is concerned — nothing. Just like bar charts, JapaneseCandlestick charts display the open, high,low and close of a given period of time.

However, when it comes to visual recognitionof data, and the ability to see datarelationships and investor sentiment easier,candlesticks on a Japanese chart areexceptional.

Bar charts have little meaning by themselveswhereas candle charts combine them intogroups and use pattern analysis to determinethe probability of market movement.

This is possible because the psychological analysis of the investor or trader becomesan important factor. Japanese candlesticks reveal quick insight to the recent tradingpsychology and investor sentiment. After a small amount of practice and familiarization,Japanese candlesticks will likely become part of your technical analysis methods.

Japanese candlesticks offer a quick view into the current trading atmosphere andinvestor sentiment. Candlesticks study the effect of a given market and security.Japanese candlesticks are strictly about technical analysis, and as such are not always100% accurate because they measure the effect of market forces, including price,fundamentals and others. When used correctly, Candlesticks are a great tool that canhelp you determine potential market direction. Candlesticks quantify what the tradersare doing and thinking.

We cannot ignore the fact that prices are very often influenced by fear, greed, and hope.Some form of technical analysis must be used to analyze the changes in thesepsychological factors. Japanese candlesticks read the changes in the market’sdetermination of value, otherwise known as investor sentiment.


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Japanese candlesticks show the interaction between buyers and sellers, which isreflected in price movement. As such, Japanese chart provides insight into the financialmarkets that is not readily available with a bar chart. Candlesticks work best with stocks,commodities, and Forex.

This introduction to Japanese candlestick charting and technical analysis will alsoprovide information about the usefulness of Japanese candlestick patterns as atechnical analysis tool. All methods of technical analysis and all assumptions will beopen and visible.

You will learn the specifics of the most popular candlestick patterns, how to spot them,and what to do with them. While daily analysis is the most common, JapaneseCandlestick technical analysis can be used in any time frame, in any market. You willdiscover some differences in the Forex markets, as they don't have a specific closingand opening time during the week, since it is a 24-hour market.

Benefits of Candlesticks?Easy to Unders tand

Japanese Candlesticks visually provide a clear and easy to identify set of patterns thatare highly accurate in predicting market trends. Using Japanese Candlesticks, alongwith some basic Western technical analysis, you can easily begin to start seeingpatterns emerge in the market and start taking advantage.

Japanese candlestick charting doesn't take months or years to master. With practice,the patterns can be memorized in a few short weeks and you will begin to see thepatterns reveal themselves on the charts at a glance.

Early Reversals

While most charting methods are reactive in nature, Japanese Candlesticks can help toidentify early reversals of direction that may be missed on other chart methods. Thissets Candlesticks apart as predictive.

Proven Techniqu e for 250 years

Candlesticks are generally first attributed to a Japanese rice trader in the 1700s namedMunehisa Honma. Honma began trading in the rice market in 1750, in the city ofSakata. For this reason, you may often hear reference to “Sakata’s Methods” or“Sakata’s Rules”. Homma analyzed decades of rice prices, comparing them with yearlyweather conditions, and over time became a legend in the rice trading industry. It isfrom his methods of trading in the rice markets that candlesticks evolved into themethods currently used in Japan.


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Considering this, Japanese Candlestick analysis has been used in some form since themid-1700s, giving it a history of around 250 years.

Quickly A nalyze Any Market and Any Time Frame

With a Japanese candlestick chart and technical analysis, the patterns becominginstantly recognizable. You will no longer have to spend as much time analyzing asingle chart or market to have an understanding of the current price action and thegeneral likely trend. Japanese Candlesticks and a Japanese chart work in any marketover any time frame. Since it takes much less time to study a chart in candlestick formyou can cover more charts in less time.

What Are Japanese Candlesticks?

Candlesticks are an ancient form of predicting trends in trading markets.

A Japanese Candlestick chart is a price plotting technique that offers a quick and easy

method of identifying the price movement of a security.

Even though it’s been around for hundreds of years it's still hard to find anyone, exceptthe experts, who understand it well. Most traders use candlesticks for trend predictionsbecause it quickly shows the strength and action of the bulls and bears over the price ofa security.

There are two primary ways to use Japanese Candlesticks. The first way is to read thedata in an individual candlestick. The second method is a pattern identification processof using Japanese candlesticks in particular combinations. Both methods provide usefulinformation to the trader.

Japanese candlestick charting is easy. It doesn't involve complicated formulas orextensive calculations to master the method. It is also powerful and accurate. Usedalongside other market indicators you can build a method that works for you and whichcan help you to be successful.

Will you profit on every trade? No. Japanese Candlesticks, however, can help youbecome successful and profit more frequently because, when read correctly, Japanesecandlesticks will show you investor sentiment for any given market.


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Bodies Wicks and Shadows

How To Read A Japanese Candlestick

While bar charts are useful, Candlestick charts are much more visual and therefore it iseasier to spot patterns within the charts. Both types of charts provide the same

information; open, close, high and low prices. But the Candlestick chart creates a boxbetween the open and close values, visually reducing possible rare extremes to theprices. In other words, the box (or body) formed between the open and close is wherethe real price action occurs, whereas the prices outside the box (the highs and lows) areconsidered fluctuations in the price with less significance.

Candlesticks display the high, low, open, and close for a given security or market. It isdifferent from a bar chart in that a narrow line - called the shadow or wick - shows theday's price range. This is the high and the low price of the day. Last, there is a body,which is called the "Real Body", which shows the actual range of pricing from the opento close prices.

Candlesticks are formed using the open, high, low and close prices of the time period:

A market price closing higher than where it opened will produce a hollow - or white -candle.

A market price closing lower than where it opened creates a solid - or black - candle.

A wide body - or box - marks the area between the open and the close, referred to asthe Body or Real Body.

The thin lines poking above and below the body display the high or low range and arecalled wicks or shadows.

The top of the upper wick/shadow is the “high”.

The bottom of the lower wick/shadow is the “low”.


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The best way to explain is by using a picture:

In reality, it doesn’t matter what colors you choose for your charts. You could use thecolor red for the Bear candle - meaning price went down - and green for the Bull candle- meaning price went up. Whatever you choose to use, it gives a dramatic visualindication of the day's market price movement.

Candlestick trend analysis is easy to use, thus great for beginners, but powerful andaccurate; that's why even the professionals use them often.

The signals and patterns are easy to see. Memorizing the Japanese Candlesticksnames and descriptions of the candlestick trading formations is not necessary forsuccessful trading. The patterns are what are important.

Fortunately, out of the many, many patterns available, there are only about a dozenmajor patterns that you need to know.


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Basic (One Candle) Candlesticks

Hammer (bullish)The Bullish Hammer Pattern is a single candlestickpattern. It is similar to the Bullish Dragonfly Doji Pattern,as they both have long lower wicks. However, the BullishHammer Pattern has a small real body at the upper endof the trading range instead of a flat line. The oppositesignal is the Hanging Man

The Hammer signal is an important signal, even if it is aweak signal. It is very easy to spot since it really does

look like a hammer. The body is fairly square, there is little or no wick on top, and thelower shadow should be at least twice the length of the body.

The Hammer is a single candle. At the bottom of a downtrend, the trade opens near or

slightly below the previous day's close, drops down during the day to some value, andcloses slightly above or below the open. This is an indication that the buyers arestepping in and that it may be the beginning of a price reversal.

If the close is higher than the open, this is a slightly stronger indication of a reversalthan if the close is lower than the open. To be sure, it is wise to wait another day tomake sure the trend has really reversed.

Identification:

Market: Hammers are best identified in a Downtrend Candle: Short to Medium Body. Color is irrelevant, but white has more bullish

implications. The real body is at the top end of the trading range. The lower shadow must be at least two times the length of the body. There should be little or no upper wick.

Potential Signal Strengtheners:

The longer the lower shadow, the higher probability of a reversal. The shorter the upper wick, the higher probability of a reversal.

The smaller the body, the higher probability of a reversal. While a white body is slightly stronger, it is not required to signal the reversal. A gap below the previous candle’s close indicates a stronger reversal if the following

day after the Hammer opens higher. Large volume trading on the Hammer day indicates that the reversal may be

occurring.


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Variations:

Single candlesticks rarely have any variations, however, if thebody of the Hammer is extremely small it becomes a Doji

Confirmation:

While the Hammer is a potentially strong bullish reversal signal, it should have someconfirmation that it is a true reversal and not just consolidating. A reasonableconfirmation would be a white candle the next period, where the low does not dropbelow the body of the Hammer candlestick.

General Analysis and Investor Sentiment:

The market trend was on its way down. The price opens and moves down as investorsentiment is still in sell mode. The buyers step in and start pushing the price back up,thinking they have hit the low end and it’s time to buy. The price moves back up to thetop of the trade range, closing either slightly below or slightly above the opening. Thisshows the sellers could not maintain control and the downtrend is slowing down orending. The upward rally of the price starts the sellers thinking that the decline is over. Ifthe next day opens higher, this indicates the sellers have given control back to the

buyers, and the reversal is likely to be continued.


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Chart Example(s):

In this daily chart of XLE, we can see the distinctive Hammer formation on July 1, 2010.This Hammer formed after a strong pullback and downward trend over a 2 week period.

Afterwards, the price steadily rose, returning to prices shown before the originaldownward trend prior to the Hammer. Following that trend up, assuming entry above theHammer:

We can see that this move would have been good for around a 10% gain in just over amonth. Notice the Dragonfly Doji, followed by the Doji, near the end of the upswing. This

indicates strong indecision in the trend, and a potential drop in price. At this point, caremust be given as to how to handle the trade. Longs should take steps to protect theirpositions. With the strong indecision, potentially near resistance, taking the profit andgetting out is never wrong.


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Afterwards, notice the decline, followed by another Hammer candlestick.

Let’s see what happens here:

In this particular case, XLE made a consistent and dramatic rise following the Hammer.Using good money management and trading techniques, this move would have gainedanother 30% over the course of 6 months.

Candlestick Combination:

None


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Trading Technique(s):

A Hammer appearing near support may be more likely to indicate a true reversal. Let’stake a look at a weekly chart of JPMorgan Chase:

You can see a fairly strong downward trend during 2005. During that move, supportnear 33.25 was tested three times, with the third time showing a strong Hammerpattern. The two weeks just prior to the Hammer also showed patterns very close toHammers. With this Hammer occurring right at a line of support, and using the following

candlestick as confirmation, a long position would have had excellent results. Inaddition, placing a stop loss directly below the low of the Hammer would have protectedagainst a turn against the reversal. As you can see, the risk/reward ratio was veryfavorable.


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Shooting Star (bearish)The Shooting Star Signal is a one candle patternappearing in an uptrend. The Shooting Star warns of a

potential top of an uptrend, however it is not a majorreversal signal. The opposite signal is an InvertedHammer.

Ideally, a Shooting Star should gap up from the priorcandlestick, but it isn’t necessary to do so.

The shadow (or tail) should be at least two times thelength of the body. This shows an inability of the bulls tomaintain control, and is potentially slipping as the Bears

take over. If the shadow is too short, it loses the strength of a Shooting Star and just

becomes a short day with little significance.

The color of the body is not important, although a black body has slightly more Bearishimplications. A black body would show that the Bears had more control by the end ofthe day than the Bulls did.

Identification:

Market: Uptrend. Candle: Short to Medium Body. The real body is at the lower end of the trading

range. The color of the body is not important although a black body should haveslightly more bearish implications. Ideally, a gap up from the previous candle ispreferred.

The upper wick should be at least two times the length of the body. There should be very little or no lower shadow.


The longer the upper shadow, the higher the potential of a reversal occurring. An opening gap up from the previous candle’s close sets up for a stronger reversal

move provided the day after the Shooting Star signal opens lower. Larger volume on the Shooting Star day increases the probability that a sell-off day

has occurred and a reversal is possible. If the upper shadow is near resistance levels, this increases the likelihood of a

reversal occurring.


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Variations:

One variation on the Shooting Star could be if the price closed at orextremely near the opening. This would result in a Gravestone Doji,which is also a bearish indication when seen at the top of a trend,especially near resistance levels.

Confirmation:

Further confirmation is required to indicate a reversal signal. The following dayneeds to confirm the Shooting Star signal with a black candle or even better, a gapdown with a lower close.


After a strong uptrend the Bulls appear to still be in control with price opening higher,but by the end of the day the Bears step in and take the price back down to the lowerend of the trading range, creating a small body for the day. After a gap up, with the pricereturning near its open after a strong push up, investor sentiment begins to turn bearish.

The long upper shadow represents that the Bears had started shorting at these levels.Even if the Bulls may have been able to keep the price positive by the end of the bar (asseen with a white candlestick), the Bears made a good showing. Lower trading the nextday reinforces the probability of a reversal.


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Chart Example(s):

Here is a good example of two Shooting Stars. In the first Shooting Star, it wasconfirmed with a gap down and black candle following it. After a couple of weeks, wesaw a rise back up almost to the original level. Then we see another Shooting Star, andthe price once again fell, giving potential to get gains on short positions, or at the veryleast it is warning us to protect long positions. Below, another prime example of aShooting Star, confirmed, with a definitive downward trend afterward.


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Since the Shooting Star is a single candle pattern, there is no candlestick combination.However, if we include the previous candlestick, we can see why confirmation isdesired:

By looking at the previous candlestick and combining itwith the Shooting Star, we can see that the resultingcombination still shows a potentially bullish period.

Another black candlestick following the star, especially if itcloses below the open of the candlestick prior to theShooting Star, may be confirmation of the reversal.


The upper shadow of a Shooting Star could be used to help determine a resistancelevel. Since the Bulls were unable to push the price up any further, and the Bearspushed it back down, it is reasonable to assume that the upper shadow may show uswhere the upper price limit is for the security. Taking our example from Sprint again:

If we were to enter a short position after confirmation of the first Shooting Star, we coulduse the upper shadow as potential resistance, setting our stop loss just above the top ofthat shadow (above the high for the day). Even when the price rallied a few weeks later,we can see that it never broke through our potential resistance zone. Indeed, thesecond Shooting Star upper shadow remained below our stop loss, and continued thedownward push afterward.


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In the following chart, we see a potential Shooting Star that has formed at the top of areasonably strong upward trend:

This could be telling us to think about protecting any long positions we might have. If thereversal hits, we would want to capture as much of the profits as we can. In thisparticular case, it might be prudent to move any long position stops just below theprevious candlestick low:


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While this may look like a perfect opportunity to capitalize on an impending reversal andtake some short positions, here is what happened:

As we see, this Shooting Star occurred right after a break through recent resistance.While it could be a false break out, it could also easily continue to the upside, which isexactly what happened. The Shooting Star would have been a confirmed reversal if thenext day had closed down, especially if it had filled the gap and taken out the previouscandle stick. Since it didn’t, it would not have been a good time to take short positions. Inthis case, the Shooting Star was most likely just a short term consolidation after thebreakthrough of resistance.

Checking different time frames will usually provide additional information to help indetermining signal validity.


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Take this example of EQT Corporation:

We see what might be considered a Shooting Star (5) following the recent uptrend (4).Prior to that, there was a downtrend (1), with a gap down (2), then a good size one daydrop (3). Can you spot the problems with using this Shooting Star candlestick forpredicting direction?

First, the body of the Shooting Star candlestick is right at the level of resistance/support.The question is, which side is it on? In this case, it is almost impossible to tell.

Second, the upper shadow of the Shooting Star is much too large. While the uppershadow should be at least twice as long as the real body, this particular shadow is morethan 14 times the size of the real body. This indicates something much more going onthan a change in investor sentiment and a potential reversal.


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Finally, let’s take a look at a shorter time frame, to see how that Shooting Star wasgenerated:

This is a 1 minute chart of the Shooting Star day. We can see that the entire range oftrading that day, the high and the low, was done in the first 2 minutes after open. If weignore the first 2 minutes of the day, we would see the candlestick resolve like this:

This is still a potentially bearish indication, but much less so than a true Shooting Star.


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And if we ignore the first hour of the day:

Again, this may still be considered bearish, but is even less predictable of a potentialreversal. Indeed, it appears as if there was a significant jump in price during afterhourstrading. The market opened, and the price spiked, then began to consolidate. By theend of the day, the price started to continue to move up. While it closed down from theopen, I would suggest that the upward trend will likely continue.

The lesson here is that we can’t believe everything we see. Sometimes we have to divedeeper to see the whole truth. The killer Shooting Star that we saw on the daily chartwas due to a 2 minute opening volatile spiking, which did produce the Shooting Starcandlestick, for the wrong reasons.


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Inverted Hammer (bullish)The Inverted Hammer is similar to a Hammer as it appears ina downtrend and implies a weakening or reversal of trend.This is a very weak signal and not much significance is placedon it, unless it is followed by a confirming candlestick.

The upper shadow should be at least two times the length ofa small body. The real body is at the lower end of the tradingrange. There should be no lower shadow or a very small lower

shadow.

Identification:

Market: Downtrend. Candle: Short to Medium Body. The real body is at the lower end of the trading

range. The color of the body is not important, although a white body should haveslightly more bullish implications.

The upper wick should be at least two times the length of the body. There should be no lower shadow, or a very small lower shadow.


The longer the upper shadow, the higher the potential of a reversal occurring. A gap down from the previous day's close sets up for a stronger reversal move

provided the day after the Inverted Hammer signal opens higher. Larger volume on the Inverted Hammer day increases the probability that a sell-off

day has occurred and a reversal is possible.

Variations:

One variation on the Inverted Hammer could be if the price closed ator extremely near the opening. This would result in a Gravestone Doji,which would indicate even less potential for a reversal.

Confirmation:

Further confirmation is required to indicate a reversal signal. The following dayneeds to confirm the Inverted Hammer signal with a white candle or even better, agap up with a higher close.

Because the closing price is near or at the low for the day, confirmation is important.The reason is because the price action that creates the Inverted Hammer is still verybearish in reality. It shows that while the Bulls tried to rally the price, they could not


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maintain it and it fell by the end of the period, clearly in control of the Bears. If thefollowing day is bullish, that may confirm the action.


The market trend was on its way down. Investor sentiment is bearish. The price opensand starts to trade higher. The Bulls have started buying at the low prices but cannottake control. By the end of the period, the Bears keep the price down to the lower end ofthe trading range.

If the price remains strong after the Inverted Hammer day, the reversal may beconfirmed.

Chart Example(s):

Here was a steady downward trend prior to a good gap down which looks like it createdan Inverted Hammer candlestick. However, the upper shadow is not at least twice aslong as the body, but we can keep an eye on it anyway. The day following confirmed thepotential upward move and as we see, it has slowly continued up over the next week.Even though it was not quite an Inverted Hammer, it still gave us some potential upwardgain.

In this particular case, the downward move was weak and small, and while the signallooks like an inverted hammer, it fails to provide the long upper shadow. Even thoughthe price did move back upward after that candlestick, it appears to just be filling the


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gap, and the upward momentum stopped into the bearish channel that was created justbefore.

On WLK we see a clear downward trend approaching support levels. An InvertedHammer appears which is confirmed the following day with a strong white candle.

On this chart from General Electric, we can clearly see the Inverted Hammer at the endof a nice downward trend. This is an excellent example of an Inverted Hammer, even ifthe upper shadow is perhaps a little too long. Notice how the bottom of the InvertedHammer is slightly below the large black candlestick from the day before. This showsthe Bulls are now coming into power as the Bears falter.


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Since the Inverted Hammer is a single candlestick pattern, there is no candlestickcombination. However, if we include the previous candlestick, we can see whyconfirmation is desired:

By looking at the previous candlestick and combining itwith the Inverted Hammer, we can see that the resultingcombination still shows a potentially bearish period.

Another white candlestick following the star, especially if itcloses above the open of the candlestick prior to theInverted Hammer, may be confirmation of the reversal.

Trading Technique(s):Since the Inverted Hammer is such a weak signal, there are no trading techniques untilconfirmation is made. However, we should think about protecting any short positions wemay be holding, and there may be a possible long position we could enter. Let’s takethe example of General Electric we saw earlier:

This Inverted Hammer could be telling us one of two things.

First, it could be signaling the end of the recent downward move, and anybody holdingshort positions may want to consider protecting their profits by entering a stop lossabove the shadow of the Inverted Hammer candlestick. Should the trend reverse, shortswould get stopped out without having risked the profits they generated on the downwardmove.


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Second, it gives a possible signal to a reversal much sooner than many traders mightsee, which would give an opportunity to actually get into a long position at the bottom ofa new upward trend. In this case, a long position could be entered almost immediatelyfollowing the Inverted Hammer, with relatively little loss potential:

1) For short positions, a stop loss could be entered just above the long uppershadow of the Inverted Hammer. If the trend should continue down, the trade isstill active and the profit potential is not affected. However, if the trend shouldreverse, as it did here, the protective stop loss keeps the trade in the profit range,preventing the loss of profit, or even a potential loss on the trade overall.

2) At this point, the day did trade above the potential stop loss, closing out thetrade. The next couple of days the price did track back down, but then the majorupward move continued, verifying the reversal. Anybody short on this stockwould gladly take the profit from the stop loss rather than losing it all on the newpush up.

3) For potential new long positions, entry could be made at open the following day,with a stop loss placed just below the bottom of the Inverted Hammer. Notice thefollowing day gapped up, and finished out the day recovering most of the dropfrom the day before the Inverted Hammer. Even if the price had continued thedownward move after the Inverted Hammer, the loss would have been veryminor, and the potential gain was quite large. With such a large risk/reward ratio,this could be a trade not to pass up. However, if we saw this in the middle of arange instead of near/slightly below recent support, the trade may not be asagreeable.


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Hanging Man (Bearish)

Another very strong single candle indicator is the Hanging Man. It is verysimilar to the Hammer, but at the top end of an uptrend. If you see thecorrect indication of the Hanging Man signal, your probability of being on the

right side of a trade increases dramatically.

The Hanging Man is a single candle. It is identified because it looks like anunfinished game of Hangman at the top of an upward trend. It has a smallbody at the top of the trading range, with the lower shadow being at least twotimes greater than the body length.

Identification:

Market: Uptrend. Candle: Short to Medium Body. The real body is at the upper end of the trading

range. The color of the body is not important, although a black body should haveslightly more bearish implications.

The lower shadow should be at least two times the length of the body. There should be little or no upper wick.


The longer the lower shadow, the higher probability of a reversal. A gap above the previous day’s close indicates a stronger reversal , if the period

following the Hanging Man opens lower. Large volume trading on the Hammer candlestick indicates that the reversal is

occurring.

Variations:

One variation on the Hanging Man could be if the price closed at orextremely near the opening. This would result in a Error!Reference source not found. , which would indicate even lesslikelihood for a reversal.


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Confirmation:

Further confirmation is required to indicate a reversal signal. The following dayneeds to confirm the Hanging Man signal with a black candlestick or even better, agap down with a lower close.

Because the closing price is near or at the high for the day, confirmation is extremelyimportant. The reason is because the price action that creates the Hanging Man is stillvery bullish in reality. It shows that while the Bears tried to turn the price, they could notmaintain it and it rose by the end of the period, clearly in control by the Bulls. If thefollowing day is bearish, that may confirm the action. It is preferable to see a blackcandle that closes well into the lower shadow of the Hanging Man, if not below.


The market trend was on its way up. The price opens higher than the previous timeperiod but starts to move lower. This indicates that the buyers have topped out of themarket. The sellers move the price lower, but the buyers step in and the price movesback up to close in the higher end of the trading range. This creates a small body and along tail. Even though the buyers have pushed the price back up, this indicates strongactivity from the sellers which implies that investor sentiment is changing. If the next dayshows a lower open, or a black candle by close, this reinforces that sellers are takingcontrol and a reversal is very likely or has begun.

This is an especially good indicator if the market is overbought, at the top of an uptrendor near strong resistance levels, and provides the information necessary for interpreting

the reversal.


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Chart Example(s):

Here we see a Hanging Man signal at the top of a trend. In addition, it happens to benear recent resistance. As shown, following the Hanging Man, the Bears wrestledcontrol from the Bulls and the price dropped over the following week or two, potentiallygaining traders a profit of around 10%.

While not the best of the “ideal” Hanging Man signals, we can see one here followingsome choppy prices. The first two are more like Dragonfly Doji candlesticks, which are avariation of the Hanging Man. Then, following a long white candlestick, we see a goodHanging Man candle, which was then followed by a gap down, and a downward move.


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In the second group, we see what appears to be a good Hanging Man signal at the topof a solid upward trend. The next candlestick confirms the Hanging Man, but as we see,the price actually retraced back up to its prior high levels. Candlestick Patterns will showprobabilities of a trend or direction, but as with almost anything else, there are noguarantees.


Since the Hanging Man is a single candlestick pattern, there is no candlestickcombination. However, if we include the previous candlestick, we can see whyconfirmation is desired:

By looking at the previous candlestick and combining it withthe Hanging Man, we can see that the resulting combinationstill shows a potentially bullish period. Another blackcandlestick following the Hanging Man, especially if it closesbelow the low of the candlestick prior to the Hanging Man,may be confirmation of the reversal.


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You can use the top of the Hanging Man as a potential resistance point, placing a stoploss just above the high for the period. Since the Hanging man should be at the top of atrend, if it is a true reversal indication, it should not hit the stop. If it does, it should be aminimal loss.

Notice the price did temporarily move above the top of the Hanging Man candlestick.However, extending a line out from the top of the prior peak (i.e. a potential point ofresistance), we would see that it didn’t break that level prior to dropping down. Whendetermining stop losses for a short trade off of a Hanging Man, it is wise to consider

such things like areas of resistance.


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Copyright © 2011 by Traders Reserve. All rights reserved. Printed in the United Statesof America. Except as permitted under the United States Copyright Act of 1976, no partof this publication may be reproduced or distributed in any form or by any means, orstored in a data base or retrieval system, without the prior written permission of theauthor.

This publication is designed to provide accurate and authoritative information in regardto the subject matter covered. It is sold with the understanding that neither the authornor the publisher is engaged in rendering legal, accounting, or other professionalservice. If legal advice or other expert assistance is required, the services of acompetent professional person should be sought.

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