Monday, 20 May 2013

Forex Tutorials Part 9 - Advanced Candlestick Patterns (3) Candlesticks

This tutorial, we are going to touch on interpreting 3 candlesticks indicators. The more candlesticks you have that show a possible uptrend, downtrend or reversal, the more confident you can be when you buy or sell in the market. With no further ado, lets move on to learning how to interpret 3 candlesticks in the market.

Evening And Morning Stars


You can usually find evening and morning stars at the end of a trend. They usually signal a possible reversal to a large extent. You can identify an evening or morning star through these signals:
  1. The first candlestick is a part of a recent trend (uptrend or downtrend)
  2. The second candlestick has a small body, indicating indecision in the market. The candlestick can be either bullish or bearish
  3. The third candlestick confirms that a reversal is in place. The third candlestick will usually close beyond the centre point of the first original candlestick that you used for identifying an evening or morning star
Three White Soldiers And Three Black Crows

 
Like the evening and morning stars, the three morning soldier and three black crows signal a downtrend or uptrend reversal respectively. This is one of the most accurate reversal patterns. This is especially true during a period of extended uptrend or downtrend or a short period of random opposing movements in the market.

In order for this indicator to be accurate, the 3 candlesticks must follow this rule:
  1. The first candlestick, also known as reversal candlestick ends the previous market trend or implies that the previous market trend is ending
  2. The second candlestick should be larger than the first candlestick, and should close at or near its high for a three white soldiers pattern and close at or near its low for a three black crows pattern
  3. Finally, the third candlestick should be at least the same size or bigger than the second candlestick and have a negligible shadow  
Do refer to the figure above on the application of analyzing a three white soldiers or three black crows pattern.

Three Inside Up And Down


The three inside up candlestick pattern is a trend-reversal pattern that is found at the bottom of a downtrend. It signals a possible end of a downtrend and that a new uptrend is coming. Do look for these signal for a possible three inside up pattern:
  • The first candlestick should be found at the bottom of a downtrend, and is characterised by a long bearish candlestick
  • The body of the second candlestick should be a green candlestick that is at least half of the first candlestick in its body
  • The third candlestick should close above the high of the first candlestick to confirm that buying pressure is stronger than selling pressure
In contrast, the three inside down candlestick pattern is a trend-reversal pattern that is found at the peak of an uptrend. It signals a possible end of an uptrend and that a new downtrend is coming. Do look for these signal for a possible three inside down pattern:
  • The first candlestick should be found at the peak of an uptrend, and is characterised by a long bullish candlestick
  • The body of the second candlestick should be a red candlestick that is at least half the length of the first candlestick
  • The third candlestick should close below the low of the first candlestick to confirm that selling pressure is stronger than buying pressure
Do take note of all these indicators and use it as a rough guide in your trading. Next lesson, I will post a complete summary sheet you can print out and use for your day to day trading in finding the candlestick patterns.

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