Discover How To Make Clearer Exit Decisions With These Advanced Patterns

Candlestick patterns can be used to identify when to buy a share as was covered in Candlestick patterns for professional traders. They can also be used when tracking your shares to identify possible points to sell the share at. The following candlestick patterns are common patterns that can be used to identify when to sell your shares.

Shooting Star

The shooting star has a small body with a long upper shadow at least two to three times longer than the main body. The colour of the pattern can be either red or green and the candle can be open or solid. The shooting star is one of the most common candlestick patterns that are found in the market and very reliable. The shooting star indicates that a share is likely to go down when seen after a strong rise in the share price.

The shooting star shows that the share price rose strongly early in the day to reach a new high level. At the top of the shadow the profit takers stepped in to sell the share back down, near to where it opened. This wave of selling has stalled the up trend and it is now time to consider selling.

Hanging Man

The hanging man looks the same as a hammer. The difference between the two patterns is dependent on their location. A hammer is found after a share price has been falling while a hanging man is seen after a share price has been rising. The hanging man consists of a small body with a long lower shadow which must be at least two to three times the length of the main body for the pattern to be considered legitimate.

The candle can be red or green, open or solid. The Hanging Man shows that there has been a large sell off of shares during the day and this may have exhausted the up trend. If the next day’s opening price is less than the Hanging Man day’s close, prices will usually fall. If the next day’s price opens even, or above, then prices will usually crab sideways.

Doji

The doji (pronounced doe -gee) is formed when the opening and closing price for the day are the same. The share price moved higher and/or lower during the day however the closing price was the same as the opening price. The colour of the doji can be either red or green. The doji is a reversal pattern, which signals a balance between supply and demand. Buyers cannot push the share higher and sellers cannot push the share lower indicating balance.

A reversal will occur if the sellers take over from the buyers after a strong up trend. Doji patterns appear many times and it is important to confirm the change in trend before acting on this pattern. If there are many doji present it signals the price is in balance and will crab sideways.

Bearish Doji Star

The bearish doji star is a combination of two candles. The first candle is open and green, the second candle gaps or jumps higher the next morning and the forms a doji. The interest in the share has been so strong that the share gapped higher at opening time however could not push higher during the day. This is a stronger signal than the doji on its own and is sometimes called an evening star. It is likely that the share price will drop after this signal.

Dark Cloud Cover

The dark cloud cover is formed by the combination of two candles. The first candle must be open and green followed by a solid red candle the next day. The second candle must gap up from yesterday’s close and then drop past the middle of yesterday’s green candle. This is a common and very reliable candlestick pattern.

Dark cloud cover regularly signals a reversal in the trend of the share when it is seen. In the market the second day’s candle completely ignores the fact that the share was rising yesterday and reverses the trend. The share gaps higher when the market opens and then heavy selling drives the share price back down to create the second candle.

Bearish Engulfing Pattern

The bearish engulfing pattern is formed by two candles. The first is an open green candle. The price then gaps higher to open above yesterday’s close. The second candle is solid and red and closes below yesterday’s open. Only the main body is important in this pattern, both upper and lower shadows are ignored. In the market this pattern indicates a complete reversal in trend.

Sellers have stepped in and sold the share off to close below where it started the previous day. This is an indication of a major shift in sentiment in the market and is a very reliable pattern when seen. For those using bar charts this pattern is referred to as an outside day.

Confirmation

The same rules apply to selling as to buying. All the patterns discussed indicate a possible trend reversal and confirmation of a change in trend should be found before buying or selling shares. In the case of seeing a shooting star after a strong rise a conditional buy order can be placed below the shooting star.

This means you will buy the share if it falls the next day. A more conservative strategy is to wait for the next candle to confirm the change in trend before placing a sell order. Be aware that a candlestick pattern in an uptrend does not always mean that the share is going down. It can often mean the share is going to rest for a few days or weeks before it continues to rise.

To confirm a change in trend consider the volume traded on the day of the candlestick pattern. If large volume has been traded it is more likely that the pattern will be significant, than if only a few shares are traded on that day. Candlestick patterns can often occur at support or resistance or near a trend line or channel line. These tools can be used to confirm the significance of a candle.

Finally the clearer the pattern the more likely it is that the share will reverse. If it is difficult to see the pattern or distinguish the validity of a pattern then it is far less likely to indicate a reversal than a pattern that is very clear and obvious.