Multiple Candlestick Patterns Definition:
In multiple candlestick patterns, there are two or more candles to indicate the trading behavior of the stock. In this chapter, we will discuss the trading types of candlestick patterns in detail. In previous chapter, we knew about various single candlestick patterns including bullish marubozu, bearish marubozu, the spinning top and doji. There are various different types of multiple candlestick patterns that use several candles to portray the trading behavior. Let us understand multiple candlestick chart patterns starting with the engulfing patterns.
Technical Analysis: Types of Multiple Candlestick Patterns:
Here we will discuss about various types of multiple candlestick patterns with examples:
1. Engulfing Candlestick Pattern:
Definition: An engulfing pattern is the candlestick pattern that utilized two candles to indicate the trading behavior of two sessions. A typical engulfing pattern consists of two candles including a small candle to show the trading behavior of day one and a comparatively longer candle to show the trading behavior of day two. Let us understand about engulfing pattern firstly from one of the types of multiple candlestick patterns.
There are mainly types of engulfing patterns: candlestick bullish engulfing pattern and candlestick bearish engulfing pattern.
1.1 Bullish Engulfing Candlestick Pattern:
In a bullish engulfing pattern, the first candle is a bearish candle the second candle is a bullish candle. The bullish candle is relatively longer than the bearish candle and totally engulfs the real body of bearish candle. The bullish engulfing pattern occurs in the bottom of a trend, not in middle or top.
Unlike Spinning Top and Doji, which we learned in the previous chapter, the bullish engulfing pattern does not represent indecision in the market but a situation where control has shifted from sellers to buyers. The long body of the current candle that completely engulfs the body of the previous candle represents that buyers have not only taken over, but they have done it by force. As such, when this pattern is for a bearish trend in the market; is seen as a signal that the trend may be reversing.
There are some conditions where traders typically see a greater potential for reversal if:
- The longer the blue candlestick and smaller the black candle that precedes it, the greater the potential reversal.
- When the blue candle completely surrounds the black candle in front.
- When large volume is formed during the period when the blue candle.
In the above chart pattern formation, we can see the example of bullish engulfing candlestick pattern and example of bearish engulfing candlestick pattern in detail.
1.2 Bearish Engulfing Candlestick Pattern:
In a bearish engulfing pattern, the first candle is a bullish one and the second candle is a bearish one. The bearish candle is relatively longer than the bullish candle and totally engulfs the real body of bullish candle. Generally, the bearish engulfing pattern occurs in the top of a trend.
A bearish engulfing pattern is similar to a bullish engulfing pattern, but the colors or candles are exchanged. The bearish engulfing pattern when viewed in an uptrend is representative of a possible reversal of this trend. The pattern consists of a black and blue candle, where the last candle (black color) opens higher than the previous candle (blue candle) and closes below the opening of the previous candle. When this happens, the black candle in the current period completely engulfs the blue candle body for the previous day or session.
There are several instances where traders typically see a greater potential for reversal, this happens when:
- The longer the black candle color and smaller the blue candle that precedes it, the greater the potential reversal.
- When the black candle completely engulfs the blue candle in front.
- When large volume is formed during the period of the red candle.
2. Piercing Candlestick Pattern:
Definition: A piercing pattern isn’t much different than a bullish engulfing pattern. However, the difference is that in a piercing pattern, the bullish candle doesn’t engulf the bearish candle completely. The bullish candle may engulf more than half portion of a bearish candle but it doesn’t engulf the bearish candle completely.
This type of grouping of candles is part of the family patterns shift upward trend, which is expected following the identification of this pattern in a downtrend, prices turn upward. It is important to emphasize that the emergence of this pattern must be within a prolonged decline in prices, what we know as downtrend, if not, this pattern would be invalidated.
To identify more precisely a grouping such bullish candlestick character, we must be attentive to the formation of three candles through available will help us know a quick way to locate this shift in prices on a chart:
- The formation appears compulsion behind the development of a downtrend in prices generally.
- The appearance of the first candle will be clearly bearish nature; indeed the body is extensive due to the big drop in prices.
- The next candle would have an opening below the minimum shown by the first candle chart pattern, but the price is clearly turned upward reaching the second candle closing above the half of the previous range.
- Do not confuse this pattern with the pattern “bullish engulfing” candle, since the difference is that in this case not exceed ends of the body above the previous candle.
In the above chart pattern formation, we can see the example of bullish piercing candlestick pattern and example of dark cloud cover candlestick pattern in detail.
3. Dark Cloud Cover Candlestick Pattern:
Definition: The above named pattern is a “bearish reversal candlestick pattern”. We call it a bearish candlestick pattern, because it indicates a signal for the beginning of a downward movement. Means when a dark cloud cover is formed on the chart, it can be said that the price are much likely to go down. We call it a reversal candlestick pattern, because a dark cloud cover is formed at the top of an uptrend, or a few of the previous candlesticks may be bullish. When formed at the top of an uptrend, it shows the bulls’ exhaustion signal indicating an incoming bearish attack.
A dark cloud cover candlestick chart patterns has two candles. The first candle has to be a bullish candle, and the second one that is the main candle in this pattern, will be a bearish candle.
The second candle opens a little higher the closing price of the first candle. And then it goes all the way down, and closes little above the open price of the first candle.
4. Harami Candlestick Pattern:
Definition: In Japanese, Harami means pregnant. Here in a Harami pattern, two candles form a shape together that looks like a pregnant woman standing. A Harami candlestick chart patterns are formed by two candles together. The first is a large candle in direction of movement or trend. The second candle is against. Candles may have small shadow or having nothing of shadow. The second candle’s body must be within the body of the first candle. Although of the second candle’s body is smaller than the body of the first, its size should be larger than normal so that the harami has a good strength.
In the above chart pattern formation, we can see the example of bearish harami candlestick pattern, bullish engulfing pattern, bearish engulfing pattern, piercing pattern in detail.
4.1 Bullish Harami Candlestick Pattern:
A bullish harami pattern is a two-candle formation. More likely it is to be formed after a previous downward trend that suggests a change in trend to bullish. It must be formed in a downtrend where a large red candle body (closes below the opening) appears. The next candle body is blue (close above the opening) that is all contained within the body of the previous red candle including shadows.
In a bullish harami candlestick chart pattern, the first candle is red and the second candle is blue. The important thing is that the second candle is contained in the body of the first. A particular case is the Harami Cross, where the second candle is a doji.
4.2 Bearish Harami Candlestick Pattern:
A bearish Harami pattern is a formation of two candles that occurs after an uptrend, suggesting a change of bearish trend. It must be formed in an uptrend where a large blue candle body (closing above the opening) appears. The next candle is red body (closes below the opening) that is all content within the body of the previous blue candle including shadows.
In a bearish harami candlestick chart pattern, the first candle is blue and the second candle is red. The important thing is that the second candle is contained in the body of the first. A bearish harami gives important information about the market and signals a trader that it may an opportunity to start small trades.
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