Trading with candlestick chart patterns (part 3)
Candlesticks offer an easy visualization of price movements that can flash an alert when the market has turned or is showing signs of turning.
Here are some further reversal patterns that are a little more complex and somewhat harder to spot:
Three White Soldiers
The Three White Soldiers is a multiple candlestick pattern that forms after a downtrend. The key feature is that each next bullish candle opens inside the body of the previous candlestick:
Three Black Crows
The opposite pattern is called the Three Black Crows. A period of strength is reversed and successively bearish candlestick form, indicating increasing downside pressure that is likely to continue to send the price lower:
Three Outside Up
The Three Outside Up is another multi-candlestick pattern that shows a strong bullish reversal is in effect. It is a confirmation of the reversal after an engulfing pattern covered in the first part of this series of articles.
The next candlestick shows a strong upside move, and a little wick is below the body.
Three Outside Down
It can happen on a reversal after a bearish engulfing pattern as well:
The Tweezer Bottom pattern is one of the most watched-for indications that the downtrend is reversing. It shows two consecutive candlesticks with the same low, which forms at the close of one bar and the opening of the next bar:
Its bearish counterpart is the Tweezer Top:
The Bullish Harami is another multiple candlestick pattern that indicates a bearish trend may be reversing. It forms when a small price increase is contained within the previous candle, which follows another bearish candlestick.
The Bearish Harami is the same process in the opposite direction, indicating a reversal from bullish to bearish.
Combining With Technical Indicators
While these reversal patterns can be helpful as a stand-alone trading signal, combining them with technical indicators is more likely to give a much richer understanding of how a trend is breaking down and potentially reversing. Indicators such as RSI, Stochastics, and Divergence measures are commonly used to judge the possible degree of reversal.
In addition, moving averages can also be combined with reversal patterns. For example, a trader may watch the 100-period moving average to ensure a long-term bullish trend remains during a bearish retracement before using the Bullish Harami as a signal to take a long position.