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Trading With Candlestick Chart Patterns (part 4)

Nick Goold

As we have shown in the previous articles in this series, candlesticks are a quick visual representation of price movements that appear when the market has changed direction or is about to change.

However, candlestick patterns also detect when the market is continuing in the same direction after some consolidation has taken place. These are important for longer-term trend traders and useful for positioning stop-loss and profit-taking orders.

Doji

The doji is a trading pattern when the opening and closing prices are almost identical. This pattern makes a candlestick with a very small or nonexistent body and long upper and lower shadows, or "wicks."

The significance of a doji candlestick depends on its context within the price action. A doji can be a sign of a reversal but is more commonly a continuation of the current trend, depending on whether it appears after an uptrend or a downtrend. It can also signal a period of consolidation or uncertainty in the market.

Spinning Top

A Spinning Top formation is very similar to the Doji. In this case, though, there is more open and closing price variation. This price action is usually a continuation pattern, showing the price is likely to continue in the same direction as the difference between the open and close of the candlestick.

Rising Three Methods

The Rising Three Methods pattern is a bullish continuation pattern signaling the end of a period of consolidation where the upward trend is likely to push the price further higher.

Falling Three Methods

The same pattern in reverse, signaling a continuation of a downtrend, is called the Falling Three Methods.

Upside Tasuki Gap

Another bullish continuation pattern is the Upside Tasuki Gap, which consists of three candlesticks, with the first being a long upside candle, followed by a gap up (opening above the previous day's high because of some new information that came out when the market was closed, say over the weekend), and then a bearish candlestick that opens within the body of the previous candlestick and then closes above the midpoint of the first candle's midpoint.

The middle downside candlestick shows that bears attempted to push prices down, but the bulls regained control and pushed the price back up to stay within the body of the first candle. This pattern is often seen as a sign of bullish continuation, with traders looking to buy into the market as the attempt to reverse the price direction has failed.

Downside Tasuki Gap

Its bearish counterpart is the Downside Tasuki Gap, which is the same pattern in the opposite direction:

Using Continuation Patterns

The usefulness of candlestick continuation patterns lies in their ability to provide traders and investors with valuable information about the direction and strength of existing trends. By identifying these patterns, traders can make informed decisions about when to enter or exit positions and use them to set stop-loss orders to limit potential losses.

However, it is essential to note that candlestick continuation patterns are not infallible, and their effectiveness can vary depending on the market conditions and other factors. Therefore, traders should always use multiple technical analysis tools and indicators to confirm the signals provided by candlestick continuation patterns.

To use candlestick continuation patterns effectively, traders should have a solid understanding of technical analysis and market trends and access to reliable market data and trading platforms. They should also develop a trading strategy incorporating these patterns and be disciplined in their approach to trading to maximize their chances of success.