The 3 Most Reliable Candlestick Patterns for Trading in the Financial Markets
The objective of a candlestick pattern is to identify the underlying market trend within the pattern. This will include the highs, lows and the opens and closes, especially relative to the previous candlesticks.
Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at prices, they don't involve any calculations. When a candlestick attempts new highs and fails to close at those highs you can get some clues as to who’s in charge at the moment, the bulls or the bears. There are single candlestick clues, as well as 2, 3 and even 4 candlestick patterns that will reveal a lot about who’s in charge.
When applying a pattern to a Chart, you need to input the Trend Strength. The input value for the Trend Strength specifies the number of bars required to define a trend when a pattern requires a prevailing trend. A value of zero will disable trend requirement. Since many candlesticks define a reversal in the market, we use the Indicator Swing to identify whether we have bull or a bear trend before the pattern occurs.
After applying one or more patterns to a strategy, you can combine these patterns with some specific indicators to identifying short term market tops and bottoms as well as some very specific entry and exit points.
This document/section describes briefly about what are believed to be the 3 most reliable reversal candlestick patterns used by some of the world's top traders. Well, these three patterns are commonly seen and available under the eyes of every trader, but only a few well trained investors are able to spot them at first sight and make good valuable use of them.
Some forex/stock trainers & mentors actually “sell” by teaching these patterns to their students in exchange for thousands of pounds/dollars or equivalent currencies and wave their flag by stating that it is their “secret method” for being successful traders.
You can save thousands in attending paid for courses and start being successful straight away just by applying the technique of being able to spot the following three candlestick patterns:
Cup and Handle Pattern in Financial Markets Trading – #1 Reliability !
This pattern is one of the strongest patterns we have ever seen. This pattern does not form on the charts too often, because unlike the other patterns it needs a long time to form. However, when it forms and you are lucky to spot it it turns to be very relaible and and generates strong and profitable trade setups.
This patterns looks exactly as it is named. It looks like a cup and its handle when you look at it from the side.
There is a well-known rule about the handle which says: if the price breaks above the handle resistance, it will keep on going up strongly. This up movement can be at least the same as the size of the cup depth. You have to wait for the handle to develop. It will have a resistance and probably a support.
Inverted cup and handle is as common as the regular one. It looks exactly the same, but it is just inverted. With inverted cup and handle, we wait for support breakout to go short.
Head and Shoulders Pattern in Financial Markets Trading –#2 Reliability !
The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends. It is also most reliable when found in an uptrend as well.
Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance. Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.) Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again.
Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline. (Volume has a greater importance in the head and shoulders pattern in comparison to other patterns. Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves.) New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline.
These patterns are found frequently, and these are very profitable chart patterns to trade.
One thing we should remember that, it is not necessary to form exactly similar high or similar low in case of a double top and double bottom pattern respectively. Sometimes double top patterns found with a lower high point and double bottom pattern with a higher low point.
If you get a higher high then it is not double top pattern. Inversely, if you get a lower low then it is not a double bottom pattern. A double top pattern would consist two high points, one similar or lower than the previous one. A double bottom consists two low points one similar or higher than the previous one.
Now, here is the trading strategy to trade double top and double bottom chart patterns.
What are the details that I should pay attention to in the head and shoulders top ?
This is a reversal pattern which marks the transition from an uptrend in prices to a downtrend or vice-versa.
There are certain characteristics that experts like to see in the pattern:
Symmetry - The right and left shoulders should peak at approximately the same price level. In addition, the shoulders are often about the same distance from the head. In other words, there should be about the same amount of time between the development of the top of the left shoulder and the head as between the head and the top of the right shoulder. In the real world, the formation will seldom be perfectly symmetrical. Sometimes one shoulder will be higher than the other or take more time to develop. Experts warn, however, that if a shoulder reaches the level of the head, you're no longer looking at a head and shoulders top.
Volume - The importance of volume should be highest on the left shoulder, lowest on the right shoulder and somewhere in between on the head. The real tip-off in this formation occurs when activity fails to rally on the right shoulder.
Duration of the Pattern - Some experts say that an average pattern takes at least three months from start to the breakout point when the neckline is broken. It is not uncommon, however, for a pattern to last up to six months. The duration of the pattern is sometimes called the "width" of the pattern.
Slope of the Neckline - The neckline can slope up or down. The direction of the slope tends to predict the severity of the price decline. An upward sloping neckline is considered to be more bullish than a downward sloping one, which indicates a weaker situation with more drastic price declines. However, as noted above it is rather rare to have a downward sloping neckline for this pattern.
Decisive Neckline Break - To be complete, the neckline must be decisively broken. If the support at the neckline holds - if price bounces around the neckline or fails to move below the neckline - this is a sign that the reversal pattern has failed. If the pattern fails to decisively break through the neckline, prices will often move higher as the rally continues.
The above three patterns are a "Must" in the knowledge of any serious committed trader in the financial markets; Three silent and reliable partners for extremely successful trading, if applied correctly.