Japanese Candlesticks Part Two— Double Candlestick Patterns
Engulfing candlestick pattern
An engulfing candlestick pattern is considered to be a possible indicator for a trend reversal. Depending on the order of candles, it can either indicate a bullish or a bearish trend reversal. No matter the order though, in an engulfing pattern the first candle’s body can never overtake the second candle with its body in either direction. The wicks of the candles are not being taken into consideration in these patterns, but they do indicate where to set stop losses and take profits.
The bearish engulfing is a candlestick pattern that indicates a bearish reversal after an uptrend. It can be identified by a bullish closing of the first candle, while the second candle’s body completely covers the body of the first bullish candle.
While the first candle indicates that buyers were in control, the second candle shows that selling pressure closed the candle below its opening price.
The bullish engulfing pattern indicates a bullish reversal after a downtrend. It can be identified by a bearish closing of the first candle and the second candle’s body at least completely covers the body of the first candle, often exceeding it by far.
The first candle of a bullish engulfing shows that sellers were in control, while the second candle shows, that buying pressure led the candle to close above the opening price.
Contrary to an engulfing candlestick pattern is a harami pattern, as it displays an opposite engulfing, a much smaller candle following a bigger one.
A bullish harami is a larger red candlestick followed by a smaller green candle, whose body is completely enclosed by the precious candle’s body. It often indicates the reversal in a downtrend.
A bearish harami is a pattern in which a larger green candle is followed by a smaller red candle.
In both scenarios the size of the second candle is taken into consideration when looking into a strength of a possible reversal. The smaller the size of the second candle, the stronger a possible reversal can be considered.
Homing pigeon is a bullish pattern in a downtrend belonging to the harami pattern family. It looks similar to a harami, but with both candles in red and the second candle completely being enclosed by the body of the first candle. A homing pigeon can indicate that a level of support has been reached and that a reversal from this point is possible, which should be confirmed by the following candles.
Tweezers Tops and bottoms
Tweezers are patterns with two identical candles, which makes them look like a pair of tweezers. Tweezers do have short bodies and long wicks in one direction. It is considered a sign of an upcoming reversal after a definite trend.
Tweezer top is a pattern that indicates a reversal after a bullish trend, confirming through the first candle the previous trend by closing green. It normally shows a strong rejection of buying pressure. The second candle normally shows that the previous highs were retested but the price got pushed below its opening price as the selling pressure was too strong. The two candles indicate that two failed attempts at trading higher.
Tweezer bottom is a reversal pattern indicating a bullish reversal after a downtrend, as sellers encounter resistance at trading lower. As with a tweezer top, the candles look identical, a small body with a longer wick below. The first candle confirms the downtrend by closing red, while the second candle closes green.
The first candle of a tweezer bottom displays that sellers, although trying to push the price lower, were met with buying pressure. While the second candle re-tests the low price of the previous candle, sellers meet strong buying pressure, leading the candle to close above its opening price.
Stay tuned for the third part of this series to learn more about triple candlestick patterns….