candle stick 6 - reversal patterns

Candlestick VI: Candlestick Patterns Confirming Reversals

Candlestick patterns are used to confirm reversals. Often when a price moves towards a support or resistance level, it is unclear for several periods on the chart whether it is going to break through or reverse. Intraday penetrations of important technical levels are often misleading signals, but quick bounces off support can be false signals as well. Candlestick patterns offer a means of confirming that a price has reversed itself at a key technical level. They also provide a precise entry point and ensure that the market's momentum is in the direction of the trader's position at the time of entry.
In the chart below, the Euro has made its famous double top against the US dollar. The first relative high has been established, and although there are later several intraday breaks above this level, no daily candle has closed at a new high. Shortly after, a rapid fall from the 1.29 level creates a bearish engulfing pattern that allows the trader to sell the next day with the market's momentum to the downside. The stop is placed just above the black resistance level, because a further test of the recent highs could easily lead to a breakout higher.

Chart Patterns I: Introduction to Reversal Patterns and Continuation Patterns

There are two major ways to trade the financial markets: swing trading and trend following. Swing traders use technical analysis to look for short-term price movement and capture gains in a relative short-term period. They look for the price patterns that hint for a reversal, in order that they can pick the tops and bottoms of the trend. Trend followers pay attention to the general direction of the price movement and enter trades by following the current direction. They would look for continuation patterns on the price charts to predict the future direction of the trend, or exit the trade until the reversal patterns appear.
The following articles discussed the rules for identifying reversal patterns and continuation patterns, and introduced some well-known reversal and continuation patterns. The reversal patterns include: Head and Shoulders, Double Tops and Bottoms, Triple Tops and Bottoms and Saucers. The continuation patterns include Triangles (Ascending, Descending, Symmetrical and Broadening), Flags and Pennants, Wedges and Rectangles.
The patterns exhibit the psychology and momentum of the market. No matter which type of traders you are, it is always helpful to be aware of the patterns. Using the patterns is not a stand-alone method of trading the market, in fact, it is better to be used with a mix of trend lines and technical indicators. Beginners might first find it difficult to identify the patterns; they can familiarise the patterns by looking at the historical charts and try to identify the patterns.