In the last article we described in enough detail how the main Japanese candlesticks are and how they are divided, let’s continue today with other examples of PRICE PATTERN that can be found by looking at any chart on any TIME FRAME and on any financial instrument.
With the word pattern we mean a “model”, a type of image that tends, in a more or less precise way, to lead an observer to make predictions about what the future price of a specific asset or financial instrument may be; obviously all in a rational and well contextualized way, also because there is no certainty in the financial field, but working on the basis of statistics and in-depth studies, satisfactory results can be obtained.
I open a brief parenthesis about it….
In trading, the word “INFALLIBLE” combined with a pattern or any trading system is not real or possible and if someone says it is lying or trying to cheat you. However, this should not discourage you because, in any case, if in trading you follow the rules to the letter and with discipline, the results arrive and our capital grows steadily and certain over time and this also applies if you decide to use PATTERNs for our operations. . So even if a good price pattern is not infallible, it will be enough for us to contextualize it well and by applying the right filters we will be able to realize that it can even reach 70% reliability. That said, if we are able to respect the basic rules of money management and work with the right RISK REWARD, having the statistics in our favor, we will bring home some good earnings. Closed parenthesis!
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Let’s go back to our dear price patterns now.
As we specified last time, CANDLESTICKS are generally formed with a single candle while instead the price patterns are generally composed of a maximum of 4 or 5 candles and are therefore used in a short / medium term operation and should not be confused with the GRAPHIC CONFIGURATIONS of the most classic technical analysis, i.e. the various HEAD SHOULDERS, TRIANGLES, RECTANGLES, FLAGS, etc.
Furthermore, price patterns, once correctly identified on a chart, do not give a goal in terms of points or pips but simple indications of a trend reversal and therefore bullish or bearish indications.
Let’s see some of them
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Engulfing bullish (bullish) – Engulfing bearish (bearish)
Engulfing is one of the most important and well-known patterns and is a reversal pattern consisting of two candles and can in fact be bullish or bearish.
This definition already tells us that in order to find one that can be reliable we must be faced with a clear bullish or bearish trend or at least faced with a good retracement. The two candles must be of a different color. In the case of a bullish engulfing of bullish reversal, we will have to have a red candle followed by a green one that encompasses it, that is, it has a much larger body able to incorporate the opening and closing range of the previous one without taking into account the shadows that could also be outside the body Of course, the more the body of the second candle is extended, the greater the reliability of the pattern.
Another point in favor of the degree of reliability are the volumes which must be low in correspondence with the first candle and decidedly higher in the second. Generally this formation occurs in correspondence with important supports therefore the more the level is important, the more reliability the engulfing will consequently have.
The Morning star pattern is a bullish reversal pattern that appears at the end of a bearish trend or a strong price correction, thus indicating weakness on the part of sellers who are no longer able to push towards the low prices thus giving temporary control of the market to buyers, the so-called bulls.
It consists of three candles, the first red or black, however bearish, with a very extended body aimed at confirming the sell force in place, the second a so-called Star, that is a candle with a very small body that must be possibly not incorporated into the body of the previous one, and finally, a third green or white candle, therefore bullish, with a very extended body that is at least of the same size as the first candle.
To give strength and reliability to this pattern we will have to see that the third candle opens in a gap above the second candle. Generally, if the minimum level of the second candle represents a good level of support, it can be used as a possible stop loss when opening a long position at the confirmed breakout of the maximum of the third candle.
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This pattern is also inversion but unlike the Morning it is bearish and like him it is formed by three candles.
In this case, its formation will take place in the presence of an upward trend, or a strong upward correction.
The first candle will therefore have a long green or white body, bullish, the second will have a very small body and will not be incorporated into the body of the previous one (gap up) and finally the third will again have a very large red or black body, bearish forming a gap down against the previous one. For operations, the rules of the MORNING pattern apply, obviously seen in reverse, ie stop loss on the high of the second candle and entry to the sell market when the low of the third candle is broken.
Rising three methods
The rising three methods is a bullish continuation pattern and consists of at least three candles and a maximum of six \ seven.
Obviously it is found during the phase of an ongoing uptrend and following the formation of a long green or white candle, you will notice the subsequent formation of two or maximum four candles with a much smaller body (important but not fundamental in color bearish red or black) which can be both sideways and downwards or upwards, but always and in any case incorporated into the body of the largest candle.
As soon as there is a candle that opens inside the body of the first candle and closes above its maximum, we will have the signal of continuation of the upward trend. Here, too, confirmation can be found in the observation of the volumes that must be high at the first candle, sharply down in the central candles and again high in correspondence with the candle that will close on the highs. To give further strength to this type of pattern will therefore be the coincidence of the break out of the high of the first candle with the break of an important resistance level.
The same but bearish pattern is called Falling three methods for which the same rules just seen apply but applied on a bearish trend.
Well, that’s all for today. We look forward to seeing you in two weeks with a new interesting insight into the PRICE PATTERN, so stay tuned to our blog so as not to miss new curiosities and valuable ideas that you can use in your training with BPFX!
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