Technical Classroom: How to use advanced double candlestick chart patterns for trading

Market

There are many advanced candlestick chart pattern based on two consecutive candlesticks namely: Piercing Line Pattern, Bullish Harami Cross Pattern, Bearish Harami Cross Pattern, Tweezer Top Pattern, Tweezer Bottom Pattern etc. These advanced candlestick patterns are popular

among professional traders and many automated trading algorithm makes extensive use of these patterns.

A piercing line pattern occurs in the candlestick chart of a financial instrument when manages to closes more than halfway into the prior

candlestick’s red body, leading to the formation of a strong green candlestick. This pattern usually occurs during a down trend and is

thought to signal the beginning of a bullish trend in the stock, commodity or currency.

• The market is in an existing downtrend.

• A red solid body is observed on the first day.

• The green body is formed on the second day has managed to close above halfway of the red body of the prior day.

The market opens lower with a significant gap down in the direction of the existing downtrend. After the market opening, sentiment changes

rapidly and the market moves in the opposite direction towards upside. This causes fear among traders who have short positions, leading to

the covering of short positions faster, which further adds strength in the rally in the market. However the buying force overcomes the selling

force and in the end markets manages to close above the close and halfway of the prior day.

This pattern consists of a large red body on the first day followed by a small green body (doji) the next day that is completely inside the

range of the first day’s red body. It tends to act as a reversal pattern.

• The market is in an existing downtrend.

• A large red solid body is observed on the first day.

• The green small body (doji) is formed on the second day completely engulfed by the red body of the prior day.

The pattern appears in a downtrend and forecasts its bullish reversal. The Bullish Harami Cross pattern needs confirmation on the subsequent

candles. The first red candles indicate an existing downward trend in the stock, and the doji candle represents a slightly upward trend on the

second day, which is completely contained by the body of the previous candle. The second day prices open higher or at the close of the

preceding day and steadily rises bringing a sense of fear among the short sellers. This creates a doubt in existing downtrend and leads to the

covering of short positions, causing the price to rise further.

This pattern consists of a large green body on the first day followed by a small doji the next day that is completely inside the range of the

first day’s green body. It tends to act as a bearish reversal pattern.

• The market is in an existing uptrend.

• A green solid body is observed on the first day.

• The doji candle is formed on the second day completely engulfed by the green body of the prior day.

The market is in an existing uptrend and there is heavy buying interest indicated by a green body, which indicate support the bullishness.

However, the next day prices open lower or at the close of the preceding day and trades in a small range throughout the day, but still within

the prior day’s body. The bulls now begin to doubt the strength of the market, and trend reversal to downtrend is confirmed by another

confirmation bearish candle after doji candle of indecisiveness.

This is a bearish reversal pattern with two candlesticks. A green candlestick appears on the first day while an uptrend is in progress. The

second day opens and makes an almost a same high of the previous candle.

• The market is in an existing uptrend.

• A green solid body is observed on the first day.

• The red body is formed on the second day has similar high of the previous candle’s high.

The high of the second candle signifies an area of resistance. Although the bulls were pushing the price higher, they aren’t willing to buy

above the highest price. So the bears force their way into the action, returning with great force, and drive the price back down. The identical

height of the topmost candles shows the strength of the resistance and indicates that the uptrend will either pause or reverse, forming a

downtrend. Bearish reversal candle formation on third day confirms the trend reversal.

This is a bullish reversal pattern with two candlesticks. A red candlestick appears on the first day while a downtrend is in progress. The

second day’s low is almost similar to the previous candle’s low.

• The market is in an existing down trend.

• A red solid body is observed on the first day.

• The green body is formed on the second day has similar low of the previous candle’s low.

The low of the second candle signifies an area of support. Although the bears were pushing the price lower, they aren’t willing to sell below

the lower price. So the bulls force their way into the action, returning with great force, and drive the price back upward. The identical low of

the two candles shows the strength of the support and indicates that the down trend will either pause or reverse. Bullish reversal candle

formation on third day confirms the trend reversal.

• Piercing Line is strong bullish reversal candlestick pattern exactly opposite to Dark Cloud cover.

• Bearish Harami Crosss is bearish reversal pattern, which requires confirmation candle on the next day.

• Tweezer bottom is bullish reversal pattern; since both candles low are identical, it indicates strong support on lower levels.

• Tweezer top is a bearish reversal candlestick pattern where both candles are having identical high showing strong resistance near

top. A bearish reversal pattern on next day will confirm the trend reversal to down trend.

(The author is Head - Technical & Derivative Research, Narnolia Financial Advisors)