If you have ever wondered how some traders are able to come out on top above the others, you don't have to look further.
The answer is Japanese Candlesticks.
Why?
They are visual
Easy to spot
Bullish reversal and continuation patterns
Bearish reversal and continuation patterns
You can combine these patterns with other technical analysis to get a more powerful analysis
Know where to enter, exit and put a stop loss
Candlesticks are just one of the weapons in the arsenal of a trader. But when you learn to combine them with other technical analysis and technical indicators, they can be so powerful that your analysis can be extremely accurate.
I won't bore you with the basic knowledge of how to read candlestick patterns but I will just mention a bit of it here.
This is how Japanese Candlesticks looks like. You can usually find green and red candlesticks. Sometimes traders will use different colors to paint their candlesticks.
But for our purposes, green is when the stock went up and red is when the stock went down.
There will be a body and there will be a wick. If the candlesticks are green, then the stock opened lower but closed higher. The long wick represents the low of the day.
If the candlestick is red then the stock opened higher but closed lower. The wick represents the high of the day.
It can be quite confusing for the beginner but after some practice, you will be able to read candlestick bars like a pro.
Japanese Candlesticks are useful because they can be separated into different types:
Bullish reversal patterns
Bearish reversal patterns
Bullish continuation patterns
Bearish continuation patterns
With this knowledge in mind, what do you do when you want to spot a bullish reversal in a stock? Obviously, you want to look for bullish reversal candlestick patterns.
Examples of bullish reversal patterns are:
Bottoming tails
Bullish Engulfing
Piercing Line
Bullish Harami
Bullish Kicker
Yes, there are so many names that you can get confused trying to remember them. But all you need to do is learn how to spot green and red candles.
If after a series of red candle bars you see a green candle bar, then you should take note because there is a possibility of a bullish reversal in the stock.
I will be starting a How To Analyze The Stock Market With Accuracy course where I will teach in depth about Candlestick patterns. That will be coming soon I hope and I am in the process of creating it.
But at this moment, let me show you some powerful applications of the Japanese Candlestick pattern in spotting a bullish reversal.
A bottoming tail as I explained above is a bullish reversal candlestick pattern. This pattern appears because the stock declined a lot only to close back higher forming something that looks like a hammer.
In the chart above, we can see how AAPL formed two weekly bottoming tails. The stock was selling off for weeks but for 2 weeks it refused to go down but actually went higher.
After the appearance of the two weekly bottoming tails, AAPL shot higher. I know this sounds so simplistic but it is really that easy to spot.
All you need is an open mind to find this pattern in the stock.
Be An Expert At One Japanese Candlestick Pattern And Spot Bullish Reversals
Now that you know how powerful one pattern is, you can actually learn the pattern in and out and be an expert at it.
If you like the bottoming tail bullish reversal pattern, then master it. If you like another type of bullish reversal pattern, master that as well and focus on trading stocks that exhibit that pattern.
You can even be an expert at:
bullish continuation patterns
bearish reversal patterns
bearish continuation patterns
You will be more focused and it saves you more time and prevent stress as well.
Let me give you another example. The chart above is the daily chart of the SPY. SPY is the exchange traded fund of the S&P 500 and can be traded like a stock.
Notice how the stock formed a large green bar near the bottom. What actually happened is the SPY gapped lower but then rose to completely engulf the candlestick bar formed the previous day.
What this meant was the bulls came in and wipe out all the negativity throughout the whole trading day.
Since the appearance of the bullish engulfing pattern, the SPY has traded higher. Since the SPY is an index ETF, the move up is not that much in subsequent days. But sometimes when the bullish engulfing pattern appears in an individual stock it can move up by quite a lot.
Are you convinced now that Japanese Candlestick patterns really work? You might not agree but why not try spotting some candle patterns from now on. You might be surprised at what you may discover.
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