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Power & Finesse of Candlestick Charting (Part 3)
Extended pattern groups used with candlesticks
1. Confirmation
Confirmation patterns are created after an initial candlestick pattern has formed. The confirmation pattern is considered a conservative traders entry point. They identify that the initial candlestick pattern nowhas a higher likelihood of prompting a market price move in the directing predicted. Confirmation patterns are an essential part of trading with candlesticks and have been taught to generating after generation of Japanese.
2. Continuation
Continuation patterns are created after an initial candlestick pattern has formed, and normally appearsafter a confirmation pattern. The continuation patterns are used to identify a trending market and tomaintain an awareness of the trend strength. Many times, the continuation patterns will form during the individual Three Level Fluctuations as described earlier. These continuation patterns are generally helpful to keep you long or short during a defined market trend after the initial candlestick buy or sellpattern.
3. Combination
Combination patterns are fairly simple to understand. They are created when two or more individual candlesticks, or two or more individual multi candlestick patterns, or any combination thereof, appear side by side and issue similar signals. An example would be a Hanging man and Doji Line found at or near a ceiling. This is a strong indication of a potential bearish price move. Combinations patterns are not rare,they appear in generally all stocks and commodities. The key to these unique patterns is to be able to identify them as a stronger influence to a possible future price move and to help identify the direction of the future move.
4. Confluence
Confluence patterns are composed of a number of other technical oscillators or patterns that assist in confirming or denying the potential for any candlestick pattern probability of success. For example, one might choose to use Moving Averages, Stochastics, Momentum and Elliot Wave Theory as confluence indicators to assist in determining the current conditions of any market and to assist in confirming the possibilities of the current candlestick pattern(s). Generally all Western technical oscillators can be used as Confluence patterns. The key is to understand the relationships between the price movement of the chart, the relative change in the Western technical oscillators, and the candlestick pattern(s) that have formed. This could be considered part of the Sakata Constitution as it is an underlying concept. Although, this is more a fundamental reality of profitable trading than a concept.
Candlestick Analysis Rules & Suggestions
As one learns to interpret the different candlestick patterns, one should always keep in mind the following rules to assist in the proper identification and possible actions taken from the patterns. There are three simple rules to interpreting candlestick patterns:
1. Size
Larger candles play an important role when identifying patterns. They represent accumulation or distribution within the market or stock. When you begin to see an increase in size of the candles, the trend is accelerating and accumulation is occuring. When you begin to see a decrease in the size of the candles, the trend is decelerating and distribution is occuring.
2. Shape
The shape of the candlestick, or pattern, determines the type of pattern generated, the possible trading signal and the potential direction of trend. Shape and sizework hand-in-hand. A very small Engulfing Bullish pattern would indicate the potential for a market rally, yet the small size indicates that the trend has not yet begun to accelerate.
3. Location
The location of a candlestick pattern will assist in determining the possible trading signal. For example, a Shooting Star found after a defined up trend strongly indicates a potential bearish correction or top. A Piercing Line found after a defined down trend indicates a potential for a bullish reversal. Either of these twopatterns found within a consolidated, sideways trend, do not indicate as strong a potential for a trend reversal, and one should wait for confirmation of the candlestickpattern before taking action.