In our previous blog on candlestick we discussed the basics about the formation of candlestick, commonly know candlestick patterns.
In this blog, we will be focusing on three more major candlestick reversal patterns viz.,
- Harami Patterns
- The Magic Doji
Unlike the earlier patterns which were formed with two candlesticks Engulfing Bullish and Piercing Patterns, Stars are made up of three candlesticks.
There are two types of stars viz.,
- Morning Star: As the name itself suggests, it is a bullish pattern or bottom reversal pattern. The name is derived from the planet mercury as it foretells the sunrise. The pattern comprises of three candlesticks. The first one is a Red long real body candlestick. It is followed by a small real body with a gap.The third candlestick is a Green long real body that moves in the range of the first Red real body candlestick. It shows that the bulls have taken over the command from the bears.
- Evening Star: It is a bearish formation also called top reversal pattern and generally appears at the top of the trend. The formation is exactly opposite to Morning star. The first candle is Green real body candle followed by a small body candle with a gap down opening and finally as the bears takes up the control a long Red real body candle appears with a gap up opening.
The pattern will be clearly understood with the help of the picture below.
2. Harami Patterns:
The patterns which we are about to discuss now is considered to be one of the most powerful reversal pattern. The word “Harami Pattern” may sound weird in India, but in japan where is it has its origin means “pregnant”. It is because the the pattern appears like a mother and her child in her womb. Its a two candlestick pattern. It can be Bullish harami or Bearish harami.
Please refer the charts below for a better understanding;
3. The Magic Doji:
The magic Doji is the most praised candlestick formation by most of the technical analyst worldwide. The appearance of doji in the chart is nothing less than a fire alarm for the chart analyst.
The Doji is a candlestick in which the opening and the closing price is the same and the prices during the day moves within the high and the low range of the day. However the length of the shadow may vary.
In such a formation the real body is a merely a thin line, and the candlestick looks like a cross.
Dojis are valued most at the tops as its appearance at the top gives a warning that the markets have topped out and bulls have lost their purchasing power. It is because the doji implies the indecision of the market over the prices.
There are four major types of Doji;
b. Long legged Doji
c. Gravestone Doji
d. Dragonfly Doji
When any of the above types of Doji is spotted at the top of a trend, in an overbought area, one should be extremely cautious in buying further.Conversely, when it appears at the bottom of a downtrend one should wait for a buying signal the next day to confirm the reversal.
The following figures will help you get a better clarity on Doji.
We have designed this blog keeping in mind the interest of brevity.