There are many Japanese Candlestick patterns described in the literature to help day traders and swing traders create profitable trades. They can be broken up into two groups. The first is a trend reversal signal, i.e., a market top or bottom. The second group signals a trend continuation. We are going to only examine the signals in the second group. At Right Line Trading we do not believe that any set of indicators or Japanese Candlestick patterns can reliably call a market top or bottom: we exclusively are trend traders.In this video we are going to look at three Japanese Candlestick patters that are powerful predictors of trend continuation. They are called the “Engulfing Candle, Piercing Candle and Dark Cloud Cover Candle”. These are candles you want to use to enter a trend. They all exploit traders taking a countertrend position.
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Japanese Candle Stick Basics:
The candle-body is the key element that we look at when evaluating a candlestick formation: very rarely is the wick utilized. A large body in an up candle indicates significant buying strength and a large body in a down candle indicators significant selling strength.
The ABC Candlestick Pattern:
In an uptrend for example, sellers will create a countertrend candle. The long trend is designated “A” and the pull-back candle designated, “B”. The B-candle will be followed by a “C” engulfing candle in which the high of the C-candle body equals or exceeds the high of the B-candle body and the low of the C-candle body equals or exceeds the low of the B-candle body.
Dark Cloud Cover – Piercing Candle
These are trend continuation signals in which the continuation candle body does not engulf the previous counter-trend B-candle but at least pierces its candle body ½ of the way to the upside on a long trade or covers the B-candle at least ½ of the way to the downside on a short trade. These are also signs of strong buying and selling enthusiasm respectfully.