Many technical analysts are borderline religious about their candlestick patterns, with some even creating their own names for them. For the most part, it is all about patterns that sound technical and that are difficult to spot, which is where the problem lies.
Like most technical analysis, candlestick patterns are self-fulfilling. By this we mean that the patterns and technical set ups will be successful purely because other people have identified them and are trading them. For example, if I spot a sell signal and click sell, and fellow traders see the same signal I do and sell – the market will go down. It is no more complicated than that, so why look for harami, kicker, dark cloud cover, evening stars, homing pigeon, advanced blocks and the myriad of other patterns that exist, when nobody else will spot them? Here is a list of five candlestick signals that are very easy to spot and have the potential (this is not science, it will not work every time) to help you on the path to profitability.
The shooting star (sell signal)
As you can see from the picture below, there needs to be an uptrend in place before this signal works. The theory behind the signal dictates that the upside has been tested and rejected. If you spot this you may want to sell the market.
Hammer (buy signal)
This is basically the opposite of the shooting star, and theory is the same. If there is a downward trend in place and a hammer occurs, theory states that there is a rejection of the downside and buyers are taking control. If this happens you may want to buy the market.
Head and Shoulders
Head and shoulders is a classic candlestick pattern and easy to understand. Many traders are looking for perfect shoulders and perfect distance from the shoulder to the head to the other shoulder, making sure it is in sync, but this is not necessarily required. This is because some traders will take a punt and try it if it looks similar to a head and shoulders pattern. For this reason; if it looks like a head and shoulders pattern, it is a head and shoulders pattern. It also works upside down from what is shown here. If the pattern looks like it does in the picture below, then it is a sell signal.
A doji is a candlestick pattern in which the opening and closing price is the same. For example, the market opens on 100.50 in crude oil on a one hour candle, trades up and down at different prices and then at the time the candle ends we are again at the same price. There are various types of dojis, each with different names, but if you refer to it as a doji nobody is going to question you. The doji is a reversal pattern, and should be used as the “top” and the “bottom” of a trend to signal reversal.
In the futures market you will quite often see this phenomenon after weekends where there has been a lot of news. For example, you will sometimes see that the closing price on Friday in the German DAX index at 9550 whilst the opening price on Monday is at 9660.Theory states that at some point during this day the price will merge back to the closing price of Friday, referred to as a ‘gap close’. This can often happen during the mornings as well. The way to trade it is to wait for the DAX to meet a support level, before going long and exiting the market just before the closing price of Friday.