Price reversal candlestick analysis

The following patterns are reversal patterns:

А. Hammeror Hanging Man

Reversal candlestick:

  • The body is at the top (bottom) of the price range. The color of the body is irrelevant.
  • The lowest shadow is twice as long as the body.
  • The reversal candlestick has no upper shadow, or it is very short.
  • Intensifying factors:
  • The longer the lower shadow, the shorter the upper one, and the bigger the body - the greater the potential.
  • Although the color of the body is irrelevant, the bullish color of thehammer indicates greater bullish potential, while the bearish color of the hanging man means greater bearish potential.

Peculiarities:

  • In the case of the hanging man,it is important that the bearish signal is confirmed. The more the downward price gapbetween the body of the hanging man and the opening price of the next day (period), the more likely it is that thehanging man willform a high.
  • The hammer is characterized by the previous price dynamics. If there is an explicitly bearish candlestick before the hammer (e.g. a long body with no shadows), this is evidence that the bear market is gaining momentum.In this case it is reasonable to wait for confirmation that the bulls are in control (for example, the next candlestick with the closing price higher than the closing price of the hammer). It is important to monitorwhether the hammer has not broken an important support level.

B. Double Top or Double Bottom

Reversal patterns Double Top (bullish trend changing to bearish) and Double Bottom (bearish trend changing to bullish) is formed in the event that the price forms two local extremums and thenbreaks through the line at the bottom (the support line in the bullish trend or the resistance line in the bearish trend).

The illustration shows abstract patterns Double Topand Double Bottom. The double bottom figure is a mirror image of the double top figure.

This figure allows the analyst to suggests that after the breakdown of the support level (in double top) or the resistance level (in double bottom), the price might move in the same direction for a distance at least greater than the height of the figure (from base to the high or low).

C. Head and Shoulders, or three-high figures

The figures of this groupare reminiscent of the previously discussed double top or double bottom. The general principles of their formation are the same as above described except that the pattern consists of three highs instead of two. Here we will discuss only one situation, namely, upward trendchanging to the downward, but it is implied that if mirrored, the same will be true for the downward trend changing to the upward trend.

The model is formed by three highs. If two (outer) of the three highs are lower, and the central high is higher, the pattern is called Head and Shoulders. The same modelwith all the three highs located at close price levels will be called Triple Top. In case of the breakdown of the pattern's base, the price is likely to move in the direction of the breakdown by no less than the height of the figure (from the base to the high).

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