Understanding Dual Candlestick Patterns

Dual Candlestick Patterns

Engulfing Candles

The bullish engulfing pattern is a two candlestick pattern that signals a strong up move may be coming. It happens when a bearish candle is immediately followed by a larger bullish candle. This candle pattern is called 'engulfing' because the real body of the later candle completely covers the real body of the previous candle. When these reversal patterns are found at significant support/resistance levels, you can be 70% - 80% sure that prices are going to bounce off the support/resistance levels and move in the opposite direction.

As you can see in the bullish engulfing reversal pattern, the real body of the bull candle shows strong upward momentum as it completely covers the high and low of the bear candle. This is an indication of the weakness of sellers in the market, as the buyers completely overwhelm them. Effectively, the buyers are flexing their muscles and that there could be a strong up move after a recent downtrend or a period of consolidation.

On the other hand, the bearish engulfing pattern is the opposite of the bullish pattern. This type of pattern occurs when bullish candle is immediately followed by a bearish candle that completely "engulfs" it. This means that sellers overpowered the buyers and that a strong move down could happen.

When these candle patterns are found at a significant support/resistance level, chances are high that prices will move in the direction of the second (later) candle.

When market prices drop down to an established support level, chances are high that the buyers in the market will come in and attempt to push prices back up again. However, this is not always the case, as prices do break below support levels every now and then.

Sometimes, the buyers are simply too weak to prevent the market price from falling below a support level. However, when we see the bullish engulfing pattern form at such a critical price level, it's an early indication that the buyers have come in strong and are likely to soon overwhelm the sellers. That's how we know that prices may to shoot up soon after we see a bullish engulfing pattern at an established support level.

The Piercing Line

The Piercing Line Pattern is a bullish candlestick reversal pattern, similar to the Bullish Engulfing Pattern. The piercing line pattern occurs in a downtrend and is comprised of two candlesticks. The first candlestick in the pattern is a long black candle, that is accompanied with high volume. The next candlestick makes a lower low, but then rallies to close above the midpoint of the first candlestick, but not above the open of that candle. This snap back rally is called a kirikomi, or cutback.

The piercing line is one of the first signs that a potential bullish reversal is in play. Traders should wait for the high of the first candlestick in the pattern to be exceeded prior to taking a long position. Stops can conversely be placed below the low of the first candlestick of the formation. The more the second candle or kirikomi closes above the mid-point of the first candlestick, the greater the odds of a successful piercing line reversal pattern.

The Bullish Engulfing and Piercing Line patterns indicate that prices are likely to bounce off a support level.

The Dark Cloud Cover

The dark cloud cover candlestick pattern is one of the double candlestick patterns (i.e. it consists of two individual candlesticks), and it is a bearish pattern.

The bearish dark cloud cover candlestick consists of an upward candlestick (e.g. a green or white candlestick), followed by a downward candlestick (e.g. a black or red candlestick) that opens above the close of the previous candlestick (i.e. a gap up), and closes below the middle of the previous candlestick.

The bearish dark cloud cover pattern can occur in a number of different contexts (e.g. at the beginning of a trend, during a trend, at the end of a trend, etc.), but it is most relevant when it occurs during a significant upward trend. The bearish dark cloud cover can be used as an indication of the end of an upward trend, and therefore can be used as both a trade entry and a trade exit pattern (i.e. an exit from a long trade, and/or an entry into a short trade). Note that if the second candlestick does not close below the middle of the first candlestick, that a different (and bullish) pattern is created instead.

Generally, you should be careful when prices are heading towards prominent support/resistance levels. Try to enter into a trade only when both candlestick analysis and the support/resistance levels complement each other.

For example, if you see a large bullish marubozu candle hit a very strong resistance level, don't enter into a Buy trade... it's not a good idea to do that! Likewise, if you see a bullish engulfing pattern form on a resistance level, don't enter into a trade either! When prices are nearing a strong resistance level, it's a better idea to wait for a loss of upward momentum and a bearish engulfing pattern to form before you consider entering a Sell trade.

Tweezer Bottoms and Tops

The tweezers are dual candlestick reversal patterns. This type of candlestick pattern could usually be spotted after an extended up trend or downtrend, indicating that a reversal will soon occur.

Notice how the candlestick formation looks just like a pair of tweezers!

The most effective tweezers have the following characteristics:

The first candle is the same as the overall trend. If price is moving up, then the first candle should be bullish.

The second candle is opposite the overall trend. If price is moving up, then the second candle should be bearish.

The shadows of the candles should be of equal length. Tweezer tops should have the same highs, while tweezer bottoms should have the same lows.

Triple Candlestick Patterns

Evening and Morning Stars

The morning star and the evening star are triple candlestick patterns that you can usually find at the end of a trend. They are reversal patterns that can be recognized through these three characteristics:

The first stick is a bullish candle, which is part of a recent uptrend.

The second candle has a small body, indicating that there could be some indecision in the market. This candle can be either bullish or bearish.

The third candle acts as a confirmation that a reversal is in place, as the candle closes beyond the midpoint of the first candle.

Three White Soldiers and Black Crows

The three white soldiers pattern is formed when three long bullish candles follow a downtrend, signaling a reversal has occurred. This type of candlestick pattern is considered as one of the most potent in-yo-face bullish signals, especially when it occurs after an extended downtrend and a short period of consolidation.

The first of the three soldiers is called the reversal candle. It either ends the downtrend or implies that the period of consolidation that followed the downtrend is over.

For the pattern to be considered valid, the second candle should be bigger than the previous candle's body. Also, the second candle should close near its high, leaving a small or non-existent upper wick.

For the three white soldiers pattern to be completed, the last candle should be at least the same size as the second candle and have a small or no shadow.

The three black crows candlestick pattern is just the opposite of the three white soldiers. It is formed when three bearish candles follow a strong uptrend, indicating that a reversal is in the works.

The second candle's body should be bigger than the first candle and should close at or very near its low. Finally, the third candle should be the same size or larger than the second candle's body with a very short or no lower shadow.