Candles very loyally tell us of the battles between buyers and sellers for any given timeframe, but these are just a small part of the total picture of patterns they create.
To understand where a stock originates and to try and predict where it is going, we must look at much more than a single candle within a group of candles, and try to make our decisions based on patterns comprised of several candles. When we learn to identify patterns, we can “understand” a stock with just a glance, and take decisions accordingly.
Reversal patterns are chart formations of a group of candles that help us identify high and low points.
We use reversal patterns to understand when we should buy or sell stocks that are about to change (reverse) direction. For example: if we bought a stock, we would want to sell as close as possible to its high, but if we were holding a stock short, we would want to buy it back as close as possible to its low, right at the point where it just begins to go up.
If we want to profit when shorting a stock, we would do that before its price goes up.
If we wish to sell short, we would want to short when the stock has finished correcting itself and is about to execute another drop.
Reversal patterns are usually formed after a significant rise or fall in price. Patterns are subdivided into bullish, implying an upward direction, or bearish, implying a downward direction.
The patterns I will explain further are common and accepted by professional traders. All these patterns are valid for any timeframe or period. They can be implemented for a group of weekly candles, daily candles or intraday candles, depending on your purposes and the range over which you plan to hold the stock.
Common Reversal Patterns
Summary of Reversal Patterns
Patterns are mirrors that reflect the war between buyers and sellers. They can help predict the outcomes of this war, allowing the trader to choose the winning side.
Try to examine each pattern, and imagine the war. Once you’ve learned these patterns, your next move is to join the real game. Open a volatile stock price chart, such as that of AAPL, and try to guess, in real time, according to patterns of five-minute candles, what the stock’s next step could conceivably be. I believe you'll be pleasantly surprised by your ability to predict the pattern.
To learn more about the stock market and to begin your own journey toward financial independence, visit Meir Barak's site Tradenet and check out his book "The Market Whisperer."
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer