Japanese Candlestick Analysis
patterns in Example 1. Finally, in Example 3, which candlestick would offer
the most interruption to a trend? This would not be as straightforward or easy
to answer. What we can say is that the first spinning top displays more market
confusion as compared to the last spinning top with the smallest range. Hence
the internal proportions of a candlestick or candlestick pattern play a role on
determining the overall message of the markets.14.2 Popular Candlestick Patterns and Their Psychology
Before we study individual candlestick patterns, we first need to turn our attention
to the guidelines for:- Preferred Pre‐Entry Conditions
a) Quality of Trend: All bullish and bearish reversal candlestick forma-
tions require an uptrend to be in place. Bullish and bearish reversal
candlestick formations occurring within narrow price consolidations are
ignored. A parabolic uptrend on low volume would be ideal conditions
for a bearish reversal candlestick formation, while a parabolic down-
trend on low volume would be ideal conditions for a bullish reversal
candlestick formation.
b) Proximity to Price Barriers: Bullish and bearish reversal candlestick forma-
tions are more reliable if located near strong price barriers. It is preferred
that bearish reversal candlestick formations be found near strong resistanc-
es and bullish reversal candlestick formations be found near strong support
levels or zones. Barriers represent indicator overlays, such as:
■ (^) Standard support and resistance levels
■ (^) Fibonacci and Gann levels
■ (^) Trendlines
■ (^) Channels
■ (^) Chart pattern boundaries
■ (^) Moving averages
■ (^) Envelopes and bands
■ (^) Ichimoku clouds
■ (^) Floor Trader’s Pivot Point levels
c) Divergent Pre‐Conditions: It is preferred if bearish reversal candlestick for-
mations are in a state of bearish divergence with their oscillators and indi-
cators, while bullish reversal candlestick formations are in a state of bullish
divergence with their oscillators and indicators. It is also best if both bullish
and bearish reversal candlestick formations are also divergent with respect
to volume and open interest.
d) Overextended Conditions: It is also preferred if both bullish and bearish
reversal candlestick formations are in a state of overextension, that is, in a
state of overbought and oversold with respect to their oscillators and indi-
cators.