Candlestick Patterns and Point & Figure Chart Analysis for Trading Strategies
Candlestick patterns are one way to anticipate potential market sentiment changes. These patterns allow traders to understand market psychology and anticipate potential price reversals.
How to draw a trendline: It is an open-ended question with no definitive answer. There is a system of rules for drawing trendlines. There is a method called the pivot day, where you connect the line between days before and after, with a higher pivot point. In any case, most trendlines should be drawn on the Line Chart. There is a tendency to draw lines from left to right, although it is generally preferable to draw a line from right to left.
Candlestick Patterns
Candlestick patterns are one way to anticipate potential market sentiment changes. These patterns allow traders to understand market psychology and anticipate potential price reversals.
Reversal Patterns
Dark Cloud Cover
This is a simpler version of the Engulfing pattern, a situation in which the high is higher than the previous day's, but it doesn't engulf the entire white body, only part of it. The rule is that the black candle body needs to penetrate at least 50% into the white candle body.
At the peak, this is called a Dark Cloud Cover, and in a downtrend, it's called the Piercing Pattern.
Dark Cloud Cover:
Piercing Pattern:
Morning Star and Evening Star
These are reversal patterns consisting of three candles.
The Morning Star pattern signifies a reversal from a downtrend to an uptrend. If there's a price gap between the small candle and the white one that follows, the pattern is considerably stronger. If there's also a price gap between the star and the candle before it, this is called an Island Reversal, an excellent sign for a trend change. The star indicates a balance point between buyers and sellers.
Morning Star:
The Evening Star is the counterpart to the Morning Star and signifies a potential reversal from an uptrend to a downtrend.
Evening Star:
Continuation Patterns
Continuation patterns are less significant because the basic assumption is that the trend will continue, and we need indicators that suggest a potential change in the trend. However, continuation patterns confirm that the trend is likely to persist because we see the stock rising and fear that it may decline. Continuation patterns reassure us that holding onto the stock is reasonable. Without continuation patterns, we might have sold the stock prematurely, even if it had already risen significantly. These patterns provide us with the confidence to continue holding the stock.
Windows
Rising Window and Falling Window
When there is a price gap up or down, it is called a window. Even in the Japanese version, the critical point is the closing point of the window. When we spot a window, it indicates a buying opportunity, but we should wait for the window to close before taking action. The window is a continuation pattern. If there is a rising window during an uptrend, it supports the current trend and creates a trading opportunity.
Five Windows Pattern – Three Ascending
A large white candle, the first candle, followed by three small descending black candles that are entirely encompassed within the body of the large white candle. The subsequent candle is another large white candle that contains the three smaller candles and even exhibits a slight rise.
Points & Figures
A chart designed to provide a long-term perspective without noise. Noise reduction is achieved by updating the chart not as a function of time but as a function of price. In previous charts like bar, line charts, and candlesticks, updates occur on a daily basis. There is a chart called Kagi, which is even better than P&F in eliminating noise.
As long as the stock is rising and not falling below a specific threshold I set, we don't switch columns. The drawback of this chart is that it significantly delays response time. Beyond the rising line, there is a falling line, indicating a trend change. The chart provides support and resistance, patterns, and more.
The most basic pattern for an uptrend is the double top, which signals a buying opportunity. A stronger pattern is the triple top, and an even stronger pattern is the catapult (ballista), a triangle peak that has been breached. For Doris traders, there is a system of rules that measures how far it is considered a correction to the trend and where it is not.
