The Trend

Two Powerful Candlesticks Patterns You Can Use Right Now

Over the weekend, I had a family get-together.

They’re always fun.  I get to see relatives I haven’t seen for years. 

Unfortunately, they’re also always full of people you wish you could ignore. My Uncle David is one of those people. The guy who thinks he knows everything about everything, especially about trading stocks and options.

“I’ve been trading since you were in diapers,” he told me. “I can tell you with absolute certainty that technical analysis is for the birds. If you want to make money, it’s all about fundamental analysis,” says the guy that lost another $20,000 in the last year.

Like other traders, he doesn’t want to hear about market psychology, and how Bollinger Bands, MACD, RSI, Williams’ %R or even Money Flow can help dictate the herd. “None of that works. Its mumbo-jumbo,” a word he doesn’t realize dates him by years.

So I always try to lovingly aggravate him a bit more each time I see him. 

He’s family.  And overall, he’s a good guy.  Aggravatingly stubborn but a good guy…

“Uncle David, do you know I trade candlestick patterns now, too,” knowing very well he’s about to fall out of his chair, arguing with me. “I love you kid, but you’re out of your mind.”

But as I began to explain to Uncle Know-it-All, candlesticks can be powerful tools.

The doji cross, for example, when found at top or bottom of trend, can be an indication of indecision among bulls and bears. They’re typically considered a sign of potential reversal in price direction.  Quite literally, we’re looking at a virtual tug of war between buyers and sellers.  Long-legged dojis and even gravestone dojis are useful, too.

Most candlesticks have odd names, including abandoned baby bottoms. 

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Odd or not, they can be powerful, including evening stars and morning stars.

The morning star is based on three candles.  The first candle in a long, bearish candle that indicates a recent drop in the asset price.  The second candle is a small candle that indicates indecision – a doji cross for example.  The third candle is a large bullish candle that indicates a bigger increase in the price of the asset.  When found at bottom of trend, they can indicate potential change of direction. 

The evening star is the exact opposite.

It starts with a giant bullish candle that indicates strength in the asset price.  The second candle is a small one, indicating potential indecision.  The third one is a large bearish candle that begins to indicate a sell-off.  When found at top of trend, it’s bearish. 

I’m explaining this to Uncle David, who is now beginning to giggle.

It doesn’t matter if he believes it or not, truth is – it works. 

Morning Stars and Evening Stars can signal the start of a significant reversal, but when it comes to large moves in stock prices, a mysterious "X-Pattern" can also appears on the charts before stocks make a significant break to the upside or downside. Click Here to learn more about this chart pattern.