Technical Patterns 101: Two Essential Candlestick Formations to Know
To a new trader, candlestick patterns are just a confusing bunch of odd crosses and oblong shapes on a chart. Even worse are the names, like the abandoned baby bottom, white soldiers, and doji stars. But as odd as they may appear and sound, even the oddest ones can help give you the signal you need to be a successful trader.
Let's look at the gravestone doji for example.
Typically, when we see a doji at top or bottom of trend, it can be a sign of indecision among the bulls and bears. They can also indicate a potential reversal in the stock. But when it comes to the gravestone version of it, it’s just as deadly as it sounds.
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It literally looks like an actual gravestone from the side. And it’s formed when the open, low and close of the day are all the same. What it can tell us – especially if found at top of trend – is that bulls are becoming exhausted and are beginning to sell. In a way, it’s burying any hopes for making any more money on the upside of a trade.
If we turn the gravestone upside down, we now have a dragonfly doji, which can also signal indecision at top or bottom of trend, and indicate potential shift in direction. With this candle, the open, high and close are the same.
While these two candles can be difficult to screen for, when you spot them, be well aware of where they’re located and what they may be telling you. However, don’t just place a trade based on a candlestick. Always be sure to confirm your findings with other momentum indicators, such as Bollinger Bands, MACD, relative strength, Money Flow and even Williams’ %R. The more you know about how to chart properly, the better you stand to do.
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