Technical Trading Basics: Candlesticks (Part 3)

Welcome back to Smart Money Club’s Technical Trading Basics lessons.  In this lesson, we are continuing our look at candlestick patterns.  Last time we covered the Bullish patterns.  This time we are looking at

the bearish indicators.  Don’t forget, to take your trading to the Power of X; you must use multiple patterns and indicators to get an accurate picture of price movements.  Let’s learn about the fundamental bearish candlestick patterns.  

Bearish Candlestick Patterns

Bearish candlestick patterns will usually form after an extended uptrend, signaling a point of resistance.  Growing pessimism about the future market and its prices causes traders to close their long positions,  opening up short positions to take advantage of a falling price.  You will see that many of the patterns are similar to their bullish counterparts.

The Six Bearish Patterns

The Hanging Man

This pattern is the bearish version of The Hammer.  It has a similar shape but the hanging man is formed at the end of an uptrend.  

This pattern shows that overall the day was down and buyers are starting to lose control but were able to push the price up after a significant selloff (the long bottom wick).  

Shooting Star

The bearish version of the bullish Inverted Hammer is the shooting star.  The Shooting star is formed in an uptrend with a long upper wick and short body with a minor or, better still, no lower wick.

There will usually be a gap with an opening higher than the previous day and a rally to the high that is significantly above the body long upper wick), but the bulls lose control, and the star falls back to earth, passing the open and ending the day down.   

Bearish Engulfing

This is our first two-candle bearish pattern that ends an uptrend.  The first candle has a smaller green body that is engulfed entirely by the long red candle that follows.  

Bearish engulfing signifies an end or slowdown in upward price movement and the sign of a market reversal.  The lower the second candle goes, the more significant the trend tends to be.  

Dark Cloud Cover

Our next bearish candle pattern, the Dark Cloud Cover, is named as an indicator of the end of the bullish blue sky, reversing the previous trend of price optimism.  It is comprised of two candlesticks, a green and then a red, where the red opens above the green’s body and then closes below its midpoint.  It is similar to the Piercing Line bullish pattern.

The pattern signals that bears have wrestled control from bulls pushing the price sharply lower.  If there is no lower wick on the second candle, the trend is decisive.  

The Evening Star

Our first three candlestick pattern is the bearish version of the morning star.  The EveningStar is formed by a first large green candle then a second short green or red candle, and a final large red candle.  

The evening star is the first indication of a slowing and then reversing uptrend.  If the second candle is red, this is the inflection point.  Suppose the third candle erases the gains for the first candle.  In that case, it is essentially engulfing the previous two days, indicating that the new downtrend is solid.  

Three Black Crows

The three black crows is a three candlestick pattern that is comprised of three consecutive long red candles, all with short or non-existent wicks (especially upper wicks).  It should now be named the three red crows; its name made more sense when candlesticks were white and black.  

Each new day opens with a price close to or below the previous day’s closing price, but selling pressure was significant, and the price gets pushed lower to end each day for three days in a row.  Traders will consider this pattern as the start of a bearish downtrend, with the bears (sellers) taking control from the buyers for the three days of the pattern.  The fourth may be a slight up day, allowing for a buying opportunity, then the pattern continues; watch the volume on these days to see if the reversal is strong or weak. 

Summary

Again these bearish patterns are straightforward to recognize, especially if you already know the bullish patterns.  In our next Smart Money Club Technical Trading Basics lesson, we will be covering continuation patterns; knowing these will take you to the  Power of X.

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