The Harami pattern is composed of two candles. The body of the first candle is the same color as the current trend, normally black or red for a downtrending market and white or green for an uptrending market. The first candle of the pattern has a long body, the second candles body is shorter. The open and the close of the second candle occurs inside the open and the close of the first candle. The presence of an Harami indicates that a trend may be over.

Because the harami indicates that the trend could be reversing, it signals that it might be a good time to enter into a trading position in line with the reversal. The smaller the second candlestick, the more likely the reversal. In the case of the bullish harami; the higher the second candle closes up on the first candle the more likely the reversal has occured. For the bearish harami, the opposite is the case; the lower the second candle closes down on the first, the more likely the reversal.

The Bullish Harami (bearish Harami is exact opposite)

These patterns need confirmation and should not be seen as a complete reversal. Unless you are a very aggressive trader, a confirmation of the reversal should be seen before committing to a trade.

This article does not represent an in depth study of this pattern, so I would suggest further study before using it in your trading.

The Doji is one of the most important candle signals of all and the only one that looks the same on both Candlestick and Bar charts.

There are many versions of the Doji, but all of them rely on the fact that the open and close are virtually equal. What happens in between decides the type of Doji and has a bearing on the strength of the signal. The length of the shadows will indicate the degree of activity. If the tails are long it indicates volatility; if the tails are short it indicates consolidation.

If the Doji has a large movement both above and below the body it is called a “Long-Legged Doji”; movement only above the body is called a “Gravestone Doji” and indicates the bulls have put up a good fight but the bears have pushed the price back down to its open; movement only below the body is called a “Dragonfly Doji” and indicates the opposite of the “Gravestone Doji”. Each one has it’s own particular meaning and is stronger when it appears in certain positions.

The Doji

The Doji appears in a number of other Candlestick Patterns including the “Star” patterns. It is a very powerful indicator especially when used in conjunction with selected western indicators.

The Doji indicates indecision on the part of both buyers and sellers and in most cases heralds a trend reversal. When you see a Doji on an uptrend, do not ignore it, particularly when it gaps up from the last close. Check your indicators and look for an overbought signal. The chances of a reversal are very high.

If the Doji appears during a downtrend, the indicators need to be showing an oversold position. A bullish confirmation signal will be required before making any commitment to a trade in this case.

I know of traders who base their trading decisions almost exclusively on the Doji signal. But in my opinion that is a very dangerous thing to do.

This article does not represent an in depth study of this pattern, so I would suggest further study before using it in your trading.

The reversal signal is the first thing you need to be looking for when planning a new trade. As their name implies; they signal a reversal in a market trend. A great many fortunes have been made by mastering the skills to spot a trend reversal. It is the stock in trade, excuse the pun, of the Day Trader.

You, as a Day Trader will make your trade as the market hits a high or low and the signals indicate a reversal. You may want to see this as having occurred previously if you want to jump on to a continuing trend or you may want to wait for a new trend reversal to occur before placing your trade. In any case your trades will be placed as close to a high or low as possible and profits taken as you climb or fall to new lows or highs.

Take a look at any candlestick chart and look for large changes in trend. You are looking for high peaks and deep troughs to start with. It makes it easier to see the reversals. Now, try to identify the signals that would have warned you of this impending change. A good charting system that has the added bonus of being completely free, is BigCharts. The charts are clear and easy to read. Make sure you choose “Candlesticks” as the chart style option in the setup menu on the left of the interactive chart section.

If you can master this technique then you can gain runs of many points in each direction that will accumulate a very nice profit. Trade regularly like this and your income will explode.

The important thing here is to learn how to identify the reversal signals. Just a handful will give you the necessary tools to make your trading decisions. Combine those with the selected western indicators and you will be a force to be reckoned with!

But, remember; its not just your signal strategy that accounts for your success. In fact its only around 10% of the skills you need to be successful. The other 90% is discipline and your frame of mind. See my other articles for more about this aspect of trading.

The markets exist to facilitate trading and are driven by floor traders. These are the guys who work the pits every trading day regardless of whether the markets are volatile or not. Just like the circle of the economy, if there is no movement the markets will die and no money will be made.

Therefore, it is important to understand that the perception of what is happening in a market may sometimes have very little to do with actual influences of market news and world events.

In fact I would go further and say that too much fundamental analysis of individual stocks and commodities can often confuse the situation. That’s not to disrespect the work of trained fundamental analysts. I just don’t buy into it myself. I personally do not read any financial magazines or publications. I rely totally on the candlestick patterns to inform me of investor opinion at any given time.

That is the key to this technique; understanding what the majority of investors are feeling and knowing how that sentiment is driving the markets. It is the majority’s reaction to what takes place in the pit that drives an instrument up or down. It is investors perception, fear and greed that will give momentum to a given markets movement.

That is not to say that world events have no impact at all. Take the discovery of BSE in one animal in Washington State, a year or so back, for example. The effect on Live Cattle and Feeder Cattle prices was overwhelming. But this sudden collapse of the market did not take place for almost 24 hours after the news broke! The wise had already closed long positions and immediately gone short. Many fortunes were made over those few days of trading. But, many more fortunes were lost.

A good working knowledge of Candlestick analysis would have warned you of the sudden selling activity and ensured you were correctly positioned for that rare opportunity.

The candlestick patterns will, at the very least tell you it’s time to get out of a trade. If it’s a false alarm then you can always get back in with the loss of a few points instead of the loss of your shirt!

A glance with a trained eye at a candlestick chart can immediately alert you to sudden changes in investor opinions. The very anatomy of a candlestick shouts bull or bear. By familiarising yourself with a handful of reversal patterns you can see and predict the actions of the majority of investors. You won’t always get it right, but as long as your exceeding 75% accuracy then you will be making very decent profits.

About a hundred years after Leonardo de Vinci had developed his myriad mechanical devices and painted the world renowned “Mona Lisa”, a young Japanese Rice Trader realised the sophisticated connections between the Open, High, Low, and Close market prices for the day and depicted them graphically using symbols. These symbols are known today as Candlesticks.

Anatomy of a Candlestick

Consider the above diagram and you will observe that a close that is lower than the open produces a black candle (a bearish candle) and a close higher than the open creates a white candle (a bullish candle). The combination of these black and white candles combined with their size and position are what form the basis of Candlestick Analysis. The longer the body of the candle in either direction, the stronger it’s bearish or bullish attributes are.

Once believed to be overly intricate for the average western mind, Candlestick Analysis is now enjoying a tremendous following, thanks in no small measure to the endeavours of two very high profile Candlestick Analysts; Stephen W. Bigalow and Steve Nisson, who between them have whittled the thousands of Japanese Candlestick patterns down to a few Major Signals that can be used by any trader who takes the time to learn them.

The Japanese Rice Trader mentioned previously, utilised and developed them to generate a rather impressive fortune by employing them in his daily trading on the Rice Exchanges. His family rapidly became the forerunners of today’s billionaire elite and the stuff of legends. A point to consider here is that computers did not exist in those times and therefore all charts and calculations were produced by hand; a quite formidable job for the majority of us nowadays!

By studying the interaction of these candlestick symbols and by using selected western indicators to the charts; a smart and disciplined analyst can foresee, with incredible precision, the movements of any chosen market.

What I am aiming to do in the following paragraphs is to present you with an example of how a signal can pre-empt a reversal of a trend. If you are able to foresee such events then you’re in a really strong position to complete regularly profitable trades. The candlesticks together with selected western indicators will make sure your accuracy exceeds 75% to 85%. That’s one heck of a hit rate.

An illustration of a Candlestick Signal.

To provide an illustration of the way a Candlestick Pattern can trigger a signal to trade; consider the chart below:

A Morning Star

Look at the three candles which are arrowed. This pattern forms what is known as a “morning star” pattern. So named because it’s formed at the bottom of a trough. It’s sister pattern, is referred to as an “evening star” and is formed at a peak.

The initial candle needs to be the colour of the present trend which for the morning star is a bearish trend. Meaning that the candle will be black (or in this case brown). The second candle will be a Doji or Spinning Top, the colour of the body doesn’t matter. In the case of a Doji, the open and close are identical very nearly and the spinning top has a very small body. Both of these candles show indecision, or a battle for control between the bears and the bulls. The 3rd candle will be a white candle (bullish candle) and should really close at least halfway up the body of the first candle.

I can hear you saying “But it doesn’t!!”. True, in this instance it does’nt. Even so, the overall trend of this market was bullish and by understanding the concepts of reading charts you would have noticed that this pattern was signalling an end to the retracement and a continuation of the original trend.

I would stress that this is in no way meant to be an exhaustive review of Candlestick Analysis. I am basically seeking to supply you with a preliminary understanding of how the signal patterns can help you when making a trading decision. They work for me, and that’s why they make up the major part of the trading strategy I teach and use in my personal trading.