Candlestick Pattern Q&A

Email Question:

Hey Lance,

Thanks, I believe some of your knowledge held in trading is very wealthy to your students and viewers. I have a few questions on Candlestick Reversals please.

1. Some candle patterns like Hanging Man and Hammer are same in body form but different in which trend they appear, how should we recognize them a bit more, is a different colour to each reversal necessary?

2. Do Indicators play a key role with these phenomenal reversal candlesticks say like e.g. VOLUME, to tell you how much pressure that particular candle has given off for extra assurance along with where the next bar will close afterwards for traders to take action?

3. As Volatility is very important to traders from all sides, does it matter at which time or part of the day a Candle Reversal may appear and how valid is it before a news release?

4. You have not mentioned this in your videos and with due respect, can we say Piercing Patterns are both Bearish and Bullish Reversals with slight candle changes and appearing in a different trend?

Response:

Thanks for your email and your great feedback. I’m glad you’ve found value in my candlestick video series.

Before answering your questions, please let me address one point that you may or may not be aware of. There is a common assumption in the many emails I receive that I trade candlestick reversal patterns as an integral part of my trading strategy. This is not true at all. I teach candlestick reversal patterns (and similar price bar reversal patterns) simply because they are a useful stepping stone for people in learning to perceive the shifting sentiment within price movement. Candlestick patterns allow us to examine a small sequence of price movement (1-3 candles) and discuss how the sentiment shifts from bullish to bearish, or vice versa. If you desire to be a professional trader though, I highly encourage you to move beyond this information, to learn to see shifting sentiment within ALL price movement, not just those short sequences that fit a textbook candlestick pattern definition.

You will have mastered the lesson of candlestick patterns, only when you no longer need the candlestick patterns… and instead have learnt to read shifts in sentiment within all price movement.

Some articles that touch on this, from the top of my head: (there may be more if you search through my article archives)

 

See also the YTC Newsletter signup bonus ebook, “The LOST Files – 150 Lost YTC Blog Posts” for the following post: “Breaking the Pattern-Mindset”

And of course the concept is also a feature of the YTC Price Action Trader, so if you want to explore it further then check it out here: http://www.ytcpriceactiontrader.com/

Now, having said that, please let me address your questions:

1. Some candle patterns like Hanging Man and Hammer are same in body form but different in which trend they appear, how should we recognize them a bit more, is a different colour to each reversal necessary?

First, to ensure you’re familiar with the definition of each pattern, please download the Candlestick Patterns Poster and Quick Reference Guide from http://yourtradingcoach.com/ebooks/

If you examine the definition for both the Hanging Man and the Hammer you’ll note that the colour is not important. Both patterns may develop with a green real body. Both may develop with a red real body. The difference between the patterns is ONLY based upon the environment within which they develop. A Hanging Man will develop within an uptrending environment, signalling a short-term shift to bearish sentiment and a potential correction or reversal to downtrend. The Hammer will develop within a downtrending environment, signalling a short-term shift to bullish sentiment and a potential correction or reversal to uptrend.

Recognising the difference is not a matter of different pattern definitions, but rather recognition of different environments.

Environment comes first… then patterns!

 

2. Do Indicators play a key role with these phenomenal reversal candlesticks say like e.g. VOLUME, to tell you how much pressure that particular candle has given off for extra assurance along with where the next bar will close afterwards for traders to take action?

This will depend upon your strategy and how you wish to use the candlestick patterns. It’s not a function of the patterns themselves.

It’s like in the home handyman field, saying I really like using a hammer. What tools should I use alongside it? Well, it depends upon the task you’re undertaking. If you’re building a shelving unit you’ll probably need a saw, a tape measure, some nails, some reinforcing brackets and screws. But if you’re fixing a hole in the plasterboard wall, then the hammer is probably not even going to figure in your plans and you’ll need a whole different suite of tools.

In trading, candlestick reversal patterns are simply a tool that indicate short-term shift in sentiment. Where are you using them within your strategy? What for?

Given the answer to these questions, what indicators will also add value to your task?

Patterns are just a tool. Your strategy will determine what else you use with them.

Volume is a little different as it’s not a derivative of price, as are most other indicators. It can often add value. I’d consider a study of Wyckoff principles and Volume Spread Analysis if you want to learn how to incorporate volume into your trading strategy.

 

3. As Volatility is very important to traders from all sides, does it matter at which time or part of the day a Candle Reversal may appear and how valid is it before a news release?

Absolutely!

It’s vitally important to consider the context within which the patterns occur. These patterns require smooth directional price flow. If they’re occurring within a narrow-range sideways market then they’re much less likely to have any relevance. Although that is a generalisation… some patterns forming false breakouts at the edges of narrow-range sideways markets may offer useful information.

 

4. You have not mentioned this in your videos and with due respect, can we say Piercing Patterns are both Bearish and Bullish Reversals with slight candle changes and appearing in a different trend?

A Piercing Pattern is a bullish pattern occurring within the context of a downtrend. We cannot say that a Piercing Pattern is also bearish if occurring in an uptrend. That is not a Piercing Pattern as the definition includes consideration of environment.

However all patterns can be used to signal the opposite of their usual meaning, if you want to consider “pattern-failures” as a meaningful occurrence. And they should be.

For example, if a dark cloud cover is a sign of a shift to short-term bearish sentiment, then a dark cloud cover pattern failure, may be considered confirmation of continuation of prior bullish sentiment.

Pattern failures can be powerful signals, both at the macro pattern level and micro pattern level. But as always, they must be considered in an appropriate context.

Lance Beggs


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