I’ve covered some of the common candlestick sequences that you will find in the previous notes. You can also get into a bit more detail on the other traders’ psychology when you really think through what the lines mean, including the upper shadow, or wick, and the lower shadow.
For instance, say you had a bullish (white) candle, with no lower shadow and an upper shadow – this shows that it opened on the lowest price of the day, finished higher, and even had some trading higher than that. If this is at a low price level, in particular, this is a bullish signal. Traders are not considering going lower, but are considering going higher.
You can get the opposite of this, particularly at a high price level, with a bearish candle with no wick, but some lower shadow. It opened at the highest price it had all day, but traders were trying to push it lower than the closing price. This candlestick, considered on its own, is a bearish sign.
A sign of a balanced market, or a stalemate between the bulls and the bears, is when, say in a bear run downward, there is a bullish candle which opens much lower than the previous day, but closes up at the same level. This shows that the bears tried to push the price down at the open, but that the bulls responded to neutralise it. Again, the opposite applies, with a bearish candle opening higher than the previous white candle, but dropping back to the same level.
You can see this with some special cases of the doji. The dragonfly doji has a very long lower shadow, and very little if anything above. This means that the open, the high, and the close were all about the same price. The meaning depends on what hap-pened previously – if it is in a downtrend, the dragonfly doji may mean that the buyers are coming out and the downtrend is ending, in other words the buyers were shown by this doji to be pushing the price back up to the opening. On the other hand, if the dragonfly doji happens in an uptrend, it shows that the buyers failed to get the price over the opening, either during the day or even at the end of the day, and the sellers made a low, so the up-trend may be finishing.
The gravestone doji is the opposite of the dragonfly, and is formed when the open, the low, and the close are all about the same price, but the high creates a long upper shadow. Again, we can look at this in the context of where it comes, as it is similar to the dragonfly doji. If it comes in a downtrend, it may show that buyers are emerging and the downtrend is ending; if in an uptrend, it shows that the buyers failed to get a close above the open, even though some trading took place at higher levels. The uptrend may be finishing. Although the explanations above may seem to be complicated, all they really are is reinforcing the idea that a doji signals the possible end of a trend and a reversal.
Another pattern is called the Dark Cloud Cover. This is a bearish reversal signal in an uptrend. After a long white bullish candle, the next day the stock opens higher still, but finishes as a black bearish candle, with the close down within the white body. Of course, this is similar to the previous counterattack formation, and the difference is really a matter of the extent that the bearish candlestick returns back down towards the previous day’s open.