Japanese candlestick chart patterns- part1

The basic idea behind trading is to buy at low price and sell at higher price there by taking a profit and vice versa. So how will you know that the price is going to move up by looking at the chart. This is where Chart patterns comes to play it's role.

Candle stick chart will provide a lot of patterns which will act as a warning signal that the price is going to change it's direction.There are several types of candlestick chart patterns like

• Reversal patterns
• Continuation Patterns

Let's look at the Reversal patterns.

Reversal patterns show the trader that the price is likely to change it's direction. If a particular currency is in uptrend and a reversal pattern appear on the chart,this means that the trend may change to downward direction or is going to range.
Reversal pattern doesn't mean that the trend has been completely reversed. Sometimes the reversal will only be for a short time and after that the price will regain its strength and continue it's former trend. The length of reversal depend on various factors like Support and resistance areas, major fundamental developments,market sentiment etc.

1) Engulfing Pattern:
One of the important candlestick  reversal signal. This is a 2 candle pattern which means the pattern include 2 candlesticks. The engulfing pattern can be

• Bearish engulfing-- occurs in uptrend
• Bullish engulfing.--occurs in down trend

Bearish Engulfing pattern:

In this pattern there will be 2 candlesticks. The second candlestick will engulf the body of the first candlestick completely.The first one will be a bull candle (or a doji) and the second a bear candle. This pattern gives a warning signal that uptrend is coming to an end.

See the chart above the rectangle enclosed shows a bearish  engulfing bar pattern. In this the second bear candle is so long that it has covered almost 5 previous candles. The more candles enclosed by the second bar the stronger it is.

Features:

• When the pattern appears at major support and resistance levels the chance of reversal of price direction is more:                                                                                                                                                                                 In the above chart the engulfing pattern appeared  at the very big round number 1.3000 which is also a resistance level.   
• Only pattern appearing at peak/Swing high  are considered valid pattern.

The rectangle box in below chart shows a bearish engulfing pattern at peak/swing high. Price changed its direction after the pattern.

See the rectangle box in chart below. Bearish engulfing pattern has not formed at peak. so the price has not changed its direction.                                                                                                                

Bullish engulfing pattern:

This is exact opposite to the bearish engulfing pattern. This pattern says that the down trend is going to end.

Features:

The bullish engulfing bar is valid only if

• it is at a major resistance or support level.
• formed at a swing low
• second candle engulf the real body of the first candle completely.

The above picture shows a bullish engulfing bar formed at swing low/trough.

One important thing to note in both engulfing patterns is that the second bar need not cover the shadow of first bar for a valid signal.Covering the real body of first bar is more than enough.

Caution:

Although engulfing bars are one of the most reliable reversal signal, it is not necessary that all engulfing bars will produce a reversal. So it is advisable to wait for the confirmation before taking a trade with engulfing bar pattern.