Trading Tutorials

We all know that there are three kinds of trend: up trend, down trend and sideways trend. The ancient Japanese discovered candlestick patterns that signal the onset of these trends. In our previous columns, we dealt with both bullish and bearish reversal patterns.

However, there are distinct candlestick patterns, which are considered as neutral or indecisive patterns. The most common among these is the doji pattern. When the opening price and the closing price of a stock are almost equal, the candlestick pattern is known as doji. The body of these patterns is just a small horizontal line. The shadows or wicks can, however, be of varying length. A doji line with long upper and lower shadows indicates substantial indecision on the part of market participation.

Doji line with long lower shadow and no upper shadow is called a dragonfly doji candlestick. This pattern is believed to have bullish implications. It is formed when the security falls lower during the trading session but recovers all the losses and closes near the day’s high, which is also its opening level; denoting bargain hunting at lower levels.

Gravestone doji pattern is the opposite of dragonfly doji pattern. In this pattern the upper shadow is longer and there is no lower shadow. The implication of gravestone doji is bearish. This pattern is formed when a bout of selling is experienced at intra-day high and the stock wipes out all its gains to close near the day’s low. Gravestone doji is yet another example of the colourful terminology used by the Japanese. This pattern marks the end (death) of an uptrend.

The candlesticks, which have a small bodies with long upper and lower shadows are called spinning tops. The colour of the body is not important in this pattern. These candlestick patterns occur on days of indecisiveness. Not much inference can be drawn from these patterns, except that the security is pausing or moving sideways.