Save Time And Money When You See These 8 Candlestick Patterns (Part 1)

Argh! That's one stock that I didn't buy due to a lack of funds! Have you experienced this? Worse still, you have other stocks in your portfolio that are either caught in a range or losing you money. Prices move in 3 directions - up, down or sideways. If you'd gone Long, you don't wish for the price of your stock to go sideways or down as you'll be losing out on time and other buying opportunities. This can be prevented as there're 8 candlestick patterns that indicate a probable consolidation (sideways movement) is coming. You'll learn about 4 of them in this article, and the other 4 in Part 2. Let's dive right in!

#1 Bullish Harami

The 2 vertical lines before the Bullish Harami candlestick pattern represent the range of the previous candles. The previous candles' color, shape and size are not important. The most important thing is that they are trending down. The 2nd candle must gap up on the opening and its entire body must remain within the range of the 1st candlestick's body.

Trading Psychology

Here's an example on the chart of PAYC. The price of PAYC has been on the downtrend since July 2020. The Bullish Harami candlestick pattern appeared in early Sep 2020. Did you notice that the 1st candlestick is quite large? This tells you that the bears are strong and in total control. The 2nd candlestick gapped up at the opening. The bulls are challenging the bears. The bulls won at the opening. However, as the day went on, the bulls weren't strong enough to push prices up significantly. Hence, the closing price of the 2nd candlestick is within the body of the 1st candlestick. The bears are still very strong. Both the bulls and the bears continued to fight it out for the next 2 weeks, with neither side a clear winner. During that 2 weeks of consolidation, you could've placed your money in other stronger stocks that were trending up and made money. Think opportunity cost.

#2 Bearish Harami

The 2 vertical lines before the Bearish Harami candlestick pattern represent the range of the previous candles. The previous candles' color, shape and size are not important. The most important thing is that they are trending up. The 2nd candle must gap down on the opening and its entire body must remain within the range of the 1st candlestick's body. This is the opposite of the Bullish Harami which you've learnt earlier.

Trading Psychology

The Bearish Harami candlestick pattern appeared on the chart of A in early Aug 2020. The share price of A was enjoying a strong bull run until a Bearish Harami pattern appeared. The 1st candlestick opened higher. That is an indication that the bulls were in full control. However, the bulls ceded some control as the 2nd candlestick gapped down at the opening. Throughout the 2nd day, the bulls got challenged by the bears. The bears narrowly lost out as they didn't manage to push prices below the body of the 1st candlestick. This massive fight between the bulls and bears continued for 2.5 weeks, with no clear winners in sight. This resulted in a consolidation. As mentioned earlier, lost time and opportunity cost would've been incurred if you had held on to A.

#3 Bullish Doji

The 2 vertical lines before the Bullish Doji candlestick pattern represent the range of the previous candles. The previous candles' color, shape and size are not important. The most important thing is that they are trending down. There may be a small body on the Doji candlestick. It doesn't matter if the body of the Doji candlestick is green or red.

Trading Psychology

Let's have a look at what happened on the chart of CP when the Bullish Doji candlestick pattern appeared. The share price of CP has been on an uptrend for about a week. Prices fell and a Bullish Doji pattern appeared in late Sep 2020. The bears were extremely strong at the open as that Bullish Doji candlestick gapped down. As the bears pushed prices lower, the bulls stepped in to end the session at the same price as the trading session had begun. This meant that the bulls are present and ready to fight it out with the bears. This massive fight went on for 2 more weeks before the bulls emerged as victors. Prices soared immediately after till the middle of Oct 2020.

#4 Bearish Doji

The 2 vertical lines before the Bearish Harami candlestick pattern represent the range of the previous candles. The previous candles' color, shape and size are not important. The most important thing is that they are trending up. Similar to the Doji candlestick mentioned in the Bullish Doji section, there may be a small body on the Doji candlestick. It doesn't matter if the body of the Doji candlestick is green or red.

Trading Psychology

After price has been rising for nearly a month, a Bearish Doji candlestick pattern appeared on the chart of DE in mid-Oct 2020. The bulls have been in total control for a month. The bulls were very strong at the start of the formation of the Bearish Doji pattern as shown by the gap up. The bulls even managed to push prices up to hit an all-time high! But, this was not to be continued. The bears crashed the party to send prices down, ending the day at the same price where it had opened at. The bears would engage the bulls in a fierce battle for a week before emerging victorious.

Candlestick Patterns Recap

When any of these 4 candlestick patterns appear, it is most likely that prices are going to consolidate for some time before the next trend is formed. Hence, it pays to wait. Head back for Part 2 where you'll learn of the other 4 candlestick patterns that are likely to lead to a consolidation. 

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