Crazy Candlestick Pattern

I just thought I'd point out this rather rare candlestick pattern from last week's EUR/USD daily charts. This unusual creature emerged on May 29, undoubtedly in response to some piece of news I wasn't paying attention to at the time:


What you're seeing here is a 100 pip range, and a closing price just 1 pip above the open. In candlestick parlance it looks like a Doji Star to me, or possibly a very narrow Spinning Top. This is just about the clearest illustration of market ambivalence and uncertainty you'll ever see: the price aggressively testing both short and long directions and then settling back within 1 pip of where it all started. The upper shadow is also substantially longer than the lower one, and you can see how the next day the price headed lower in response to such a dramatic failure to make any progress upwards.

This is also the perfect illustration of an intraday whipsaw or range-based trading opportunity. If you had your stop-loss set at a safe distance and your limit order at a modest, realistic exit point, you could've made money on either a short or long trade. But I wouldn't plan on one of these showing up on a regular basis.

Know Your Candlestick Patterns

One of my goals in continuing to improve my trading system is to test out every type of bullish and bearish candlestick pattern to see if it's worth adding to the mix. In researching the different types of candlesticks, I came across this great free resource that illustrates dozens of patterns associated with uptrends and downtrends in a market. Check it out: Hotcandlestick.com

Note that those with green borders are classified as continuation signals, and those with red borders as reversal signals - an important distinction. Depending on what currency you're trading and the timeframe of chart you're looking at, you may not see some of them that often, if ever. For instance, I don't know if I've ever seen a "Tweezer Top" or "Tweezer Bottom" on the daily EUR/USD chart. But they're still good to know about.

Hope this helps you make the most of your candlestick charts!

Related topic:
Candlestick Chart Tutorial

Candlestick Chart Tutorial

If you've spent any time playing around with charting software, you're probably familiar with the candlestick chart, one of the most popular ways to visually depict the movement of a market within and between specified time periods. In fact, candlestick charts are just about the fastest, user-friendliest, and most colorful way to get a clear picture of market behavior.

When I was just learning about this type of chart, one of my favorite resources was this tutorial provided by TradingDay.com. Here I learned the fascinating origins of candlestick charting in the Japanese rice markets of the 17th Century, when Homma, a trader in rice futures, invented these charts to help in his analysis of rice prices. The tutorial also teaches you how to spot bullish and bearish candlestick signals, such as the Harami, the Three Black Crows, the Three White Soldiers, and other indicators that date back centuries (no, the markets don't really change that much, just the traders.) It includes diagrams of each chart formation with pointers on when to enter short and long trades, as well as this helpful comparison of candlestick charting with the Western bar and line chart formats.

Looking to combine a candlestick chart with other indicators? I'd recommend 5 and 20-period moving averages and Bollinger Bands, as well as Stark Bands and Parabolic SAR if your charting software provides them. But don't let your charts get too cluttered -- you may find yourself getting burnt out on all the data. No matter how great your charts are, one of the most valuable skills you can develop is knowing when to take a break.

Related topic:
Know Your Candlestick Patterns