-9, is another form of aDoji day. It develops when the Doji is at, or very near, the low of the day.
Figure 2-9
The Gravestone Doji, like many of the Japanese terms, is based on variousanalogies. In this case, the Gravestone Doji represents the graves of thosewho have died in battle.If the upper shadow is quite long, it means that the Gravestone Doji ismuch more bearish. Prices open and trade higher all day only to closewhere they opened, which is also the low price for the day. This cannotpossibly be interpreted as anything but a failure to rally. The GravestoneDoji at a market top is a specific version of a Shooting Star (Chapter 3).The only difference is that the Shooting Star has a small body and theGravestone Doji, being a Doji, has no body. Some Japanese sources claimthat the Gravestone Doji can occur only on the ground, not in the air. Thismeans it can be a bullish indication on the ground or at a market low, notas good as a bearish one. It certainly portrays a sense of indecision and apossible change in trend.
Chapter 2
The Dragonfly Doji, or Tonbo (pronounced tombo), occurs when the openand close are at the high of the day (Figure 2-10). Like other Doji days, thisone normally appears at market turning points. You will see in later chaptersthat this Doji is a special case of the Hanging Man and Hammer lines. A tonboline with a very long lower shadow (tail) (shitahige) is also called a Takuriline. A Takuri line at the end of a downtrend is extremely bullish.
Candlestick Lines
tainty in the marketplace. Stars are part of many candle patterns, primarilyreversal patterns.
Paper umbrella (karakasa)
Four Price DojiFigure 2-11
This rare Doji line occurs when all four price components are equal. Thatis, the open, high, low, and close are the same (Figure 2-11). This linecould occur when a stock is very illiquid or the data source did not haveany prices other than the close. Futures traders should not confuse this witha limit move. It is so rare that one should suspect data errors. However, itdoes represent complete and total uncertainty by traders in market direction.
Many of these lines are also included in the next chapter on candle patterns. Like the previously mentioned candle lines, the Umbrella lines havestrong reversal implications. There is strong similarity between the Dragonfly Doji and this candle line. Two of the Umbrella lines are calledHammer and Hanging Man, depending upon their location in the trend ofthe market.
ConclusionThe single candle lines are essential to Japanese candlestick analysis.When they are used by themselves, and then in combinations with othercandle lines, a complete psyche of the market unfolds. Much of the analysis of these lines and patterns is part of Sakata's Method (Chapter 5).However, this book will go beyond the Sakata Method with additionalpatterns and methods. Some of these patterns are new; some are variationsof the originals.
A Star appears whenever a small body gaps above or below the? previousday's long body (Figure 2-12). Ideally, the gap should encdrnpass theshadows, but this is not always necessary. A Star indicates some uncer-
A candle pattern can be a single candlestick line or multiple candlesticklines, seldom more than five or six. In Japanese literature, there is occasional reference to patterns that use even more candlesticks, but they willbe included in the chapter on candle formations. The order in which thecandle patterns are discussed does not reflect their importance or predictiveability. They are listed in order of their frequency of occurrence, withrelated patterns following.Most of the candle patterns are inversely related. That is, for eachbullish pattern, there is a similar bearish pattern. The primary difference istheir position relative to the short-term trend of the market. The names ofthe bullish and bearish patterns may or may not be different. So that thischapter can serve as a reference, each pattern set will be covered using thesame basic format. Some patterns retain their Japanese names while othershave been given English interpretations. A few are identical in construction, but have different names. Any differences will be dealt with in thediscussion.Three small vertical lines will precede the pattern drawing. These linesonly show the previous trend of the market and should not be used asimmediate reference to pattern relationships.
Reversal Candle Patterns
Chapter 3
i ii
Reversal versus Continuation Patterns
Pattern name
Reversal and continuation patterns have been separated into different chapters. This chapter covers the reversal patterns and Chapter 4 covers thecontinuation patterns. This separation was done to add convenience andsimplify future reference. This is mentioned here because the determination of bullish or bearish implications has to do only with continued priceaction and not with previous action. Previous price movement helps todetermine only the pattern, not its ability to foresee or anticipate futureprice movement. Whether a reversal pattern or a continuation pattern,investment and trading decisions still need to be made, even if it is the factthat you decide to do nothing. Chapter 6 deals with this concept at length.There is a normal expectancy to have a bullish pattern or situation priorto a bearish counterpart. That tendency will continue here, except whenone counterpart tends to exhibit greater prevalence; then it will be coveredfirst.
Japanese name and Interpretation
Chapter Format
General discussion of the psychology of each day
Most of the candle patterns will be explained using a standard format thatshould ensure easy reference at a later date. Some candle patterns will notbe covered as thoroughly as others because of their simplicity or similarityto other patterns. Some patterns are only modified versions of anotherpattern, and will be noted as such. Since many patterns have a counterpartreflecting the other side of the market, some of the scenarios will containonly one example. Additionally, some repetition may seem to occur. Thistoo is done so that later reference will be both easy and thorough. Theusual format will be:
The romanized Japanese name and meaning, if knownComment on whether confirmation is required or suggested
CommentaryDescription of pattern(s)Western (traditional) counterpart(s)
Graphic of classic pattern(s)Detailed drawing of the classic pattern (days that can be either black orwhite are shown with shading)Rules of recognitionSimplistic rules for quick identificationCriteria for pattern recognition
Scenarios / psychology behind the patternPossible trading scenarios that could have developedPattern flexibilitySituations that change the pattern's effectivenessAllowable deviations from the classic patternInformation for the numerically oriented and computer programmerPattern breakdownReducing the pattern to a single candle line
Related PatternsPatterns that have similar formationsPatterns that are a part of this pattern
Examples
Chapter 3
Reversal Candle Patterns
Hammer and Hanging Man(kanazuchi/tonkachi and kubitsuri)Confirmation is definitely required.
CommentaryThe Hammer and Hanging Man are each made of single candlestick lines(Figures 3-1 and 3-2). They have long lower shadows and small realbodies that are at or very near the top of their daily trading range. Thesewere first introduced as paper umbrellas in Chapter 2. They are also special versions of the Tonbo/Takuri lines.The Hammer occurs in a downtrend and is so named because it ishammering out a bottom. The Japanese word for Hammer (tonkachi) alsomeans the ground or the soil.A Hanging Man occurs at the top of a trend or during an uptrend. Thename Hanging Man (kubitsuri) comes from the fact that this candle linelooks somewhat like a man hanging.Another candle line similar to the Hammer is the Takuri (pronouncedtaguri) line. This Japanese word equates with climbing a rope or haulingup. The motion is not smooth and could be related to pulling up an anchorwith your hands: as you change hands, the upward movement is interrupted momentarily. A Takuri line has a lower shadow at least three timesthe length of the body, whereas the lower shadow of a Hammer is aminimum of only twice the length of the body.
Chapter 3
Rules of Recognition1. The small real body is at the upper end of the trading range.2. The color of the body is not important.
3. The long lower shadow should be much longer than the length ofthe real body, usually two to three times.4. There should be no upper shadow, or if there is, it should be verysmall.
Scenarios and Psychology Behind the PatternHammerThe market has been in a downtrend, so there is an air of bearishness. Themarket opens and then sells off sharply. However, the sell-off is abatedand the market returns to, or near, its high for the day. The failure of themarket to continue the selling reduces the bearish sentiment, and most_, traders will be uneasy with any bearish positions they might have. If theclose is above the open, causing a white body, the situation is even betterfor the bulls. Confirmation would be a higher open with yet a still higherclose on the next trading day.
Reversal Candle Patterns
Pattern FlexibilityFeatures that will enhance the signal of a Hammer or Hanging Man patternare an extra long lower shadow, no upper shadow, very small real body(almost Doji), the preceding sharp trend and a body color that reflects theopposite sentiment (previous trend). This trait, when used on the Hammer,will change its name to a Takuri line. Takuri lines are, generally, morebullish than Hammers.The body color of the Hanging Man and the Hammer can add to thesignificance of the pattern's predictive ability. A Hanging Man with ablack body is more bearish than one with a white body. Likewise, a Hammer with a white body would be more bullish than one with a black body.As with most single candlestick patterns like the Hammer and theHanging Man, it is important to wait for confirmation. This confirmationmay merely be the action on the open of the next day. Many times, though,it is best to wait for a confirming close on the following day. That is, if aHammer is shown, the following day should close even higher beforebullish positions are taken.
The lower shadow should be, at a minimum, twice as long as the body,but not more than three times. The upper shadow should be no more than5 to 10 percent of the high-low range. The low of the body should be
below the trend for a Hammer and above the trend for a Hanging Man.
Hanging Man
Pattern Breakdown
For the Hanging Man, the market is considered bullish because of theuptrend. In order for the Hanging Man to appear, the price action for theday must trade much lower than where it opened, then rally to close nearthe high. This is what causes the long lower shadow which shows how themarket just might begin a sell-off. If the market opens lower the next day,there would be many participants with long positions that would want tolook for an opportunity to sell. Steve Nison claims that a confirmation thatthe Hanging Man is bearish might be that the body is black and the nextday opens lower.
The Hammer and Hanging Man patterns, being single candle lines, cannotbe reduced further. See Paper Umbrella in Chapter 2.
Related PatternsThe Hammer and Hanging Man are special cases of the Dragonfly Dojidiscussed in the previous chapter. In most instances, the Dragonfly Doji
would be more bearish than the Hanging Man.
Reversal candle Patterns
Chapter 3
CommentaryThe Engulfing pattern consists of two real bodies of opposite color (Figures 3-4 and 3-5). The second day's body completely engulfs the priorday's body. The shadows are not considered in this pattern. It is also calledthe Embracing (daki) line because it embraces the previous day's line.When this occurs near a market top, or in an uptrend, it indicates a shiftingof the sentiment to selling. A Yin Tsutsumi after an uptrend is called theFinal Daki line and is one of the Sakata techniques discussed in a laterchapter.The first day of the Engulfing pattern has a small body and the secondday has a long real body. Because the second day's move is so much moredramatic, it reflects a possible end to the previous trend. If the bearishEngulfing pattern appears after a sustained move, it increases the chancethat most bulls are already long. In this case, there may not be enough newmoney (bulls) to keep the market uptrend intact.An Engulfing pattern is similar to the traditional outside day. Just likethe Engulfing pattern, an outside day will close with prices higher andlower than the previous range with the close in the direction of the newtrend.
Rules of Recognition1. A definite trend must be underway.2. The second day's body must completely engulf the prior day'sbody. This does not mean, however, that either the top or thebottom of the two bodies cannot be equal; it just means that bothtops and both bottoms cannot be equal.3. The first day's color should reflect the trend: black for a downtrendand white for an uptrend.4. The second real body of the engulfing pattern should be the opposite color of the first real body.
Reversal Candle Patterns
Scenarios and Psychology Behind the PatternBearish Engulfing PatternAn uptrend is in place when a small white body day occurs with not muchvolume. The next day, prices open at new highs and then quickly sell off.The sell-off is sustained by high volume and finally closes below the open
of the previous day. Emotionally, the uptrend has been damaged. If thenext (third) day's prices remain lower, a major reversal of the uptrend hasoccurred.A similar, but opposite, scenario would exist for the bullish Engulfing
pattern.
Pattern FlexibilityThe second day of the engulfing pattern engulfs more than the real body;in other words, if the second day engulfs the shadows of the first day, thesuccess of the pattern will be much greater.The color of the first day should reflect the trend of the market. In anuptrend, the first day should be white, and vice versa. The color of thesecond, or the engulfing day, should be the opposite of the first day.Engulfing means that no part of the first day's real body is equal to oroutside of the second day's real body. If the first day's real body was
engulfed by at least 30 percent, a much stronger pattern exists.
Reversal candle Patterns
Chapter 3
The bullish Engulfing pattern reduces to a Paper Umbrella or Hammer,which reflects a market turning point (Figure 3-6). The bearish Engulfingpattern reduces to a pattern similar to the Shooting Star or possibly aGravestone Doji, if the body is very small (Figure 3-7). Both the bullishand bearish Engulfing patterns reduce to single lines that fully supporttheir interpretation.
Related PatternsThe Engulfing pattern is also the first two days of the Three Outsidepatterns. The bullish Engulfing pattern would become the Three OutsideUp pattern if the third day closed higher. Likewise, the bearish Engulfingpattern would make up the Three Outside Down pattern if the third dayclosed lower.The Engulfing pattern is also a follow-through, or more advancedstage, of the Piercing Line and the Dark Cloud Cover. Because of this, theEngulfing pattern is considered more important.
ExamplesFigure 3-8A
**«•! I13B1
Chapter 3
Reversal Candle Patterns
Figure 3-8B
CommentaryThe Harami pattern is made up of the opposite arrangement of days as theEngulfing pattern (Figures 3-9 and 3-10). Harami is a Japanese word forpregnant or body within. You will find that in most instances the realbodies in the Harami are opposite in color, also like the Engulfing pattern.You will probably note that the Harami is quite similar to the traditional inside day. The difference, of course, is that the traditional insideday uses the highs and lows, whereas the Harami is concerned only withthe body (open and close). This requirement to use the open and closeprices instead of the high and low prices is common in Japanese candlestick analysis and philosophy. The Harami requires that the body of thesecond day be completely engulfed by the body of the first day.
Rules of Recognition1. A long day is preceded by a reasonable trend.2. The color of the long first day is not as important, but it is best if itreflects the trend of the market.3. A short day follows the long day, with its body completely insidethe body range of the long day. Just like the Engulfing day, thetops or bottoms of the bodies can be equal, but both tops and bothbottoms cannot be equal.
Harami(haramt)Confirmation is strongly suggested.Figure 3-9
Figure 3-10
4. The short day should be the opposite color of the long day.
Scenarios and Psychology Behind the Pattern
pdwntrend has been in place for some time. A long black day witherage volume has occurred which helps to perpetuate the bearishness.
Chapter 3
The next day, prices open higher, which shocks many complacent bears,and many shorts are quickly covered, causing the price to rise further. Theprice rise is tempered by the usual late comers seeing this as an opportunity to short the trend they missed the first time. Volume on this day hasexceeded the previous day, which suggests strong short covering. A confirmation of the reversal on the third day would provide the needed proofthatthetrend has sreversed.,f —r s: / *. , ' - / >
Bearish HaramiAn uptrend is in place and is perpetuated with a long white day and highvolume. The next day, prices open lower and stay in a small rangethroughout the day, closing even lower, but still within the previous day'sbody. In view of this sudden deterioration of trend, traders should becomeconcerned about the strength of this market, especially if volume is light.It certainly appears that the trend is about to change. Confirmation on thethird day would be a lower close.
Reversal candle Patterns
The bullish Harami reduces to a Paper Umbrella or a Hammer line whichindicates a market turning point (Figure 3-11). The bearish Harami reducesto a Shooting Star line, which also is a bearish line (Figure 3-12). Both thebullish and the bearish Harami are supported by their single-line breakdowns.
Related PatternsThe Harami pattern is the first two days of the Three Inside Up and ThreeInside Down patterns. A bullish Harami would be part of the Three InsideUp and a bearish Harami would be part of the Three Inside Down.
ExamplesFigure 3-13A»*«!• 11781
Pattern FlexibilityThe long day should reflect the trend; in an uptrend the long day should bewhite and a downtrend should produce a black long day. The amount ofengulfing of the second day by the first day should be significant. The longday should engulf the short day by at least 30 percent. Remember that longdays are based upon the data preceding them.
Reversal Candle Patterns
CommentaryThe Harami pattern consists of a long body followed by a smaller body. Itis the relative size of these two bodies that make the Harami important.Remember that Doji days, where the open and close price are equal, represent days of indecision. Therefore, small body days that occur after longerbody days can also represent a day of indecision. The more the indecisionand uncertainty, the more likelihood of a trend change. When the body ofthe second day becomes a Doji, the pattern is referred to as a Harami Cross(Figures 3-14 and 3-15), with the cross being the Doji. The Harami Crossis a better reversal pattern than the regular Harami.
J
Rules of Recognition1. A long day occurs within a trending market.
2. The second day is a Doji (open and close are equal).3. The second-day Doji is within the range of the previous long day.
Scenarios and Psychology Behind the Pattern
Harami Cross(harami yose sen)
Confirmation is not required, but is recommended.Fl9ures 14
-
Figure 3-15
The psychology behind the Harami Cross starts out the same as that for thebasic Harami pattern. A trend has been in place when, all of a sudden, themarket gyrates throughout a day without exceeding the body range of theprevious day. What's worse, the market closes at the same price as itopened. Volume of this Doji day also drys up, reflecting the complete lackof decision of traders. A significant reversal of trend has occurred.
Pattern FlexibilityThe color of the long day should reflect the trend. The Doji can have anopen and a close price that are within 2 to 3 percent of each other if, andonly if, there are not many Doji days in the preceding data.
Reversal Candle Patterns
The bullish and bearish Harami Crosses reduce to single lines that supporttheir interpretation in most instances (Figures 3-16 and 3-17). The body ofthe single-day reduction can be considerably longer than what is allowedfor a Paper Umbrella or Hammer line. The fact that the breakdown is notcontrary to the pattern is supportive.
Related PatternsThe Harami Cross could possibly be the beginning of a Rising or a FallingThree Methods, depending on the next few days' price action. The Rising
and Falling Three Methods patterns are continuation patterns, which are inconflict with the signal given by the Harami Cross.
Chapter 3Reversal Candle Patterns
Figure 3-1 SB
Commentaryinverted HammerThe Inverted Hammer is a bottom reversal line (Figure 3-19). Similar to itscousin the Hammer, it occurs in a downtrend and represents a possiblereversal of trend. Common with most single and double candlestick patterns, it is important to wait for verification, in this case bullish verification. This could be in the form of the next day's opening above theInverted Hammer's body. Since the closing price is near the low for theday and the market actually traded much higher, verification is most important. Additionally, there is little reference to this pattern in Japaneseliterature.
Shooting starThe Shooting Star (Figure 3-20) is a single-line pattern that indicates anend to the upward move. It is not a major reversal signal. The ShootingStar line looks exactly the same as the Inverted Hammer. The difference,of course, is that the Shooting Star occurs at market tops. A rally attemptwas completely aborted when the close occurred near the low of the day.The body of the Shooting Star does gap above the previous day's body.This fact actually means that the Shooting Star could be referred to as atwo-line pattern since the previous day's body must be considered.
Rules of Recognitioninverted Hammer1. A small real body is formed near the lower part of the price range.2. No gap down is required, as long as the pattern falls after a downtrend.
Chapters
Reversal candle Patterns
3. The upper shadow is usually no more than two times as long as thebody.
Pattern Flexibility
4. The lower shadow is virtually nonexistent.
Single-day candlesticks allow little flexibility. The length of the shadowwill help in determining its strength. The upper shadow should be at leasttwice the length of the body. There should be no lower shadow, or at leastnot more than 5 to 10 percent of the high-low range. Like most situations,the color of the body can help, if it reflects the sentiment of the pattern.
Shooting Star1. Prices gap open after an uptrend.
2. A small real body is formed near the lower part of the price range.3. The upper shadow is at least three times as long as the body.
4. The lower shadow is virtually nonexistent.
Scenario and Psychology Behind the Patterninverted HammerA downtrend has been in place when the market opens with a down gap.A rally throughout the day fails to hold and the market closes near its low.Similar to the scenario of the Hammer and the Hanging Man, the openingof the following day is critical to the success or failure of this pattern tocall a reversal of trend. If the next day opens above the Inverted Hammer'sbody, a potential trend reversal will cause shorts to be covered whichwould also perpetuate the rally. Similarly, an Inverted Hammer could easily become the middle day of a more bullish Morning Star pattern (page56).
Shooting StarDuring an uptrend, the market gaps open, rallies to a new high, and thencloses near its low. This action, following a gap up, can only be consideredas bearish. Certainly, it would cause some concern to any bulls who haveprofits.
Even though the Inverted Hammer and the Shooting Star are considered assingle-day patterns, the previous day must be used to add to the patterns'successfulness. The Inverted Hammer pattern reduces to a long black candle line, which is always viewed as a bearish indication when consideredalone (Figure 3-21). The Shooting Star pattern reduces to a long whitecandle line, which almost always is considered a bullish line (Figure 3-22).Both of these patterns are in direct conflict with their breakdowns. Thisindicates that further confirmation should always be required before actingoa them.
Related PatternsAs the Hammer and Hanging Man were related to the Dragonfly Doji, theShooting Star and Inverted Hammer are cousins to the Gravestone Doji.
Reversal candle Patterns
(kirikomi)Bullish reversal pattern.Confirmation is suggested, but not required
Reversal Candle Patterns
commentaryThe Piercing Line pattern, shown in Figure 3-24, is essentially the oppositeof the Dark Cloud Cover (see next pattern). This pattern occurs in a downtrending market and is a two line or two day pattern. The first day is blackwhich supports the downtrend and the second day is a long white daywhich opens at a new low and then closes above the midpoint of thepreceding black day. Kirikomi means a cutback or a switchback.
Rules of Recognition1. The first day is a long black body continuing the downtrend.
the black candlestick's body. There are three additional candle patternscalled On Neck Line, In Neck Line, and Thrusting Line (covered in Chapter 4), which make the definition of the Piercing Line so stringent. Thesethree patterns are similar to the Piercing Line but are classified as bearishcontinuation patterns since the second day doesn't rally nearly as much.The more penetration into the prior day's black body, the more likelyit will be a successful reversal pattern. Remember that if it closes abovethe body of the previous day, it is not a Piercing pattern, but a bullishEngulfing day.Both days of the Piercing pattern should be long days. The second daymust close above the midpoint and below the open of the first day, with noexceptions.
2. The second day is a white body which opens below the low of theprevious day (that's low, not close).3. The second day closes within but above the midpoint of the previous day's body.
Scenarios and Psychology Behind the PatternA long black body forms in a downtrend which maintains the bearishness.A gap to the downside on the next day's open further perpetuates thebearishness. However, the market rallies all day and closes much higher.In fact the close is above the midpoint of the body of the long black day.This action causes concern to the bears and a potential bottom has beenmade. Candlestick charting shows this action quite well, where standardbar charting would hardly discern it.
The Piercing Line pattern reduces to a Paper Umbrella or Hammer line,which is indicative of a market reversal or turning point (Figure 3-25). Thesingle candle line reduction fully supports the bullishness of the Piercing
Line.
Pattern FlexibilityThe white real body should close more than halfway into the prior blackcandlestick's body. If it didn't, you probably should wait for more bullishconfirmation. There is no flexibility to this rule with the Piercing pattern.The Piercing pattern's white candlestick must rise more than halfway into
Related PatternsThree patterns begin in the same way as the Piercing Line. However, theydo not quite give the reversal signal that the Piercing Line does and areconsidered continuation patterns. These are the On Neck Line, In Neck
Chapter 3
Reversal candle Patterns
Line, and Thrusting Line (see Chapter 4). The bullish Engulfing pattern is
also an extension, or more mature situation, of the Piercing Line.
CommentaryThe Dark Cloud Cover (Figure 3-27) is a bearish reversal pattern and thecounterpart of the Piercing pattern (Figure 3-24). Since this pattern onlyoccurs in an uptrend, the first day is a long white day which supports thetrend. The second day opens above the high of the white day. This is oneof the few times that the high or low is used in candle pattern definitions.Trading lower throughout the day results in the close being below themidpoint of the long white day.This reversal pattern, like the opposite Piercing Line, has a markedaffect on the attitude of traders because of the higher open followed by themuch lower close. There are no exceptions to this pattern. Kabuse means
to get covered or to hang over.
Rules of Recognition1. The first day is a long white body which is continuing the uptrend.
2. The second day is a black body day with the open above theprevious day's high (that's the high, not the close).
Reversal Candle Patterns
3. The second (black) day closes within and below the midpoint ofthe previous white body.
black body closes deeply into the first day, the breakdown would be aGravestone Doji, which also fully supports the bearishness.
Scenarios and Psychology Behind the Pattern
Related Patterns
The market is in an uptrend. Typical in an uptrend, a long white candlestick is formed. The next day the market gaps higher on the opening,however, that is all that is remaining to the uptrend. The market drops toclose well into the body of the white day, in fact, below its midpoint.Anyone who was bullish would certainly have to rethink their strategywith this type of action. Like the Piercing Line, a significant reversal oftrend has occurred.
The Dark Cloud Cover is also the beginning of a bearish Engulfing pattern. Because of this, it would make the bearish Engulfing pattern a morebearish reversal signal than the Dark Cloud Cover.
ExampleFigure 3-29
Pattern FlexibilityThe more penetration of the black body's close into the prior white body,the greater the chance for a top reversal. The first day should be a longday, with the second day opening significantly higher. This merely accentuates the reversal of sentiment in the market.
The Dark Cloud Cover pattern reduces to a Shooting Star line, whichsupports the bearishness of the pattern (Figure 3-28). If the second day's
Chapter 3
Reversal candle Patterns
4. The shadows on the Doji day should not be excessively long, especially in the bullish case.
Scenarios and Psychology Behind the PatternConsidering the bearish Doji Star, the market is in an uptrend and isfurther confirmed by a strong white day. The next day gaps even higher,trades in a small range, and then closes at or near its open. This will erodealmost all confidence from the previous rally. Many positions have beenchanged, which caused the Doji in the first place. The next day's open, iflower, would set the stage for a reversal of trend.
Pattern Flexibility
CommentaryA Doji Star is a warning that a trend is about to change. It is a long realbody which should reflect the previous trend. A downtrend should producea black body, an uptrend, a white body (Figures 3-30 and 3-31). The nextday, prices gap in the direction of trend, then close at the opening. Thisdeterioration of the previous trend is immediate cause for concern. Theclear message of the Doji Star is an excellent example of the value of thecandlestick method of charting. If you were using close only or standardbar charts, the deterioration of the trend would not quite yet be apparent.Candlesticks, however, show that the trend is abating because of the gap inreal bodies by the Doji Star.
If the gap can also contain the shadows, the significance of the trendchange is greater. The first day should also reflect the trend with its bodycolor.
Rules of Recognition1