MoneyWiseMind presents Part-III of 'A Logical Guide to Candlestick Patterns.' Discover how to interpret the signals provided by candlestick patterns. This guide explores the different types of patterns, their meanings, and practical applications. Master the art of technical analysis with expert insights and a logical approach. Read now for a valuable resource in your investment journey.
The Piercing Candlestick Pattern
The piercing candlestick pattern is a two candles bullish reversal pattern appears at the end of an existing downtrend. Location is important. If it forms at support it signals a possible trend reversal. The pattern includes the 1st session opening near high and closing near the low with a long trading range. The piercing candlestick pattern is very similar to the bullish engulfing pattern with a little variation. In a bullish engulfing pattern the 2nd session's green candle engulfs the prior red candle completely. Where as, in piercing candlestick pattern the 2nd session's green candle engulfs the previous session's red candle partially. At least above 50% but less than 100% should be the size of the engulfing.
Logic Behind Piercing Candlestick Pattern
After getting confirmation of a piercing candlestick pattern formation, one can take long position (buy). Risk-reward ratio is favourable at this level.
Below chart is an example of piercing candlestick pattern formed in daily chart of Maruti Suzuki
Dark Cloud Cover Candlestick Pattern
The dark cloud candlestick pattern is a two candles bearish reversal candlestick pattern appears at the end of an uptrend. Location is important. If it forms at the resistance it signals a potential weakness in the uptrend can turn to be possible trend reversal to the downside. In this pattern the 1st candle is bullish and 2nd follow up candle is bearish. The pattern is formed with a bearish candle that opens higher but closes below the 50%of the prior bullish candle. The dark cloud cover pattern is very similar to the bearish engulfing pattern. The only difference is in bearish engulfing pattern the 2nd session's red candle engulfs the 1st session's green candle completely. Both patterns signal a potential trend reversal. In dark cloud cover candlestick pattern the 2nd candle opens higher but closes below half of the prior green candle.
Logic Behind Dark Cloud Cover Candlestick Pattern
First, a bullish uptrend continues that forms a bullish candle. On the 2nd session market opens gap up reconfirming the bulls' control over the market. But at end, sudden selling pressure emerges driving the price down which turns into a bearish candle. The bearish candle closes below the midpoint of the prior green candle. In short, at the opening the buyers push the Price higher, but sellers take control later and pull down the price sharply. It indicates a probable trend reversal of price to the downside. One can take short position (sell) after getting confirmation of a dark cloud cover candlestick pattern formation keeping a stop loss at the high of the bearish candle. Or one can exit his long position.
Below chart is an example of dark cloud cover candlestick pattern formed in daily chart of Reliance Industries Ltd.
Here, we can see that there is a great similarity between piercing candlestick pattern and bullish engulfing pattern as well as between dark cloud cover candlestick pattern and bearish engulfing pattern. In our real trade which set up is better and profitable? I will bet my money on bullish engulfing pattern rather than piercing candlestick pattern, because of the fact that the bullishness in bullish engulfing pattern is more impulsive as the 2nd candle engulfs the prior red candle completely showing the prominent strength of the buyers. Same is the case of dark cloud cover candlestick pattern and bearish engulfing pattern, I will put my money on bearish engulfing pattern rather than dark cloud cover candlestick pattern. This is completely our personal observation as a team of MoneyWiseMind.
Whenever any bullish or bearish candlestick pattern is found at support or resistance with a follow-up candle you can initiate a trade. You can put stop-loss at candle's low or high as per setup. If the candle is too big stop-loss should be half of the candle.
We have discussed about some relevant and profitable candlestick patterns in our posts [A Logical Guide To Candlestick Patterns] series which happens frequently in any time-frame on all markets. There are many candlestick patterns that one can learn, we need not know all of them. Our only goal is to identify the perfect pattern to develop our trades by reading charts correctly. It does not matter which pattern you see. You should develop your trades on the basis of the thought process of the bulls and bears behind these patterns.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
