There are times to buy, times to sell, and time to rest, Japanese wisdom byte
– source: Steve Nison.
The most critical candlestick formations are reversal patterns. They spot potential market turns, and, thus, are good entry and exit areas. But a trend rarely goes from beginning to end in one direct movement without periods of consolidation and pullback. Continuation patterns will help to recognise these opportunities to add to the position or enter a new one in low-risk places.
Widows are gaps in western terms. They seldom occur in 24-hour exchanged securities and are almost inexistent on intraday time frames.
A rising window, show bullish bias, while a falling window, presents a bearish one. Both windows are marked by a gap in the price action. In a rising window, the current low happens at a higher level than the previous bar’s high.
In a falling window, the current high appears below the previous bar’s low.
This gap is an important characteristic. There must not be any wick or shadow crossing this space. If any portion of the current candle overlaps some part of the prior candle, there is no window.
Japanese technical analysts speak about “going in the direction of the window” because windows are continuation patterns. Hence, rising windows are good spots to buy or add to a position, and falling windows are good areas to sell short or add to a current short.
It is said, also, say that retracements end at the window. That implies windows become support or resistance levels. If a pullback closes below the bottom of a window, that uptrend is in question. Conversely, if a pullback continues and closes above the top of a falling window, the downtrend continuation is not granted.
We have to be cautious about going beyond that in the interpretation of a pullback closing below (or above) a window. Trends tend to persist. We should read this as a partial or total position closure, but not as a reversal signal.
Tasuki is a pattern created by a gap and two posterior candles. The rising Window Tasuki is produced by a rising window with a white candle and, next, a pullback (black) candle. The black candle opens within the body of the previous white candle and closes below its body. If the close of the black candle is below the window’s low, the bullish trend is debatable
Steve Nison, on the second edition of his seminal book Japanese Candlestick Charting techniques, says that the gap value is so strong that the colour combination of the candles does not matter at all.
The critical aspect is that prices should find support at that window (or resistance on falling windows).
The falling window Tasuki is the specular pattern of this one: A falling window with a black candle and, next, a white candle whose high doesn’t go up beyond the gap.
Rising and Falling Three
The rising three is a pattern that, on an uptrend, presents a retracement from the highs of a long white candle down to its support, at the bottom of the candle, composed by three short candles (fig. 5). A breakout of the high of the middle candle confirms the resumption of the main trend.
The perfect formation holds three middle candles but, under real conditions, the number of middle candles may be from two to five. This formation is just a retracement, pause, or profit taking.
If the middle candle wick stays above the low of the first white candle, it manifests the strength of the current trend, because the support at the white candle’s bottom is holding.
The falling three is a pattern for a retracement from the lows of a long black candle, during a downtrend, up to its resistance, at the highs of the candle, by three small candles (Fig. 6). A breakdown of the low of the last middle candle confirms the resumption of the primary trend.
As with the rising three, the number of middle candles may go from two up to five, since this is a specular retracement of the bullish pattern.
The wicks of middle candles should stay below the top of the first black candle, as evidence that the downtrend is strong.
Mat hold is a stronger variant of the Three, but the pullback is tinny, the middle candles piercing just the higher (or lower) range of the first white (black) candle. The breakout of the highs (lows) is proof of the continuation of the current main trend.
The three-line strike is a big candle that covers three or more previous candles. This pattern is a single day reversal. As long as the primary trend is the established one, this is a continuation pattern, although it needs confirmation by breaking the highs of the big candle.
The conditions for the bullish pattern are:
- An uptrend has been in place
- The three previous candles are white, as a three white soldiers formation
- Each white candle closes higher than the previous candle
- The fourth candle opens near the open of the previous candle and closes near the open of the first candle.
The conditions for the bearish pattern is self-understanding.
Side by Side White Lines
Side-by-side white lines appear in uptrends. Two white candles (sometimes, three, such as in Fig. 9) appear side by side, after a gap up. This indicates a pause or a break-even between buyers and profit takers, but the strong closing from the gap down of the second candle shows the uptrend is still firm.
- The colour of the first two candles is with the trend.
- The open of the third candle is near the open of the second candle and closes near its close as well.
This formation, also with two white candles, may appear during downtrends, showing short covering positions.
In FX markets, there are no gaps, being 24-hour tradable instruments. Consequently, this pattern appears slightly modified, such as Fig. 10 shows in its bearish version.
The on Neck formation is a two-candle pattern. The first candle is in the direction of the trend and the second one, after a long gap up, moves against the trend and reaches the lows of the first candle.
The bearish version of this formation is shown below.
In intraday trades or FX markets, where a gap doesn’t exist, this formation is transformed into a long candle and a hammer, or two large candle body with a couple of opposing candles in the middle. The bearish On Neck figure shows the later setup.
- With the exception of gaps, all continuation patterns studied in this report are varieties of small pullbacks. Therefore, they look as pullbacks in shorter timeframes.
- The actual patterns don’t need to look exactly like the ones pictured here. The intelligent trader just needs to identify them as a corrective phase, after an impulsive segment.
- If in doubt, move to a shorter time frame and hunt the breakout.
References: Steve Nison, Japanese Candlestick Patterns.
Stephen Bigalow, Professional Candlestick Trading