One of the best candlestick patterns to use for identifying a bearish reversal is the shooting star.
By definition, this is a pattern that signals a possible top. I say possible, because like all reversal patterns, confirmation is key before taking any action to position yourself.
For this reversal pattern, here’s what you are looking for:
- gap open greater than the previous close
- a new high
- an open and close in the bottom of the range.
In candlestick speak, the real body is small – the open and close are close to each other. The wick is at least three times as long as the real body.
The recent stock chart for IBM shows this pattern.
For confirmation of this pattern, the stock needs to trade lower, obviously. The best balance of risk versus reward comes when you wait for the stock to trade below the shooting star’s low.
Not to be confused with the “Gravestone doji“.
A subset is the gravestone doji.
The only difference between these two patterns is that the doji has the open and close equal to each other.
By themselves, candlesticks are good.
Even better is when the sticks are combined with other classical technical analysis like moving averages or support and resistance. You have a much better chance of identifying a reversal if a candle occurs at a potential support level identified by either previous high or Fibonacci retracements.
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