5. Candles: Combinations

With two candles combinations, we have to look at both bullish and bearish patterns. Similarly as with individual candles, the names of the combinations are not as important as is the message that they are communicating.  In this blog, we will look at the following combinations:

Harami Cross and Harami are both considered to be reversal patterns and are characterized by small body candles or dojis appearing inside a previous large body candles. These combinations are especially significant after multi bar moves in one direction. Wide body (WB) candles have a tendency to either ignite a new move or terminate it.  For example, WB green candle following a multi bar move higher hints that bulls may be little overextended to the upside and the likelihood of at least temporary correction increases. If the following candle closes with a small real body inside the WB green candle (Harami pattern), we have a first hint of the underlying change in momentum.

As with Harami patterns, the remaining combinations covered in this blog are more potent primarily after significant moves in one direction. For example, if a bearish engulfing pattern develops after a multi bar move higher, it communicates weakling power of bulls. Engulfing is the strongest reversal pattern out of the three. Thurst line is the weakest, because the second candle in this combination does not even retraces half of the first candle. In a piercing line pattern, the second candle retraces more than half of the real body of the first candle. As with all the candles, both individual and combinations, it is important to consider whether the previous candles were moving up or down. Know the overall context of the market and never based entry decision on candlestick patterns alone. 

 

This blog offers basic understanding of candlestick patterns. To get a deeper knowledge a further study is required. I recommend reading a book from Steve Nison: "Beyond Candlesticks". Through candlesticks, we can spot early shifts in momentum, which can lead to price reversals. Candles will not guarantee a winning trade, but understanding them and using them correctly will increase the odds of successful trading.