Written and copyright © 2009-2013 by Thomas N. Bulkowski. All rights reserved.
During research on candlesticks for my book,
Encyclopedia of Candlestick Charts,
pictured on the left, I made many interesting discoveries that I disclose in the book. This article discusses two of them.
Trade bullish candles in a primary uptrend.
This may sound obvious and it is, but try to prove it. I did. Bullish candles perform much better in a primary uptrend than otherwise.
Displayed is a daily chart of Griffon Corp (GFF) on the right, and it shows an example of what I mean.
Price after the March low started a nice upward trend. It was an
intermediate-term trend (3-6 months long). Then price retraced a portion of that climb by dropping down in an Elliott wave type
ABC correction. I show the three legs of that down move labeled as ABC.
At the bottom of the ABC correction, a morning doji star appears, highlighted by the inset so you can see it.
It is not pretty, meaning it is far from text book. It appears at the end of a
downward price trend and the candle acts as a bullish reversal 76% of the time (ranking 8th out of 103 candle patterns). I found those numbers by testing, and I dedicate a full chapter
to the candlestick in my book.
Anyway, when price breaks out upward from the morning doji star, it rejoins the primary uptrend. It's like taking a dip in the river and swimming with the current instead of
In a bull market, when the underlying price trend is upward, you want to trade bullish candles. When a reversal candle pattern appears as part of a retrace of a bullish uptrend,
such as that pictured here, your chances of making a profitable trade improve. The candlestick reversal signals the end of the downward retrace and price rejoins the upward current.
Trade bearish candles in a primary downtrend.
As you might imagine, bearish candles work best if the primary trend is downward. In a manner similar to that described above, except inverted, you want the current to pull your stock in the
direction of the industry and the general market. The best trades are when all three (stock, industry, and market) are tending in the same direction, either all moving up (bull market)
or all moving down (bear market).
If you are unsure what the price trend is (short-, intermediate-, or long- term), then flip to the weekly scale. Draw a trendline beneath the bottoms and along the tops. Those may
help you decide what the primary (basic or underlying) trend really is. Your trades should follow that trend.
In the case of bearish candlesticks, only trade them in a downward price trend. A wonderful and profitable way of doing that is to wait for them to appear as a reversal candlestick
in an upward retrace of the downward price trend. I show the bullish variety of that description in the chart (meaning it shows a downward retrace in a upward price trend). You will want
to look for the opposite: a reversal candle that appears at the top of an upward retrace in the longer term downward trend.
The chart shows the two best locations to search for reversal candlesticks. On the top half of the chart, the primary price trend is upward. Then a retrace occurs
and price drops. At the bottom of that retrace (circled in red), look for a reversal candle pattern. If one occurs there, it represents a low risk,
high reward entry to go long.
Similarly, the bottom half of the chart is when the primary price trend is downward. Look for price to move up in a retrace of that downward trend. At the top of the retrace, circled
look for a reversal candlestick. If one appears, then it may mean the end of the retrace and that price will resume trending down. It represents a good opportunity to short the stock.
-- Thomas Bulkowski
Written and copyright © 2009-2013 by Thomas N. Bulkowski. All rights reserved. Be careful of reading health books. You might die of a misprint. -- Mark Twain