Page 144 - THE MARKET WHISPERER

142 PART 5 - Principles O f Technical Analysis

A bottoming tail indicates an expected upward reversal. Here, too,
the position of the candle with the tail within the formation of candles
provides the tail with its significance. A long tail pointing down reminds
us that there used to be complete seller control, but control has now been
taken by the buyers.

Reversal Patterns

Candles very loyally tell us of the battles between buyers and sellers for
any given timeframe, but these are just a small part of the total picture of
patterns they create.

To understand where a stock originates and to try and predict where it
is going, we must look at much more than a single candle within a group
of candles, and try to make our decisions based on patterns comprised of
several candles. When we learn to identify patterns, we can “understand”
a stock with just a glance, and take decisions accordingly.

• Reversal patterns are chart formations of a group of candles that help
us identify high and low points.

• We use reversal patterns to understand when we should buy or sell
stocks which are about to change (reverse) direction. For example: if
we bought a stock, we would want to sell as close as possible to its high,
but if we were holding a stock short, we would want to buy it back as
close as possible to its low, right at the point where it just begins to go
up.

• If we want to profit when shorting a stock, we would do that before its
price goes up.

• If we wish to sell short, we would want to short when the stock has
finished a pullback and is about to execute another drop.

Reversal patterns are usually formed after a significant rise or fall in
price. Patterns are subdivided into bullish, implying an upward direction,
or bearish, implying a downward direction.

The patterns I will explain further are common and accepted by
professional traders. All these patterns are valid for any timeframe or
period. They can be implemented for a group of weekly candles, daily
candles or intraday candles, depending on your purposes and the range
over which you plan to hold the stock.