Technical Analysis Candlestick charts Part 7

Trading in the Context of Price History

Would you be confident opening a short position with the bearish engulfing pattern, as shown in figure 6.22?

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Figure 6.22: Would you open a short position with this bearish engulfing pattern?

YES! Despite the fact that there is no confirmation yet, you should not have any doubt about opening a short position here. The doji and the bearish engulfing pattern confirm the resistance of a previous evening star top from the beginning of March; therefore, a price reversal is almost certain. Additionally, you can open the position with a  favorable risk-to-reward ratio, placing a stop at the top of the bearish engulfing or at the level of the previous top, which is almost the same.

Figure 6.23: Confidence rewarded.

And the confidence was rewarded (figure 6.23)!

Figure 6.24: The last two days are a bullish harami cross. Is this a good buying moment?

In the chart shown in figure 6.24, the prices moved down considerably. The last two days make up a bullish harami cross. Is this a good buying moment?

NO! Right above the bullish harami cross, there is resistance from a falling window. If this resistance prevents an up-move now, the risk-to-reward ratio is not good. So, it will be much better to wait for the window to be broken before taking a position.

Figure 6.25: Price evolution confirmed it was better to wait!

Further price evolution confirmed that it was better to wait (figure 6.25).

The last three candles in figure 6.26 are a morning doji star. Should you buy here?


Figure 6.26: The last three candles are a morning doji star. Should you buy here?

YES! It does not look like an ideal morning doji star, but the third candle reaches just within the first candle and is very important for future resistance; the window between the first and second candles of the morning doji star is already closed by the third candle, so this window has no more meaning. The middle small hammer in the morning doji star confirms a previous window support from half of February; furthermore, you can see a symmetrical triangle price pattern, which mostly is a continuation pattern. Opening a position now, with a stop at the low side of the support window, and a primary price target calculated from the height of the start of the triangle and added to a breakout of the triangle, gives a very good risk-to-reward ratio. These are good reasons to open a position now!

Good arguments made a good decision – figure 6.27

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