Do you remember when we have studied how to read supply and demand on a chart?
I have submitted a question: "how can we know when the trend is changing and when it is confirmed?".
Traders watch for price clues alerting them that the trend is changing. Reversal patterns are these clues.
The term "reversal" may lead you to think of a strong trend ending and then reversing to a new trend.
This hardly ever happens.
That's why I don't like the name reversal patterns,
because I think it is misleading.
A trend reversal signal implies that the trend may change but not necessarily reversing.
Steve Nison is considered an expert about candlesticks and in his book Japanese candlestick charting techniques
he gives a very good example to explain how reversal patterns work. Compare a trend to a car traveling
forward. The car's red brake lights go on and the car stops. The brake light was the reversal indicator
showing that the prior trend, that is the car moving forward, was about to end.
But now the car is stationary, will the driver then decide to put the car in reverse?
Will he or she remain stopped?
Will he or she decide to go forward again? Without more clues,
we don't know.
Most of the candlestick that we are going to analyze in this course will be reversal patterns.
But we also have another category: the continuation patterns. A continuation pattern is one in which the
market should continue to follow the same direction,
so should confirm the power of the current trend.
For instance, a continuation signal following a rally means that the trend remains up and we should
expect that the buyers will continue to push the price up.
With this introduction about reversal and continuation patterns, we can finally study the candlestick signals,
starting from the single candlestick patterns.