Japanese Candlesticks
In today’s article, we’ll discuss more about how to become a successful trader and two more Candlestick patterns: Piercing Pattern and Dark Cloud.
How to become a successful Trader (continued)
In the last article we talked about the twin fears of losing money and being wrong. Today we’ll look at the importance of having a disciplined trading system and how that helps remove the emotional component of trading.
When you have a system, you must implement it the same way everyday and every trade. No exceptions. In this manner, your trading becomes mechanical and devoid of emotion or the influences of the “crowd”. Trading becomes a matter of signals and specific conditions.
There is a plethora of trading systems-almost as many systems as there are traders- but whatever system you choose, it should be tested thoroughly before “money goes on the table”. Testing should require at least a minimum of 50 “virtual trades”. Most brokerage houses allow limited “money less trading” if an account is opened with the firm. Making mock trades allows you to test your system and to test how well the brokerage can execute an order.
Almost without exception, successful traders always attempt to insolate themselves from extraneous and emotional influences by strict adherence to a trading system.
Candlestick Patterns
So far, we’Ave introduced: The Adjoin, Bullish and Bearish Engulfing and Hammers and Hanging Man.
Pattern # 5: Piercing Pattern
 The Piercing Pattern is composed of a two-candle formation in a down trending market. The first candle is black, a continuation of the existing trend. The second candle is formed by opening below the low of the previous day. It closes more than midway up the black candle, near or at the high for the day.
Specific criteria require that the body of the first candle is black (filled) and the second white (unfilled) and the downtrend has been evident for a while.
Secondary signals which help to confirm are: 1) the longer the black candle and the white candle, the more likely a strong reversal. 2) The greater the gap down from the previous days close, the more pronounced the reversal. 3) The higher the white candle closes into the black candle, the stronger the reversal. 4) Large volume during the two trading days is a significant confirmation.
After a strong downtrend has been in effect, the atmosphere is bearish. Fear becomes more predominant. The prices gap down. The bears may even push the prices down further. However, before the end of the day, the bulls step in and dramatically turn prices around. They finish near the high of the day. The move has almost negated the price decline of the previous day. This now has the bears concerned. More buying the next day will confirm the move.
Pattern # 6: Dark Cloud
The dark Cloud is the bearish counterpart to the Piercing pattern. The first day of the pattern is a long white candle at the top end  of a trend. The second day’s open is higher than the high of the previous day. It closes at least one-half way down the previous day candle, the further down the white candle, the more convincing the reversal. Remember that a close at or below the previous day’s open turns this pattern into a Bearish Engulfing pattern.
Specific criteria include that the body of the first candle be white (unfilled) and the body of the second be black (filled). Also the up-trend has been going on for some time and the white candle appears at the top of the trend. The second day opens higher the prior trading day and the black candle closes more than half-way down the white candle.
Secondary signals which enhance the probability of a reversal are: 1) the longer the white (unfilled) and black (filled) candles, the more forceful the reversal. 2) The higher the gap up from the previous days closes, the more pronounced the reversal. 3) The lower the black candle closes into the white candle, the stronger the reversal. 4) Large volume during these two trading days is a significant confirmation.
After a strong up-trend has been in effect, the atmosphere is bullish. Exuberance sets in. They gap the price up. The bears start to show up and push the price back down. It finally closes at or near the lows for the day. The close has negated most of the previous day’s gains. The bulls are now concerned. They obviously see that the up trend may have stopped. This signal makes for a good short, with a stop being the high of the black candle day. Notice that if the Dark Cloud Cover were to close lower, below the open of the previous day, it becomes a Bearish Engulfing pattern. The Bearish Engulfing pattern has slightly stronger bearish implications.
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