In the diagram above, notice how both uptrend's ended with a doji that was followed by a significant reversal in price.  You can also find other doji in the chart where price did not reverse- why is that?  Again, a doji is a neutral candle unless it occurs with other components of technical analysis such as appearing at the top or bottom of a rally in price.  The combining of several components of technical analysis is called a confluence of events. We will learn more about this later.  WARNING: There are many traders that have and will continue take a trade in the opposite direction of a trend, based solely on the appearance of a doji- DO NOT DO THIS. (you will see a diagram of this 2 pictures down)

Now let's say that price has been trending down and there are several large red candles and then a doji appears.  In this scenario the sellers have had the advantage because supply has been greater than the current demand.  The appearance of the doji tells us that price, for the moment, have become balanced.  Price may still continue in a downtrend, however, the doji is a warning that price may now reverse and go the other way. (see diagram below)

Below are some examples of the warning we issued on making a trade in the opposite direction of the trend based solely on the appearance of a doji.

When a doji is found where price is moving sideways it loses its significance and goes back to being neutral.

Summary:  Although the doji by itself is a neutral candle, there are times when it IS a key reversal indicator.
 
Spinning Tops
(Neutral or Reversal Candle)

The spinning top is a very close relative of the Doji.  They too show us that neither buyers nor sellers have had an advantage to move price significantly in either direction.  They are basically telling us that the struggle between the buyers and sellers ended in a tie for the time frame of the chart we are looking at.  If we are a fundamental economist, we can also say that the presence of spinning tops represents a relationship between supply and demand that is balanced.

The neutral status of the spinning top, like the doji, changes depending on the rally, trend or candles that come before you see them on the chart.  If a single spinning top or groups of spinning tops appear after a trend that is moving either up or down, they then start to take on significance. 

Let's say that price has been trending down and there are several large red candles and then a group of spinning tops appears.  In this scenario the sellers have had the advantage because supply has been greater than the current demand.  The appearance of the spinning tops tell us that price, for the moment, has become balanced.  Price may still continue in a downtrend, however, the spinning tops are a warning that price may now reverse and go the other way. (see diagram below)

Again, let's say that price has been trending up and there are several large green candles and then a group of spinning tops appears.  In this scenario the buyers have had the advantage because demand has been greater than the available supply.  The appearance of the spinning tops tell us that price, for the moment, has become balanced.  Price may still continue in an uptrend, however, the spinning tops are a warning that price may now reverse and go the other way.  See diagram 8.8.

 
Diagram 8.8

Diagram 8.8

Summary:  Although spinning tops by themselves are neutral candles, there are times when they ARE a key reversal indicator.
 
The Hammer
(Reversal Candle)

Diagram 8.9

The Hammer is a reversal candlestick.  They tell us that price was either pushed down or up to a certain level and that the specific price level price went to was not able to be sustained.  The fact that the price was not able to be sustained is indicative of a possible change in the direction of price.  To be a true hammer the tail or wick needs to be at least twice as long as the body of the candle.  If the tail or wick is three times longer than the body of the candle it is even better.
 
 
Diagram 8.10

We would really like to see a hammer after a rally down in price, like in diagram 8.10.  Even though price went sideways after the hammer it was the basis for the rally in the opposite direction.  Price was not able to make new lows or sustain lower prices.

In diagram 8.11, the hammer that has been noted was just after a large run up in price.  The almost engulfing red candle that preceded this hammer was a further indication that price was not able to sustain higher highs thus forcing price to retreat to lower levels.

 
Diagram 8.11

The hammer is what we refer to as an exhaustion indicator.  Price is too tired to keep going in the direction it had been going and needs to take a break.  What type of position (long or short) should you consider entering if price was at M4 on an M2/M4 day and you see a hammer after the run up in price?

HAMMER CAUTION: You need to be careful of the hammers noted in diagram 8.12.  They are telling you that price could go either way and you are best to stand aside and wait until price decides which direction it would like to go.  You do have some indication in which direction price is going to go based on the appearance of the third hammer, but as with all individual candles having a confirmation of a technical indicator is highly recommended.  Another caution was that these hammers did not appear at the end of a rally up or a rally down.

 
Diagram 8.12

Diagram 8.12

Summary: After you have gained some experience by observing the hammer in real time price action, they will no doubt start to become one of your favorite candles to see appear- especially if price is way up high in the sell region of the pivots or way down low in the buy region of the pivots.  Keep this point in mind when we put things together in the Daily Trader's Review.
 
Bullish and Bearish Candlesticks
(Continuation Candles)

Diagram 8.13

The bullish and bearish candlesticks are long strong looking candles. They usually have short tails and short wicks; they can even be seen missing a tail or a wick or both.  The candles by themselves show you that price is moving convincingly up or down.

In diagram 8.14 you can see how the large green bullish candles were a significant sign that price was going to keep going up.  Also note, the large red bearish candle on the right side of the diagram, it was followed by a significant movement down in price.
 
Diagram 8.14

Diagram 8.14

When you see a bullish candle and bearish candle right next to each other- we call this candle pattern a bearish engulfing pattern.  After a rally up in price, we are anticipating that price will then go down.  See diagram 8.15.  Also, in that same diagram you will notice that there was a green bullish candle, followed by a couple of doji or spinning tops that were followed by the large red bearish candle, this combination usually acts the same as if the two candles were right next to each other.

Likewise, when we see a bearish candle and a bullish candle right next to each other after a rally down in price, we are anticipating that price will then go up.  See diagram 8.16.

Diagram 8.15

Diagram 8.16

Keep your eyes open for these bullish and bearish candles when they form engulfing patterns- this pattern is telling you that the market has quickly changed its mind and wishes to go the opposite direction.  Note: You may see this candlestick formation many times on your charts. Do not trade this formation alone, you need to have other forms of confirmation to enter a trade.

There are many more types of candles and candle patterns, far too many to cover in this manual.  You do not want to become overwhelmed with all of these candles and candlestick patterns at this time, stay focused and learn the few that we have introduced you to here in the manual.  You want to understand what the candle is telling you about price.  You will find more information in the member's library on other candles and candlestick patterns.  When you feel you are ready to learn more about candles, please visit the library and grow your knowledge as we continue to grow the library.