Wednesday, July 9, 2008

Why use Bearish candlestick patterns?

It is important to know different types of candlestick patterns because they can give you signals for when a security is going to go up. But is equally important to know bearish candlestick patterns as well.

There are a couple reasons for this. The first reason is to let you know if your stock is losing strength. If you are holding a stock and get a bearish signal on it you may start thinking about possibly exiting it or watching it carefully.

The other reason you might want to know some bearish candlestick patterns is if you are possible looking for a stock to short. If you like to short or buy puts on stocks it is important to keep up to date with possible bearish indicators.
Below is an explanation of a couple different bearish patterns.

1. The evening star is a bearish pattern. It comes after a bullish rally and consists of three days. The first day is a bullish day. Here the stock rises a pretty good amount. The second day the stock does nothing.

The buying pressure is starting to weaken on this day. The third day is a bearish day. Here the buying pressure weakens so much that the short sellers are actually able to push the stock down. After this day the stock is more likely to go down then head up.

2. The bearish engulfing pattern is another bearish signal. This signal however only consists of two different days. The first day is an up day. The stock does not need to have an explosive upward movement although it can.

The second day is a bearish day. This bearish day needs to be much bigger than the bullish day. It should open higher than the close of the last day and close higher than the open of the bullish day. This also signals that selling pressure is taking over and the stock is more likely to go down then up.

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