Candlestick formations often are described with aggressive imagery. For example, the thrusting lines and separating lines are two kinds of double-session candlestick formations that foreshadow trend reversal. The thrusting lines is especially strong because it consists of two long candlesticks with a flip in the direction. The separating lines formation has a significant but invisible gap, making it equally strong as a sign of coming price reversal.
Thrusting lines requires two long candlestick sessions next to one another. In a bull thrusting lines signal, the setup is white and the signal session opens higher, then moves down to within the body of the first session. In a bear formation, the setup moves downward and then the lower-opening signal session moves upward into the range of the first session. These formations create an invisible gap between the two sessions. The bull thrusting lines signal session opens higher than the set-up session’s close; and the bear thrusting lines signal session opens lower than the set-up session’s close. These invisible gaps are extremely important but not easy to spot.
The separating lines formation is even stronger because it creates a bigger gap between the two sessions. In the bull separating lines, a downward setup is followed by a longer, upward-moving signal. In the bear variety, the upward setup is followed by a longer, downward-moving signal. The gap each of these creates is equal to or longer than the trading extent of the set-up session.
The various types of “lines” formations come in different shapes and sizes, but their shared trait of the invisible gap makes them very important as potential signals of coming price reversal. A related formation is the neck line, a two-stick signal of long candles with opposite colors, in which the opening price gap is closed by the second session. These come in two varieties. The on neck has an intersection of the two sessions’ real bodies at the same price level. The in neck consists of overlapping real bodies.
Why are all of these distinctions so important? Candlesticks alone do not serve as reliable entry or exit points; but when combined with other signals, they can greatly improve the timing of trades. Most traders contend with missing of entry or exit by one or two sessions, or the entire misreading of singular indicators. Combining candlesticks with other reversal signs offsets many of these problems and improves overall analysis and timing.
Michael C. Thomsett is an investing and options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com. Thomsett’s latest FT Press book is Trading with Candlesticks.