Candlestick Charting For Dummies®

Combining Moving Averages and Bearish-Trending Patterns for Short Situations

The moving average is another technical indicator you can combine with bearish-trending candlestick patterns to help figure out when to enter and exit your short trades. You can read all about moving averages (and several other technical indicators) in Chapter 11, but, broadly speaking, a moving average is the average of the closing prices of a security over a certain period of time.

Moving averages are very useful in confirming trends, and that functionality makes them good bearish-trending candlestick pattern partners. Read on to find out more.

Pinning down short entry points and confirming trends

You can use one or multiple moving averages to determine trends on a chart, and in this section I work with real-world examples of both.

A short trade using a signal moving average and bearish pattern

Figure 15-5 is a chart of Merck & Co, Inc. (MRK) — one of the world’s largest pharmaceutical companies. I like this example because you can clearly see how the moving average defines the trend and how that trend is enthusiastically confirmed by a bearish-trending candlestick pattern (or two).

It’s hard to argue that the stock is in a downtrend when the first bearish-trending candlestick pattern appears. That pattern is followed quickly by a bearish-thrusting line pattern. All this bearish signaling occurs over the course of just four trading days and with the stock well under the ten-day moving average.

This ...