1/5/2018 Candlestick Chart Patterns
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Candlestick Chart Patterns
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Candlestick Charts and Patterns
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Why do candle sticks work?
Before getting deeper into different candlestick patterns, let us understand why candle sticks work. As discussed in the previous lesson, a
chart conveys information to a greater extent compared to price.
A candle stick chart allows traders to compare the behaviour of price in different time periods with a quick glance at the chart.
Traders gauge the market sentiment by looking at the length of the candle, length of the wicks etc. For example, a long white candle with no
wicks signi es that bulls were on an upper hand over bears.
Candlestick patterns combined with other technical indicators have become popular among traders as reliable signals of future market
behavior.
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Types of Candle Sticks:
Single Candle Patterns:
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Doji: when the open price is equal / near equal to its close price, it is termed as a Doji. In other words it can be said that when there is a
zero/near zero range between open and close price is termed as a Doji. Doji candle suggests an indecision or balance between the two
forces i.e. Bullish and Bearish.
In another context, when there is a strong trend in any direction and a Doji is observed, it can be seen that the strength of the trend is
weakening.
Normal Candle
Perfect Doji (Traditional)
Near Doji
Above is a glimpse of comparison between the appearances of a Doji V/s Normal Candle
Different Types of Doji:
Gravestone Doji: This is partly a bearish pattern. Open, Close and Low prices of the candle are same. Gravestone Doji implies that, buyers
and sellers were in a tough ght and by the end of the session; Sellers were able to push the prices to its open price.
Condition: open=low=close
Dragon y Doji: This is partly a bullish pattern. Open, Close and High prices of the candle are same. Dragon y Doji implies that, buyers and
sellers were in a tough ght and by the end of the session; Buyers were able to push the prices to its open price.
Condition: open=high=close
Long-Legged: Long Legged Doji is similar to traditional Doji in a way that both indicate indecisiveness in in price movement. After the
Traditional or Long-Legged Dojis are observed in the chart, price tends to move in sideways for some time.
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Hammer:
A Hammer is a candlestick pattern with a long wick below the candle’s body and a little to no wick above the candle’s body. The length of the
body is usually 1/3rd of the length of the lower wick.
A little or no wick above the candle’s body signi es that there was a huge selling pressure from starting of the day and it continued
throughout the day.
A long wick below the candle’s body and smaller candle’s body signi es that bulls were able to push the prices higher by the end of the day.
A hammer pattern is usually observed at the end of a downtrend implying an unsuccessful effort by bears to push price down, and a
corresponding effort by bulls to step in and push price back up quickly before the period closed.
Con rmation of Uptrend: When the next candle breaks the high of the hammer, an uptrend is con rmed.
Hanging Man:
Hanging man is identical in shape to the hammer but the difference is that while hammers occur in a downtrend, the hanging man pattern
occurs in an uptrend.
In a Hanging man, the price opens and makes a low during the day. But by the end of the session, bulls step in and push the prices up above
the opening price. Although the price closes above the open, the length of wick compared to the candle’s body says that bulls have not got
enough strength to maintain the trend.
In a Hanging Man, the wick extends down, and signi es the starting of a bearish trend capable of pushing the price down. It gives the rst
sign that the uptrend is exhausting, and trend could reverse from here.
Con rmation of Downtrend: A Downtrend can be con rmed when the consequent bearish bar breaks the opening price of the bullish bar on
the other side of the hanging man.
Shooting Star:
Shooting Star is simply an inversion of the hanging man pattern. It has a small body and a long wick above it, with little to no wick below.
Shooting star is usually observed in an uptrend and signi es trend exhaustion. Price opens at a lower level and goes to a new high during
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the session, but by the end of the day just manage to close above the open but below the high. The long wick above the candles body
implies that bulls tried to push the price up but ultimately the bears won.
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Con rmation of Down Trend: In case of a Shooting Star, opening price of the previous candle to shooting star acts as a neck line. Once a
bearish candle crosses the neck line, a down trend is con rmed.
Inverted Hammer: An Inverted Hammer is usually observed at the end of a downtrend. It has a long wick above the candle’s body and a little
to no wick below the candle’s body. The length of the body is usually 1/3rd of the length of the Upper wick. This pattern is similar to Shooting
Star and differs only in the position where it occurs.
Marubozu: A Marubozu candlestick pattern I loved by many traders since it indicates a strong movement. This pattern does not have any
wicks on either side of the candle’s body. There are two kinds of Marubozu patterns termed as Bullish Marubozu and Bearish Marubozu.
As seen in the above diagrams, price opened and traded in a particular direction throughout the day indicating bulls/bears are in full swing.
Two Candle Patterns:
Engul ng Pattern:
An engul ng pattern consists of two candle sticks where one candle engulfs the body of the previous candle. There are two types of
engul ng patterns
1. Bullish Engul ng
2. Bearish Engul ng
Bullish Engul ng:
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A Bullish Engul ng pattern is generally observed at the end of a downtrend. On rst day, the price opens lower than previous day and closes
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further lower. Next day, the price opens lower and tries to do the same but bulls step in and the price closes above the previous day’s open
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making it a bullish engul ng pattern.
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Bearish Engul ng:
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A Bearish Engul ng pattern is generally observed at the end of a uptrend. On rst day, the price opens higher thanCompleted
previous day and closes
further higher. Next day, the price opens higher and tries to do the same but bears step in and the price closes below the previous day’s open
making it a bearish engul ng pattern.
Piercing Pattern: GET UPDATES
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A Piercing pattern is similar to bullish engul ng pattern in a way that both of them appear near the end of a downtrend.
As seen in the above gure, the 2nd candle opens lower and closes halfway through the 1st candle. Price action in a piercing pattern is very
similar to bullish engul ng pattern. Price opens lower on the 2nd day and manages to close just below the open price of previous candle.
Rule of thumb for piercing pattern is that the 2nd candle engulfs 50% – 100% of 1st candle.
Dark Cloud Cover:
A Dark Cloud Cover pattern is similar to bearish engul ng pattern in a way that both of them appear near the end of an uptrend.
As seen in the above gure, the 2nd candle opens higher and closes halfway through the 1st candle. Price action in a dark cloud pattern is V
nd
very similar to bearish engul ng pattern. Price opens higher on the 2 day and manages to close just above the open price of previous
candle. Rule of thumb for dark cloud pattern is that the 2nd candle engulfs 50% – 100% of 1st candle.
Harami Pattern:
The word “Harami” in Japanese means a pregnant lady. A Harami pattern is quite opposite to an engul ng pattern. In an engul ng pattern,
2nd candle’s body is larger compared to the 1st candle’s body. In a Harami pattern the 2nd candle’s body is very small compared to the 1st
candle’s body.
There are two kinds of Harami Pattern: Bullish Harami and Bearish Harami
Bullish Harami:
st
In a Bullish
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bears. The next day, all of a sudden the bulls jump in and the price opens gap up and by the end of the day manages to close in a positive
note.
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Bearish Harami:
In a Bearish Harami, 1st candle is a bull candle and the 2nd candle is a bear candle. The 1st candle closes higher showing the strength of the
bulls. The next day, all of a sudden the bears jump in and the price opens gap down and by the end of the day manages to close in a
negative note.
Three Candle Patterns:
Morning Star: This pattern is observed at the end of a downtrend. Morning Star pattern has 3 candles with gaps in between each candle.
These gaps in between the candles signify the strength in between bulls and bears.
Markets are in a strong downtrend and even on day 1 of the pattern, the bearishness continues and price makes a new low.
On the 2nd day of the pattern, price opens gap down and closes as a Doji. This Doji signi es the indecision in the market and also signify that
bears are losing their strength.
On the 3rd day of the pattern, price opens gap up showing the strength of the bulls and continue to dominate throughout the day. By the end
of the day, price manages to close above the opening of day 1’s open price.
Evening Star: This pattern is observed at the end of an uptrend. Markets are in a strong uptrend and even on day 1 of the pattern, the
bullishness continues and price makes a new high.
On the 2nd day of the pattern, price opens gap up and closes as a Doji. This Doji signi es the indecision in the market and also signify that
bulls are losing their strength.
On the 3rd day of the pattern, price opens gap down showing the strength of the bears and continue to dominate throughout the day. By the
end of the day, price manages to close below the opening of day 1’s open price.
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