Trade Less, But Wisely; Get Rich Step by Step
What is Chart Patterns? ≡
A chart is a visual representation of past and current price movement of a security. Chart Pattern recognition is one of the most popular methods of technical analysis. In technical analysis it is believed that the collective behavior of all the participants in market accurately reflects all the relevant information and the price movements reflects the impact of this collective behavior. It signifies collective behavior of human nature about prices of security and helps to suggest what would be the next possible move. In general, chart pattern helps in finding out who is going to win the battle of price between bulls and bears.
Candlestick charts patterns are considered the most valuable tool that can be used in any type of trading, whether you are day trader, swing trader or even positional trader like investor. There are many different types of candlestick chart pattern and every trader should know about it in detail.
How to Read Candlestick Charts? ≡
Candlestick charts were originated in Japan before about 200 years by a Japanese man named Homma who discovered that there was a link between price and the demand-supply of commodity like rice, and hence markets also were strongly influenced by the emotions of the traders.
In Candlestick chart of a particular time period, each candlestick shows open, high, low and close price of the security for that relative time period. The candlestick's wide or rectangle part is called "real body" which shows the link between opening and closing prices. Thus real body shows the price range between open and close for that particular time frame.
When the real body is filled, black or red then it means that the close price is lower than the open price and it is known as bearish candle. It shows that the prices opened, but the bears pushed the price down and closed below the opening price.
If the real body is empty, white or green then it means that the close was higher than the open price and it is known as bullish candle. It shows that the prices opened, the bulls pushed the price upward and closed higher than the opening price.
The thin vertical lines above and below the real body is knows as the wicks or shadows which represents the high and low of prices during the trading session.
Types of Candlestick Chart Patterns ≡
Candlestick chart patterns can be divided into:
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Bullish Reversal Patterns
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Bearish Reversal Patterns
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Continuation Patterns
Although candlestick patterns have captured the attention of most of the traders, they should not be traded upon in isolation. Candlestick patterns should be used along with other tools of technical analyses for more confirmation. If a trader focuses on volume of the security in addition to the candlestick pattern, then such a signal becomes a very strong signal. Hence as a price action trader, it is advisable to look at other indicators and tools to get additional confirmation.
It is to be noted that there is not the best or the worst candlestick pattern. A trader should figure out pattern which works more beneficial to him and stick to that pattern and system only.
For biginners, it is advisable to observe more and more charts and try to identify candlestick patterns so that eyes get trained to spot them easily.
Bullish Reversal candlestick pattern indicates that the current downtrend is going to reverse to an uptrend. And the traders should be cautious about their short positions when the bullish reversal candlestick pattern is formed.
Bearish Reversal candlestick pattern indicates that the current uptrend is going to reverse to an down trend. And the traders should be cautious about their long positions when the bullish reversal candlestick pattern is formed.
Continuation Pattern forms within the trend that generally indicates the continuation of the prevailing trend.
Hammer ≡
Hammer is a single candlestick pattern formed at the end of a downtrend. It gives signal of a bullish reversal. The real body of this candle is small and is located at the top with a lower shadow. The size of lower shadow should be more than twice the real body. This candlestick chart pattern has no or little upper shadow. Psychology behind this candle formation is that price opened, sellers pushed down the price at low, but suddenly the buyers came into the market, and they pushed the prices up and closed the trading session at above the opening price.
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The stock should be in a downtrend (any time frame) leading up to the hammer formation.
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The hammer should form after a period of selling pressure.
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The hammer should have a small real body with a long lower wick or shadow.
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The hammer should be followed by buying pressure which acts as confirmation.
The resulted formation of bullish hammer pattern signifies that buyers are back in the market and downtrend may end. Traders can take a fresh long position or add to an existing position. if next day a bullish candle is formed and can place a stoploss at the low of the hammer. Hammer candlestick pattern is easy to identity and can be used easily in any time frame in conjunction with other technical indicators.
Hammer form due to a fight between buyers and sellers. This pattern forms when the market or stock is 'oversold' and buyers step in to push price higher. The long lower shadow shows that sellers were in control earlier, but now buyers stepped in aggressively and pushed prices back upward. It signifies that buyers are in control at the end.
If hammer candlestick is not followed by buying pressure, there is negation of the bullish reversal.
Inverted Hammer Pattern ≡
Inverted Hammer pattern looks opposite of the hammer pattern. It is a bullish reversal candlestick pattern formed at the bottom of a downtrend and signals a potential bullish reversal.
This pattern is formed by a candle that has a small body and with a little or no lower shadow and a long upper shadow and it is found at the bottom of a downtrend.
Normally in case of this inverted hammer pattern, the upper shadow should be at least twice the size of the real body. The colour of the real body can be red or green. But inverted hammer formed with green real body gives a strong bullish signal.
The upper shadow is formed when the bulls try to push up the price whereas the lower shadow is formed by the bears who try to resist the higher price.
This pattern tells the traders that the bulls are now willing to buy at the fallen price. After the downtrend there is pressure from the buyers in the market to raise the price.
It tells the sellers to exit as there may be a bullish reversal and tells buyers to enter in to buying position because bullish trend is about to start.
If in the next trading session the opening price is more than the closing price of the inverted hammer candlestick, then one can enter into buy position. The volume in trading should be high on the day of the formation of the inverted hammer candlestick patter. High volume signifies that buyers have entered the market and exerting buying pressure the increase the price.
Hanging Man Pattern ≡
Handing Man candlestick pattern in a single candlestick pattern that is formed at the end of the uptrend. It is a bearish reversal pattern indicating that the uptrend is going to end.
In this pattern, candlestick has a small real body with little or no upper shadow and long lower shadow and is found at the top of the uptrend. The long lower shadow indicates that the sellers have entered the market and small upper shadow indicates that bulls have lost their strength and that creates small real body.
Normally for this pattern, the lower shadow should be at least twice the size of the real body. The colour of the real body can be red or green. But hanging man formed with red body at the top of uptrend gives a strong bearish signal.
Traders can enter a short trade or exit a long position at the closing price of this candlestick or at the opening price of the next bearish candlestick.
Piercing Line Pattern ≡
Piercing Line pattern is one of the indicators used to take a long position or exit the sell position. Piercing pattern is formed when both bulls and bears are fighting to get beneficial control over the prices. It is made up of two candlesticks. The first candlestick should be a large red or black bearish candle indicating continuation of prior bearish trend. The second candle should be strong green or white bullish candle and should be opened below the low of the previous red candle, but it manages to close above the mid point of the real body of the previous red candle.
On the previous day price kept making lower lows and hence price formed a bearish candle. On the next day, the price opens below the prior day's closing price, but suddenly buying pressure from the bulls side move the price upward. However, the bulls keep buying, and at the day's end, price closes not only above the open price, but also manages to cover at least 50% of the real body of the previous day red candle from below.
For confirmation of this reversal signal, the formation of the third candle should be observed. After the formation of this pattern, the third candle should be a bullish green candle in the next session. A long trade can be taken when the price crosses the high of the first red candle with the stop loss at the low of the second day green candle. A trader must keep in mind other technical parameters to initiate the trade
Bullish Engulfing Pattern ≡
This is a two candlestick pattern indicates the end of the ongoing downtrend and start of the uptrend. In this pattern, a small red or black bearish candle is formed showing the continuation of bearish trend. On the second day more and more buyers enter the market and move the price up and up further and as result price form bullish green candle that completely engulfs the real body of the previous day red bearish candle.
As the ongoing trend is down, the price keeps making new lows and thereby forms bearish candle. On the second day price opens gap down below the close of the previous day, but due to sudden buying interest of the bulls occurs and that rises the price upward, manages to close higher than the open price of the previous day's as shown in red candle. Thus the real body of the green candle completely engulfs the real body of the bearish red candle. This indicates that bulls are back in to action and trend may reverse to the uptrend.
After the formation of bullish engulfing pattern, if a bullish candle is formed, then it confirms the reverse signal given by this pattern. A trade may take a long trade above the high of the reversal engulfing candle keeping stop loss at the low to the reversal candle.
Bearish Engulfing Pattern ≡
This is a two candlestick pattern indicates the end of the ongoing uptrend and start of the downtrend. In this pattern, a small green or white bullish candle is formed showing the continuation of bulish trend. On the second day more and more sellers enter the market and move the price lower and lower further and as result price form bearish red candle that completely engulfs the real body of the previous day green candle bullish candle.
As the ongoing trend is bullish, the price keeps making new high and thereby forms bullish candle. On the second day price opens gap up above the close of the previous day, but suddenly selling interest of the bears occurs and that moves the price downward, manages to close below than the open price of the previous day's as shown in green candle. Thus the real body of the red candle completely engulfs the real body of the bullish green candle candle. This indicates that bears are back in to action and trend may reverse to the downtrend.
After the formation of bearish engulfing pattern, if a bearish candle is formed, then it confirms the reverse signal given by this pattern. A trader may take a short trade or exit his long position at price below the low of the reversal engulfing candle keeping stop loss at the high to the reversal candle.
Morning Star Pattern ≡
Morning star pattern is a three candle bullish reversal pattern which indicates the end of the ongoing down trend and start of the uptrend. In this pattern, the first day's candle is generally large red or black candle showing the continuation of the prior bearish trend. The second day candle opens gap down and is a small body candle. Normally it is a Doji. The colour of the second candle is not important. It can either be a bullish or bearish candle. The third candle opens a gap up and is a long green or white candle. The third candle manages to close near or above the mid range of the first candle.
If we remove the second candle from between, the relationship between 1st and 3rd candles is that of a bullish engulfing pattern or a piercing line pattern.
On first day, price keeps on making lower lows and forms long bearish red candle.
On the second day too market remains bearish because it opens in gap down. Due to continuous down for some time, traders assume about probability of reversal. Due to this buying pressure increases as compared to selling pressure and it makes harder for the bears to continue pushing price down. And hence market closes around where it opened and thus Doji candlestick pattern is created.
On third day market opens gap up and bulls takes the control over the price and manages to form large green bullish candle.
The confirmation of the reversal is given by the third bullish candle itself. Once it is clear during the session that the third candle will close higher and relationship between 1st and 3rd candles would be that of bullish engulfing or piercing line, a long trade can be initiated with the stop loss at the low of the 2nd candlestick.
Evening Star Pattern ≡
Evening Star pattern is a three candle bullish reversal pattern which indicates the end of the ongoing up trend and start of the downtrend. In this pattern, the first day's candle is generally large green or white candle showing the continuation of the prior bullish trend. The second day candle opens gap up and is a small body candle. Normally it is a Doji. The colour of the second candle is not important. It can either be a bullish or bearish candle. The third candle opens a gap down and is a long red or black candle. The third candle manages to close near or below the mid range of the first candle.
On first day, price keeps on making higher high and forms long bullish green candle.
On the second day too market remains bullish because it opens in gap up. Due to continuous uptrend for some time, traders assume about probability of reversal. Due to this selling pressure increases as compared to buyinging pressure and it makes harder for the bulls to continue pushing price up. And hence market closes around where it opened and thus Doji candlestick pattern is created.
On third day market opens gap down and bears takes the control over the price and manages to form large red bullish candle.
The confirmation of the reversal is given by the third bullish candle itself. Once it is clear during the session that the third candle will close lower and relationship between 1st and 3rd candles would be that of bearish engulfing or piercing line, a short trade can be initiated with the stop loss at above the recent swing high.
When Evening Star pattern is backed up by volume and other technical indicators like resistance levels, then it confirms the signal.
Some more Patterns
Three White Soldiers Patterns ≡
Three white soldiers is a three candle bullish reversal pattern which indicate end of the ongoing downtrend and start of the uptrend. This pattern shows that buyers are taking control and the price is expected to move higher and higher.
All three candles of this pattern are long bullish candles open and close of each candle is above the open and close of the previous candle.
Another important feature of this pattern is that all three candles are of almost the same length and all three candles have comparatively smaller shadows.
The three white soldiers candlestick pattern suggests a strong change in market sentiment. When a candle is closing with small or no shadows, it suggests that the bulls have managed to keep the price at the top of the range for the session.
As three white soldiers is a bullish visual pattern, it is used as an entry or exit point. Traders who are short on the security look to exit and traders who are waiting to take up a bullish position see the three white soldiers as an entry opportunity. One of the key things to watch is the volume supporting the formation of three white soldiers. traders use the three white soldiers and other such candlestick patterns in conjunction with other technical indicators like trendlines, supports and resistances, moving averagesetc.
Three Black Crows Pattern ≡
Three Black Crows is a three candle bullish reversal pattern which indicate end of the ongoing uptrend and start of the downtrend. This pattern shows that sellers are taking control and the price is expected to move lower and lower.
All three candles of this pattern are long bearish candles open and close of each candle is below the open and close of the previous candle.
Another important feature of this pattern is that all three candles are of almost the same length and all three candles have comparatively smaller shadows.
The three Black Crows candlestick pattern suggests a strong change in market sentiment. When a candle is closing with small or no shadows, it suggests that the bears have managed to keep the price at the bottom of the range for the session.
As Three Black Crows is a bearish visual pattern, it is used as an entry or exit point. Traders who are long on the security look to exit and traders who are waiting to take up a short position see the three black crows as a trading opportunity. One of the key things to watch is the volume supporting the formation of three black crows pattern. Traders use the three black crows and other such candlestick patterns in conjunction with other technical indicators like trendlines, supports and resistances, moving averages etc.
Marubozu Pattern - Bullish / Bearish ≡
'Marubozu' is a Japanese word meaning 'Bald'. Marubozu is a single candlestick pattern that is used in technical analysis to predict bullishness in the market.Marubozu may be Bullish Marubozu Pattern or Bearish Marubozu Pattern.
Bullish Marubozu is basically a long green or white bullish candle that has no or negligible shadow (upper or lower). It occurs when the low is almost equal to the open and the high is almost equal to the close. It is considered to be very strong sign of bullishness. Bullish Marubozu pattern indicates that as soon as the trading starts, the bulls take control of the market and short traders would be badly stuck.
Bearish Marubozu is basically a long red or black bearish candlestick that has no or negligible shadow (upper or lower). It occurs when the high is almost equal to the open and the low is almost equal to the close. It is considered to be a very strong sign of beariness. Bearish Marubozu pattern indicates that as soon as the trading starts, bears take control of the market and bull do not get any chance to exit the trade because the price slips down without a breather.
Bullish & Bearish Harami Pattern ≡
Harami candlestick pattern can be either bullish or bearish. 'Harami' is a Japanese word meaning 'Pragnant Woman'. The graphic picture of this pattern resembles a pregnant woman.
Bullish Harami is a two candle bullish reversal pattern that indicates the end of the ongoing downtrend and start of the uptrend. In Bullish Harami pattern, the first day is generally with a large red or black bearish candle that forms in line showing ongoing bearish trend. It is followed by a small green or white bullish candle having small body and comparatively smaller lower and upper shadows on the second day. The body of the second day candle is contained within the body of the previous candle. Ideally, the size of the body of the large red candle should be approximately 4 times the size of the body of the smaller green candle.
This Bullish Harami pattern works better if the upper and lower shadow of white or green candle does not go beyond the previous day red or black candle.
Due to strong ongoing downtrend, the price keeps making lower lows and hence formed a long bearish candle on the first day. On the second day price opens in gap up showing that the bulls are back in action and exerting the buying pressure. On second day bulls try to push up the price and try to close above the opening price, but keep the closing level below the opening price of the previous day red candle.
Bearish Harami is a two candle bearish reversal pattern that indicates the end of the ongoing uptrend and start of the downtrend. In Bearish Harami pattern, the first day is generally with a large green or white candle that forms in line showing ongoing bullish trend. It is followed by a small red or black bearish candle having small body and comparatively smaller lower and upper shadows on the second day. The body of the second day candle is contained within the body of the previous candle. Ideally, the size of the body of the large green candle should be approximately 4 times the size of the body of the smaller red candle.This Bearish Harami pattern works better if the upper and lower shadow of red or black candle does not go beyond the previous day green or white candle.
Due to strong uptrend, the price keeps making higher highs and hence formed a long green bullish candle on the first day. On the second day, price opens in gap down showing that the bears are back in action with selling pressure. On the second bears try to keep price down and try to close below the opening price, but keep the closing level above the opening price of the previous day green candle.
Tweezer Top & Bottom Pattern ≡
Tweezer Top pattern is a bearish reversal candlestick pattern formed at the end of the ongoing uptrend. It consists of two candlesticks, the first one is bullish candlestick and the second one is bearish candlestick and both these candles have almost or same high.
The first's day bullish candlestick shows the continuation of the uptrend. On the next day bulls see to raise the price upward, but not willing to buy at higher than the high of the previous day, and hence high of both the candles remains almost at the same level. Two days' candlesticks with almost the same high indicates the strength of the resistance and also signal that the uptrend may get reversal to form a downtrend.
Tweezer Bottom pattern is a bullish reversal candlestick pattern formed at the of ongoing downtrend. It consists of two candles, the first one being bearish and the second one being bullish candlestick and both make almost or same low.
The first day's bearish candlestick shows the continuation of the downtrend. On the next day bears want decline in price, but not willing to sell at lower than the low of the previous day, and hence low of both the candlestick remains almost at the same level. Two days' candlesticks with almost the same low indicates the strength of the support and also signal that the down trend may get reversal to form an uptrend.
Shooting Star Candlestick Pattern ≡
Shooting star looks opposite of the hanging man pattern. Shooting star candlestick pattern in a single candlestick pattern that is formed at the end of the uptrend. It is a bearish reversal pattern indicating that the uptrend is going to end.
Shooing star pattern is a singal candlestick pattern that has a small body with a little or no lower shadow and a long upper shadow. It is found at the top of the uptrend.
Normally, in case of Shooting start pattern, the upper shadow should at least twice the size of the read body. The colour of the body can be red or green. But when it is formed at the top with red body, it gives a strong bearish signal.
The long upper shadow indicates that the buyers are losing position because price drops back near to the open.
Before entering a trade as per shooting star, a trader should confirm the prior trend is bullish. This pattern depicts that buyers are losing the ground and sellers are pushing the price lower indicating trend reversal towards the downside.
Dark Cloud Cover Pattern ≡
Dark Could Cover is a two candlesticks bearish reversal pattern indicating the end of ongoing uptrend and start of a downtrend.
In this pattern, the first day is generally with a large green or white bullish candle in the line of ongoing bullish trend. On the second day, it is followed by a strong red or black bearish candle which opens higher than the previous day's high but eventually close below the mid range of the previous day candle. This shows that buyers push the price higher at the open, but then the sellers take control at later in the session and push the price down. The gap up between the first bullish candle and the second bearish candle indicates how much powerful the trend reversal will be. Also both bullish and bearish candles should have large bodies.If the volume on the second candle is higher than the average volume, then it is considered to be a stronger bearish signal. It shows that the sellers have started dominating the buyers and sellers are more likely to take the price lower.
Doji Candlestick Pattern ≡
The word 'Doji' is a Japanese word which means blunder or mistake. Doji candlestick pattern is formed when opening price and closing price are equal or almost the same. The lengeth of upper and lower shadows can vary.
Doji pattern represents indecision in the market and create confusion around the price movement. It is formed when the market opens, bullish traders push the price up whereas bearish traders reject the higher price and push it back down. It could also be that bearish traders try to push down the price as low as possible, but the bullish traders fight back and push the price upward. And at last price closes at opening level or near to opening level. If we look at Doji pattern in isolation, it indicates that neither the buyers nor sellers are gaining.And hence Doji pattern does not provide enough information required to make a decision.
To understand what Doji candlestick says, prior price action building up to the Doji should be carefully observed. For example, if Doji is formed at the top of an uptrend, it may take the price lower, and if Doji is formed at the bottom of a downtrend, it may take the price higher. It signifies equality and indecision between bulls and bears which is a warning sign of reversal. If Doji is coupled with dry up in the volume, then it is considered to be a strong signal.
Depending up on the length of shadows, there are four types of Doji Candlestick Pattern, namely Standard Doji, Long-legged Doji, Dragonfly Doji and Gravestone Doji.
Standard Doji appears at the top or bottom of the trend indicating the reversal of ongoing trend. Its shape is similar to 'cross' or 'plus' sign
Long legged Doji candlestick pattern has long upper and lower shadow. When the supply and demand factors are at equilibrium, then this pattern occurs.
