Candlestick Patterns

Candlestick Patterns Dictionary (List of Candlestick Patterns):

Abandoned baby evening star
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Abandoned baby morning star
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Bearish doji star
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Bearish engulfing lines
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Bearish harami
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Bearish harami cross
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Black evening star
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Black gravestone / inverted hammer
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Black hanging man / hammer
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Black line without upper shadow
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Black marubozu
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Black morning star
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Bullish doji star
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Bullish engulfing lines
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Bullish harami
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Bullish harami cross
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Dark cloud cover
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Doji
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Doji evening star
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Doji morning star
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Downside gap
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Downside Tasuki gap
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Dragon-fly doji
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Gravestone doji
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Grip bottom and hammer
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Grip bottom and piercing line
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Grip top and dark cloud cover
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Grip top and gravestone
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Long black line
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Long white line
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Piercing line
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Three black crows
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Three white soldiers
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Upside gap
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Upside Tasuki gap
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White evening star
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White gravestone / inverted hammer
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White hanging man / hammer
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White line without lower shadow
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White marubozu
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White morning star
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Definitions and Identification of Candles:

1) The hammer and hanging man can be recognized by three criteria:

  1.  The real body is at the upper end of the trading range. The color of the real body is not important.
  2. A long lower shadow should be twice the height of the real body
  3. It should have no, or a very short, upper shadow.
  4. The longer the lower shadow, the shorter the upper shadow and the smaller the real body the more meaningful the bullish hammer or bearish hanging man.
  5. Although the real body of the hammer or hanging man can be white or black, it is slightly more bullish if the real body of the hammer is white
  6. Wait for bearish confirmation with the hanging man. It is not a reversal signal yet.  Hanging Man type of price action only shows that the market starts to sell off, it has become vulnerable to a fast break.
  7. Bearish confirmation for hanging man is gap down next day. The greater the down gap between the real body of the hanging-man day and the opening the next day the more likely the hanging man will be a top.
  8. Another bearish verification could be a black real body session with a lower close than the hanging-man sessions close.

 

2) Engulfing Pattern:

  1. The market has to be in a clearly definable uptrend or downtrend, even if the trend is short term.
  2. Two candlesticks comprise the engulfing pattern. The second real body must engulf the prior real body (it need not engulf the shadows).
  3. The second real body of the engulfing pattern should be the opposite color of the first real body. (The exception to this rule is if the first real body of the engulfing pattern is so small it is almost a doji (or is a doji). Thus, after an extended downtrend, a tiny white real body engulfed by a very large white real body could be a bottom reversal. In an uptrend, a minute black real body enveloped by a very large black real body could be a bearish reversal pattern).
  4. If the first day of the engulfing pattern has a very small real body and the second day has a very long real body. This would reflect a dissipation of the prior trend’s force and then an increase in force behind the new move.
  5. If a long, white real body closes above the highs of the dark-cloud cover, or the bearish engulfing pattern, it could presage another rally.
  6. If there is heavy volume on the second real body of the engulfing pattern. This could be a blow off (volume using candlestick charts is discussed in Chapter 15).

 

3) Dark-Cloud Cover (bullish is piercing pattern)

  1. It is a two candlestick pattern that is a top reversal after a uptrend or, at times, at the top of a congestion band. The first day of this two candlestick pattern is a strong white real body. The second day’s price opens above the prior session’s high (above the closing of previous day is also acceptable). However, by the end of the second day’s session, the market closes near the low of the day and at least 50% within the prior day’s white body. The greater the degree of penetration into the white real body the more likely a top will occur.
  2. If a long, white real body closes above the highs of the dark-cloud cover, or the bearish engulfing pattern, it could presage another rally.
  3. If the second body (that is, the black body) of the dark-cloud cover opens above a major resistance level and then fails, it would prove the bulls were unable to take control of the market.
  4. If, on the opening of the second day there is very heavy volume, a buying blow off could have occurred. For example, heavy volume at a new opening high could mean that many new buyers have decided to jump aboard ship. Then the market sells offs. It probably won’t be too long before this multitude of new longs (and old longs who have ridden the uptrend) realize that the ship they jumped onto is the Titanic.

4) Stars

  1. A star is a small real body that gaps away from the large real body preceding it
  2. It is still a star as long as the star’s real body does not overlap the prior real body. The color of the star is not important.
  3. Morning Star is comprised of a tall, black real body followed by a small real body which gaps lower (these two lines comprise a basic star pattern). The third day is a white real body that moves deeply within the first period’s black real body.
  4. An ideal morning star would have a gap before and after the middle line’s real body (that is, the star). This second gap is rare, but lack of it does not seem to vitiate the power of this formation.
  5. Bonus – The main concern should be the extent of the intrusion of the third day’s black real body into the first day’s white real body.
  6. Bonus – If there is light volume on the first candlestick and heavy volume on the third candlestick session

5) The Shooting Star and the inverted hammer

  1. The shooting star has a small real body at the lower end of its range with a long upper shadow.
  2. An ideal shooting star has a real body which gaps away from the prior real body – this gap is not always necessary
  3. A shooting star shaped candlestick after a downturn could be a bullish signal – called inverted hammer

6) Harami

  1. The Harami pattern is reverse of engulfing pattern – a small real body follows an unusually long real body. The color of real bodies should be opposite to each other.
  2. Harami is NOT a significant reversal signal

7) Tweezer tops and bottoms

  1. Tweezers are two or more candlestick lines with matching highs or lows
  2. In a rising (falling) market, Tweezer tops (bottoms) are formed when the highs match.
  3. Bonus: They take on extra importance if they occur after an extended move or contain other bearish (bullish) candlestick signals
  4. Bonus: If the candlestick preceding the tweezer top is bearish looking and slow-moving
  5. Close above tweezer top annuls the bearish view
  6. Tweezer tops and bottoms on the weekly or monthly candlestick charts made by consecutive candles could be important reversal pattern. This would be true without other candlestick confirmation because a low made the preceding session that is successfully tested

8) Belt-hold Lines

  1. The bullish belt hold is a strong white candlestick which opens at the low of the day (or with very small lower shadow) and moves higher for rest of the day.
  2. If market is at low price area and the bullish belt hold appears, it forecasts a rally
  3. Bonus: the longer the height of the belt-hold candlestick line, the more significant the signal.
  4. Bonus: More important if they have not appeared for a while
  5. A close under a bullish belt hold line should mean resumption of the downtrend

9) Upside Gap Two Crows

  1. They are analogous to black crows peering ominously down from a tree branch
  2. Ideally, the second black real body opening above the first black real body’s open. It then closes under the first black candle’s close.
  3. Rationale: Market is in uptrend and opens higher on an opening gap. The new high fails to hold and market forms a black candlestick. Third session paints a more bearish portrait with another new high and another failure. If the next day (4th day), prices fail to regain high ground, then expect lower prices.

 

10) Mat-Hold Pattern

  1. The first 3 candlesticks are similar to the upside-Gap two crows but another black candlestick follows. If the next candlestick is whiteand gaps above the last black candlestick’s upper shadow or closes above the last black candlestick’s high then buying is warranted
  2. This pattern can have 2,3 or 4 black candlesticks

Combination of 3 Candlestick patterns:

1) Morning Star (Morning star Doji – second candle is a doji)

  1. The first is a long black real body,
  2. The second is a small real body (white or black) which gaps lower to form a star,
  3. The third is a white candlestick that closes well into the first session’s black real body.
  4. Bonus if volume is heavy on third candle and light on first candle

2) Evening Star (similar to Morning Star)

 

Combination of 2 Candlestick patterns (more powerful than Single Candlestick Patterns):

1) Dark cloud cover, opposite of ‘bullish piercing pattern’, forms a top reversal pattern.

  1. The first session should be a strong, white real body
  2. The second sessions price opens over the prior session’s high (or above the prior sessions close)
  3. By the end of second session, it closes near the low of the session.
  4. The black candle should ideally close below the center of prior white candle

2) For shorting setup, look for security in a steep uptrend that’s overbought gets to a resistance area and forms dark cloud cover.

  1. Valid only if it appears after an uptrend, or at the end of a congested trading period
  2. First candle is a strong bullish candle, second candle is bearish
  3. Second candle opens above first candles high
  4. Second candle closes well within bullish candles real body
  5. Bonus if second candle penetrates and closes deep into the first candles body (more than 50% penetration of first candles real body)
  6. Bonus if second candle occurs on high volume

3) Bearish Engulfing Pattern:

  1. Only valid if it occurs in an uptrend
  2. First candle is bullish, second candle is bearish (different colors)
  3. Second candles real body engulfs first candles real body (ignore shadows)
  4. Bonus if volume is heavy on second candle
  5. Bonus if first candle real body is small in comparison to the second candle real body
  6. Bonus if second candle engulfs more than one candle
  7. Bonus if second candle High/Low engulfs first candles High/Low

4) Bearish Counter Attack:

  1. The first white candle shows the bulls in control.
  2. The next candle gaps open higher, but the bears rush to force the closing price down to the prior session’s close.
  3. The signal is not as strong as ‘Dark cloud cover’
  4. Longer the second candle, stronger the signal

5) Harami (Harami Cross, also known as Petrifying Pattern)

  1. Unusually long white (or black) body
  2. The next candle consists of small real body, which is completely within the prior real body
  3. When the second candle has no real body, it is called Harami Cross

6) Tweezers Top (important on weekly or monthly charts; not for daily or intraday)

  1. tells us that the bullish force of the long white candle began to dissipate with the small real body of the second candle line – represent slackening of demand
  2. Ideally, the tweezers pattern should develop with the first session incorporating a long real body.
  3. With first long real body and second smaller real body and integrating two consecutive highs

7) Tweezers Bottom (similar to Tweezers Top)

8) Rising Window – is a bullish signal

  1. For example, stock XYZ has a high of $50, If the low of the next session is $52, there is a $2 rising window
  2. Gap is area where candle highs and lows do not interact
  3. Windows often become support and resistance areas

Single Candlesticks patterns:

1) Dojis are extremely valuable at calling market tops (Gravestone Doji being the most powerful) but not bottoms – signify uncertainty. Close over Doji’s high could signal that bulls have regained control.

2) Only Dragonfly Doji could signal trend reversal in downtrend

3) Doji is more useful when it is rare occurrence.

4) Candlesticks can give early trend-reversal signals but they don’t give target price

5) A bearish belt-hold has significant power in foretelling a trend reversal if it opens near resistance, then falls to close at or near the close many points down, fed by strong volume. Similarly for bullish belt-hold.

  1. The longer the height of belt-hold candle the more important the signal
  2. Belt hold lines that appear at prior support or resistance areas, thereby confirming the strength of that area, are extremely valuable signals
  3. Belt-hold signals also gain value when they have not appeared regularly on the chart’s recent time frame.

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