– LESSON 3 –
CANDLESTICK PATTERNS

Candlestick patterns indicate a reversal in price movement and it is formed by two or three candlesticks. It doesn’t mean that a single candlestick can’t indicate a reversal.

There are two types of candlestick patterns:

  • Bullish Candlestick Patterns
  • Bearish Candlestick Patterns

The bullish candlestick patterns and the bearish candlestick patterns are used in Technical Analysis (TA) to determine a change in the trend of the market.

Let me show you some examples of the most powerful candlestick reversal patterns.

1.BULLISH REVERSAL CANDLESTICK PATTERNS

Bullish candlestick patterns signify that buyers are momentarily in control meaning that the price could reverse and goes up.

Here are five bullish reversal candlestick patterns you should know:

  • Hammer
  • Bullish Engulfing
  • Piercing
  • Tweezer Bottom
  • Morning Star

Before we start, I just want to tell you that you don’t have to memorize all the patterns as long as you have access to these lessons. You can check it here at any given moment you need some information. Give yourself some time and you will see that all the reversal patterns will start to make sense after a period.

Let’s start with the first one and see it by examples…

1.1 HAMMER

This candlestick, named ‘hammer’, signifies a possible bullish reversal of the price. Every time it appears it means it is a lot of buying pressure in the market.

Let’s see how it looks:

Hammer Candlestick
Hammer Candlestick

How do we recognize the “hammer” candlestick ?

This candle looks like a hammer. It has a long lower wick and a short body that is located at the top of the candle.
Usually, it has no upper wick. If the lower wick is two times greater than the size of the body, or approximately, then the candle is a valid hammer.

Here is a real example took from a real chart:

Real Chart Example: Hammer Candlestick
Real Chart Example: Hammer Candlestick

A hammer means:

After the price had opened, sellers pushed the price down to the lower of the wick. Right after that, huge buying pressure stepped in and pushed the price back up, above the opening price, showing rejection of lower prices.

This is a bullish sign.

Next …

1.2 BULLISH ENGULFING

The bullish engulfing candlestick pattern is made up by two candles. In general, a bullish engulfing pattern appears in a downtrend and is a combination of one red candle followed by a larger green candle.

The second candle (green) completely ‘engulfs’ the real body of the first one (red). The wick isn’t taken in consideration.

See the example below:

Bullish Engulfing Candlestick Pattern
Bullish Engulfing Candlestick Pattern

Here is the easy way to recognize the bullish engulfing candle.

The first candle has a bearish close and the body of the second candle completely covers the body of the first one (wick isn’t taken into consideration).

Let’s see an example on a real chart:

Real Chart Example: Bullish Engulfing Candlestick Pattern
Real Chart Example: Bullish Engulfing Candlestick Pattern

A bullish engulfing candlestick pattern means:

Sellers are in control of the first candle, closing it at the lower part of the wick. When the second candle opened, huge buying pressure stepped in and pushed the price above the previous candle high.

That means the bulls have won the battle!

Next …

1.3 PIERCING

The piercing candlestick pattern is formed by two candles.

The piercing pattern isn’t as strong as the bullish engulfing pattern because the buying pressure isn’t so strong. You can see that the second candle closes above the half of its body but doesn’t engulf the first one.

Here is a representation of the piercing candlestick pattern:

Piercing Candlestick Pattern
Piercing Candlestick Pattern

Here is the easy way to recognize this pattern:

The piercing pattern includes two candlesticks. The first candle opens near its high and closes near its low. The second one opens lower than the first candle and closes near its high.

To have a valid pattern, the second candle should cover at least half of the previous candle’s length.

Now let’s see an example on a real chart:

Real Chart Example: Piercing Candlestick Pattern
Real Chart Example: Piercing Candlestick Pattern

A piercing candlestick pattern means:

Sellers are in control of the first candle, pushing the price down and closing it bearish. The second candle closes above the halfway mark of the previous candle’s body which means the buyers stepped into the market showing bullish pressure.

Next …

1.4 TWEEZER BOTTOM

The tweezer bottom pattern is made up by two candles and it shows price rejection on both candles.

It looks like this:

Tweezer Bottom Candlestick Pattern
Tweezer Bottom Candlestick Pattern

The easy way to recognize the tweezer bottom candlestick pattern:

The first candle has a significantly lower wick. It may be bullish or bearish (green or red), it doesn’t matter. The second candle revisits the low of the first candle without breaking it. Also, the candle can be bullish or bearish, it doesn’t matter.

Here is an example on a real chart:

Real Chart Example: Tweezer Bottom Candlestick Pattern
Real Chart Example: Tweezer Bottom Candlestick Pattern

A tweezer bottom candlestick pattern means:

On the first candle, we see the sellers pushing the price down but the buyers stepped in and show some buying pressure closing the candle at or above half of its length.

On the second candle, sellers tried to push the price lower again but failed because of the buying pressure.

Next …

1.5 MORNING STAR

A morning star is made up by three candles. It is a bullish reversal pattern, formed after a decline in price.

Let’s see how it looks:

Morning Star Candlestick Pattern
Morning Star Candlestick Pattern

Here is the easy way to recognize the morning star candlestick pattern:

The first candle has a bearish close. The second candle has a small range and it is located at the bottom of the first candle. The third candle confirms the reversal and can mark a new uptrend.

Now let’s see an example on a real chart:

Real Chart Example: Morning Star Candlestick Pattern
Real Chart Example: Morning Star Candlestick Pattern

A morning star candlestick pattern means:

The first candle shows that the sellers are in control pushing the price down. We can see that the candle closes lower.
The second candle has a small range of the body, showing indecision. Comparing to the first candle, the buyers stepped in and started buying. On the third candle, we can see that the bulls are in control and push the price up.

Now, before ending the “Bullish Candlestick Reversal Patterns”, let me give you more information.

Please keep in mind that just because you see a bullish reversal pattern doesn’t mean the market reverses immediately. But along with other confirmations, this is a good opportunity to enter the market and place a buy order.

The above presented candlestick patterns are not all the bullish reversal patterns but these are the most relevant ones. Please check with the “Bullish Candlestick Patterns” page for a complete guide of bullish candlestick patterns.

Let’s move on to the bearish candlestick patterns …

2. BEARISH REVERSAL CANDLESTICK PATTERNS

Bearish reversal candlestick patterns signify that sellers are momentarily in control, meaning that the price could reverse and goes down. It is exactly the opposite of the bullish

Here are five bearish reversal candlestick patterns you should know:

  • Shooting Star
  • Bearish Engulfing
  • Dark Cloud Cover
  • Tweezer Top
  • Evening Star

Let’s start with the first one and see it by examples …

2.1 SHOOTING STAR

A shooting star is a bearish candlestick that appears at the end of an uptrend. Usually, it has a long upper wick.

Let’s see how it looks:

Shooting Star Candlestick
Shooting Star Candlestick

The easy way to recognize the shooting star candlestick:

It has little to no lower wick. For a candle to be a valid shooting star, the upper wick is about two or three times the length of the body. The shooting star candlestick pattern shows rejection of higher prices.

Here is an example on a real chart:

Real Chart Example: Shooting Star Candlestick Pattern
Real Chart Example: Shooting Star Candlestick Pattern

Here is what a “shooting start” candlestick means:

The long wick shows us that the buyers pushed the price up. But then, the selling pressure was so strong that it closed below the opening price showing that the sellers stepped in.

Next …

2.2 BEARISH ENGULFING

The “bearish engulfing pattern” is made up by two candles. Usually appears when the market is in an uptrend and it is a combination of one green candle followed by a larger red candle. The pattern can be important because it shows that the sellers have overtaken the buyers and are pushing the price down.

Let’s take a look:

Example: Bearish Engulfing Candlestick Pattern
Example: Bearish Engulfing Candlestick Pattern

The easy way to recognize a bearish engulfing candlestick pattern:

The first candle has a bullish close. The second candle completely ‘engulfs’ the body of the first one. The wick isn’t taken into consideration. A bearish engulfing candle is a hint that the price formed a top and may reverse from there.

Let’s have a look at a bearish engulfing pattern on a real chart:

Real Chart Example: Bearish Engulfing Candlestick Pattern
Real Chart Example: Bearish Engulfing Candlestick Pattern

Now let’s see what a bearish engulfing candlestick pattern means.

Buyers are in control on the first candle, closing the candle almost at the high of the wick. When the second candle opens, huge selling pressure stepped in and pushed the price beyond the previous candle’s low.

It means that the bears have won the battle and price goes down!

Next …

2.3 DARK CLOUD COVER

The “dark cloud cover pattern” is made up by two candles. It isn’t as strong as the bearish engulfing pattern because the selling pressure isn’t so strong.

It can be seen in the below example:

Dark Cloud Cover Candlestick Pattern
Dark Cloud Cover Candlestick Pattern

The easy way to recognize the dark cloud cover:

The first candle is a bullish one because the candle closes almost at its high.
The body of the second candle closes beyond the half or more of the first candle.

Let’s see the “dark cloud cover” on a real chart:

Real Chart Example: Dark Cloud Cover Candlestick Pattern
Real Chart Example: Dark Cloud Cover Candlestick Pattern

A dark cloud cover candlestick pattern means:

The buyers are in control on the first candle, closing it at the high of the wick. On the second candle, selling pressure stepped into the market. The body of the candle closes beyond the half of the first candle, which tells you that there is selling pressure around.

Next …

2.4 TWEEZER TOP

The tweezer top pattern is made up by two candles. It is the oposite of the tweezer bottom. They may simply indicate the possibility of a reversal.

Let’s see how it looks:

Tweezer Top Candlestick Pattern
Tweezer Top Candlestick Pattern

Here is the easy way to spot the “tweezer top” pattern:

The first and second candle looks very similar. The first candle shows rejection of higher prices.
The second candle may also be bullish or bearish, and revisits the high of the previous candle, without breaking it.

Let’s take a look at a real chart:

Real Chart Example: Tweezer Top Candlestick Pattern
Real Chart Example: Tweezer Top Candlestick Pattern

A “tweezer top” candlestick pattern means:

On the first candle, we see the buyers pushing the price up, but as the wick of the candle shows us, selling pressure came in. On the second candle, the buyers tried to push the price up again but failed as the selling pressure remained in that zone.

Next …

2.5 EVENING STAR

An evening star is made up by three candles. It is a bearish reversal pattern that forms after an upward movement of the price. It is the opposite of the “morning star” candlestick pattern.

Let’s see how it looks:

Evening Star Candlestick Pattern
Evening Star Candlestick Pattern

The easy way to recognize an evening star candlestick pattern:

The first candle has a bullish close. The second candle has a small range.
The third candle confirms the reversal, and from here we can see a possible trend reversal.

Here is an example of the “evening start” on a real chart:

Real Chart Example: Evening Star Candlestick Pattern
Real Chart Example: Evening Star Candlestick Pattern

An evening star candlestick pattern means:

The first candle shows that the buyers are in control because the candle closes at its high. On the second candle, we can see a small range of the body, showing indecision. Sellers step in and start to sell.

The third candle shows that the sellers won the battle and pushed the price down.

Awesome! You’ve just learned different reversal patterns with high probability of success! These are the most frequent candlestick reversal patterns.

Please keep in mind that just because you see a bearish reversal pattern doesn’t mean the market reverses immediately. But these candlestick reversal patterns along with some other ‘confirmations’ will boost your chances for winning trades. Later you will find these patterns very useful.

Now let’s go forward to see other types of candles named DOJI …

3. DOJI CANDLESTICKS

What is a DOJI candlestick and what does it tell us?

Dojis are formed when the price opens and closes at almost the same level meaning that the body of the candle is very very small. These are the most misunderstood candlestick patterns.

A Doji candlestick signals market indecision and the potential for price reversal.

Here are 5 of the most common DOJI candlesticks:

  • Standard Doji
  • Long-legged Doji
  • Dragonfly Doji
  • Gravestone Doji
  • 4-Price Doji

Let’s see some examples …

3.1 STANDARD DOJI

Example: Standard Doji
Example: Standard Doji

A standard Doji is a single candlestick that doesn’t signify much on its own. It has a small range and it closes near the level where it opens. It means that the market is undecided as neither buyers or sellers are in control.

To understand what this candlestick means, you have to observe the prior price action building up to the Doji.

Trades based on Standard Doji need to be taken into context.

3.2 LONG-LEGGED DOJI

Example: Long-Legged Doji
Example: Long-Legged Doji

The long-legged Doji has long wicks, and it has approximately the same opening and closing price.

This candlestick has a long-range on its wicks and shows indecision between the buyers and the sellers. It could also indicate a reversal of the current trend.

In conclusion, trades based on Long-Legged Doji need to be taken into context because the candle itself isn’t bullish or bearish.

3.3 DRAGONFLY DOJI

Example: Dragonfly Doji
Example: Dragonfly Doji

The Dragonfly Doji can appear at the top of an uptrend or at a bottom of a downtrend and indicates the potential for a price reversal.

Being at the bottom this candle can be interpreted as the ‘hammer’. At the top of the trend, you can interpret this candle as the ‘hanging man’ or ‘shooting star’, which are bearish.

The longer the wick, the stronger is the signal.

3.4 GRAVESTONE DOJI

Example: Gravestone Doji
Example: Gravestone Doji

The Gravestone Doji usually appears after an uptrend and it is used as a bearish confirmation before going short. At the top, this candle can be interpreted as the ‘shooting star’. The longer the wick, the stronger is the signal.

It can also appear at the bottom of a downtrend, which indicates a possible price reversal.

3.5 FOUR PRICE DOJI

Example: 4 Price Doji
Example: 4 Price Doji

The Four Price Doji isn’t such a common candle. This candle appears in extremely quiet markets and signifies the ultimate indecision since the Open, Close, High and Low are at the same price level.

Congratulations, now you know how to read a candlestick reversal pattern!

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>>> GO TO LESSON 4

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