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This document describes 16 candlestick patterns - 6 bullish patterns that signal potential upward momentum (hammer, inverse hammer, bullish engulfing, piercing line, morning star, three white soldiers) and 6 bearish patterns that signal potential downward momentum (hanging man, shooting star, bearish engulfing, evening star, three black crows, dark cloud cover). It also describes 4 continuation patterns that indicate indecision or consolidation in the current trend (doji, spinning top, falling three methods, rising three methods). Each pattern is formed by 1-3 candlesticks and provides clues about the balance of supply and demand forces in the market.

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1K views

Amit PDF

This document describes 16 candlestick patterns - 6 bullish patterns that signal potential upward momentum (hammer, inverse hammer, bullish engulfing, piercing line, morning star, three white soldiers) and 6 bearish patterns that signal potential downward momentum (hanging man, shooting star, bearish engulfing, evening star, three black crows, dark cloud cover). It also describes 4 continuation patterns that indicate indecision or consolidation in the current trend (doji, spinning top, falling three methods, rising three methods). Each pattern is formed by 1-3 candlesticks and provides clues about the balance of supply and demand forces in the market.

Uploaded by

amit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Six bullish candlestick patterns

Bullish patterns may form after a market downtrend, and signal a


reversal of price movement. They are an indicator for traders to
consider opening a long position to profit from any upward trajectory.

Hammer
The hammer candlestick pattern is formed of a short body with a long
lower wick, and is found at the bottom of a downward trend.

A hammer shows that although there were selling pressures during the
day, ultimately a strong buying pressure drove the price back up. The
colour of the body can vary, but green hammers indicate a stronger
bull market than red hammers.
Inverse hammer
A similarly bullish pattern is the inverted hammer. The only difference
being that the upper wick is long, while the lower wick is short.

It indicates a buying pressure, followed by a selling pressure that was


not strong enough to drive the market price down. The inverse hammer
suggests that buyers will soon have control of the market.

Bullish engulfing
The bullish engulfing pattern is formed of two candlesticks. The first
candle is a short red body that is completely engulfed by a larger green
candle.

Though the second day opens lower than the first, the bullish market
pushes the price up, culminating in an obvious win for buyers.
Piercing line
The piercing line is also a two-stick pattern, made up of a long red
candle, followed by a long green candle.

There is usually a significant gap down between the first candlestick’s


closing price, and the green candlestick’s opening. It indicates a strong
buying pressure, as the price is pushed up to or above the mid-price of
the previous day.
Morning star
The morning star candlestick pattern is considered a sign of hope in a
bleak market downtrend. It is a three-stick pattern: one short-bodied
candle between a long red and a long green. Traditionally, the ‘star’ will
have no overlap with the longer bodies, as the market gaps both on
open and close.

It signals that the selling pressure of the first day is subsiding, and a
bull market is on the horizon.
Three white soldiers
The three white soldiers pattern occurs over three days. It consists of
consecutive long green (or white) candles with small wicks, which open
and close progressively higher than the previous day.

It is a very strong bullish signal that occurs after a downtrend, and


shows a steady advance of buying pressure.
Six bearish candlestick patterns
Bearish candlestick patterns usually form after an uptrend, and signal a
point of resistance. Heavy pessimism about the market price often
causes traders to close their long positions, and open a short position
to take advantage of the falling price.

Hanging man
The hanging man is the bearish equivalent of a hammer; it has the
same shape but forms at the end of an uptrend.

It indicates that there was a significant sell-off during the day, but that
buyers were able to push the price up again. The large sell-off is often
seen as an indication that the bulls are losing control of the market.
Shooting star
The shooting star is the same shape as the inverted hammer, but is
formed in an uptrend: it has a small lower body, and a long upper wick.

Usually, the market will gap slightly higher on opening and rally to an
intra-day high before closing at a price just above the open – like a star
falling to the ground.

Bearish engulfing
A bearish engulfing pattern occurs at the end of an uptrend. The first
candle has a small green body that is engulfed by a subsequent long
red candle.
It signifies a peak or slowdown of price movement, and is a sign of an
impending market downturn. The lower the second candle goes, the
more significant the trend is likely to be.

Evening star
The evening star is a three-candlestick pattern that is the equivalent of
the bullish morning star. It is formed of a short candle sandwiched
between a long green candle and a large red candlestick.

It indicates the reversal of an uptrend, and is particularly strong when


the third candlestick erases the gains of the first candle.
Three black crows
The three black crows candlestick pattern comprises of three
consecutive long red candles with short or non-existent wicks. Each
session opens at a similar price to the previous day, but selling
pressures push the price lower and lower with each close.

Traders interpret this pattern as the start of a bearish downtrend, as


the sellers have overtaken the buyers during three successive trading
days.
Dark cloud cover
The dark cloud cover candlestick pattern indicates a bearish reversal –
a black cloud over the previous day’s optimism. It comprises two
candlesticks: a red candlestick which opens above the previous green
body, and closes below its midpoint.

It signals that the bears have taken over the session, pushing the price
sharply lower. If the wicks of the candles are short it suggests that the
downtrend was extremely decisive.
Four continuation candlestick patterns
If a candlestick pattern doesn’t indicate a change in market direction, it
is what is known as a continuation pattern. These can help traders to
identify a period of rest in the market, when there is market indecision
or neutral price movement.

Doji
When a market’s open and close are almost at the same price point,
the candlestick resembles a cross or plus sign – traders should look
out for a short to non-existent body, with wicks of varying length.
This doji’s pattern conveys a struggle between buyers and sellers that
results in no net gain for either side. Alone a doji is neutral signal, but it
can be found in reversal patterns such as the bullish morning star and
bearish evening star.

Spinning top
The spinning top candlestick pattern has a short body centred between
wicks of equal length. The pattern indicates indecision in the market,
resulting in no meaningful change in price: the bulls sent the price
higher, while the bears pushed it low again. Spinning tops are often
interpreted as a period of consolidation, or rest, following a significant
uptrend or downtrend.
On its own the spinning top is a relatively benign signal, but they can
be interpreted as a sign of things to come as it signifies that the current
market pressure is losing control.

Falling three methods


Three-method formation patterns are used to predict the continuation
of a current trend, be it bearish or bullish.

The bearish pattern is called the ‘falling three methods’. It is formed of


a long red body, followed by three small green bodies, and another red
body – the green candles are all contained within the range of the
bearish bodies. It shows traders that the bulls do not have enough
strength to reverse the trend.
Rising three methods
The opposite is true for the bullish pattern, called the ‘rising three
methods’ candlestick pattern. It comprises of three short reds
sandwiched within the range of two long greens. The pattern shows
traders that, despite some selling pressure, buyers are retaining
control of the market.

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