In this master class on candlestick patterns, you will learn about single, double, and triple candlestick patterns that can greatly benefit your trading. It is recommended to have a pen and paper handy to take notes, as this will help reinforce the learning in your subconscious mind. These patterns are significant as they appear repeatedly on the charts, and by recognizing them, you can understand their implications when making real trades. The aim is to simplify complex concepts and provide valuable knowledge for free. Remember, history often repeats itself, and by studying these patterns, you gain insight into potential future market movements.
In the world of candlestick patterns, it is understood that these patterns have occurred in the past, continue to occur in the present, and are likely to repeat in the future. While there is no 100% confirmation or guarantee, the existence of these patterns increases the probability of price movements in a particular direction. By familiarizing yourself with these patterns, you can enhance your trading accuracy, potentially increasing profits and reducing losses. To start, let’s focus on the two types of candles: green (bullish) and red (bearish). A green candle signifies that its opening price is lower than its closing price, with the high above and the low below. The rectangular part of the candle is called the body, while the thin lines extending from the top are referred to as shadows or wicks.
The candlestick pattern known as a hammer, or sometimes referred to as a pin bar, holds significant importance in technical analysis. This pattern appears like a pin with a small body and a long lower wick, resembling a hammer. It is a bullish pattern, indicating a potential upward price movement. However, it is crucial to note that any candlestick pattern should be analyzed in conjunction with volume to increase its accuracy. Without sufficient volume, the reliability of the pattern decreases. When a hammer forms and is accompanied by increased volume, it enhances the probability of the price moving higher. Additionally, it is worth noting the distinction between bullish and bearish candlestick patterns. On the right-hand side, the patterns discussed indicate a bullish sentiment, suggesting a potential price increase. Conversely, the patterns on the left-hand side denote a bearish sentiment, indicating a potential price decline.
When analyzing a hammer candlestick pattern, it is important to note that bullishness is only valid if the pattern forms at the bottom of the chart. If the hammer appears at the top of the chart, it becomes a bearish pattern, indicating a potential price reversal. The location of the pattern plays a crucial role in determining its significance. Suppose the price opens at ₹100, and sellers aggressively push it down to ₹80. It may create a sense of fear or apprehension among traders witnessing this continuous downward movement. However, the strength of the buyers becomes evident as they manage to overpower the sellers. Despite the initial decline, the buyers drive the price up to ₹105 and close it at ₹104, showcasing their determination and potential for further upward movement. The hammer pattern signifies a potential reversal, indicating that buyers have gained control and are likely to push the price higher.
Let’s consider an example of a hammer pattern. The color of the hammer doesn’t matter, but its formation at the bottom of the chart is crucial. Once the hammer pattern is identified, confirmation is sought from the next candle. The confirmation comes when the high of the hammer candle is broken by the subsequent candle, accompanied by increased volume. At this point, an entry is made, and a stop loss is set at the low of the hammer candle. It is essential to respect the stop loss to protect capital. A favorable risk-reward ratio is employed, such as 1:2 or 1:3, where the reward is at least double the stop loss. If the trend continues, the stop loss can be trailed, adjusting it to the lows of subsequent candles. This trailing stop allows for capturing more profits while protecting against reversals. If the price falls below the trailing stop, indicating a potential trend reversal, the trade is exited. It’s important to note that even if a significant price increase occurs after the trailing stop is hit, adhering to the stop loss strategy ensures risk management.
In the case of an inverted hammer and shooting star candlestick patterns, the psychology of buyers and sellers is still evident. The inverted hammer is considered bullish when it forms at the bottom of the chart, while the shooting star is bearish when it forms at the top of the chart. Let’s understand the inverted hammer first. The price opened from below and experienced a decline to ₹95. However, buyers entered the market and pushed the price up to ₹120. Despite the presence of sellers, the closing price remained above the opening price, indicating bullishness. The inverted hammer pattern is significant because it occurs at the bottom of the chart, implying a potential price reversal to the upside. On the other hand, the shooting star pattern is formed when the price opens higher, rises further, but experiences a decline and closes near its opening price. This pattern suggests that sellers are overpowering buyers, and if it forms at the top of the chart, it can signal a potential price reversal to the downside. It is important to note that both patterns require confirmation from the subsequent candle. Traders can enter a trade if the low of the inverted hammer or shooting star is broken in the next candle, with a stop loss set at the high of the pattern. By understanding these patterns and their implications, traders can make informed decisions and manage their risk effectively.
In candlestick analysis, the pin bar or pin candle is a significant pattern that traders often look for. It is characterized by a small body and a long shadow, resembling a pin or needle. The pin bar’s appearance provides valuable insights into market sentiment and potential price reversals. When the pin bar forms at the bottom of the chart during a downtrend, it suggests that buyers are gaining strength and the price may reverse to the upside. Conversely, if the pin bar forms at the top of the chart during an uptrend, it indicates that sellers are becoming more dominant and the price may reverse to the downside. The color of the pin bar, whether green or red, is not as crucial as its structure and placement on the chart. Once the pin bar is identified, traders can wait for confirmation by observing whether the high or low of the pin bar is broken in the subsequent candle. Entry can be taken once the confirmation occurs, with a stop loss placed at the opposite end of the pin bar. To manage risk and maximize potential profits, traders often aim for a reward-to-risk ratio of at least 1:2. Moving on to the shooting star pattern, it signifies a potential trend reversal in an uptrend. The shooting star has a small body and a long upper shadow, indicating that sellers are entering the market and overpowering the buyers. Traders can enter a trade after confirmation by placing a sell order below the shooting star’s low and setting a stop loss at the high of the pattern. Now, let’s proceed to the next pattern, the Doji.
In candlestick analysis, the Doji pattern holds significant importance due to its unique structure. A Doji is formed when the open and close prices are virtually the same, resulting in a small or non-existent body. This pattern indicates a state of equilibrium between buyers and sellers, reflecting indecision in the market. Traders often consider the Doji as a potential reversal signal, especially when it forms after a strong price move. The interpretation of the Doji pattern varies depending on its location on the chart. For instance, the Dragonfly Doji forms at the bottom of a downtrend and suggests a possible bullish reversal. Traders can enter a long position after the high of the Doji is broken in the following candle, with a stop loss placed below the Doji’s low. On the other hand, the Gravestone Doji appears at the top of an uptrend, indicating a potential bearish reversal. Traders can take a short position after the low of the Gravestone Doji is breached, setting a stop loss above the Doji’s high. Higher volume during the formation of a Doji adds credibility to its significance.
Double candlestick patterns provide valuable insights into market sentiment and potential trend reversals. One of the significant patterns in this category is the bullish and bearish engulfing patterns. The term “engulfing” refers to one candle completely engulfing the previous candle, indicating a strong shift in momentum.
Let’s start with the bullish engulfing pattern. This pattern occurs when a smaller bearish candle is followed by a larger bullish candle that engulfs the entire body of the previous candle. It signifies a potential reversal from a downtrend to an uptrend. The bullish engulfing pattern is most powerful when it forms at the bottom of a chart, indicating a strong buying pressure. Traders can take a long position after the high of the engulfing candle is surpassed, with a stop loss placed below the low of the previous candle. It is crucial to consider volume during the formation of the engulfing pattern, as higher volume adds credibility to the pattern’s significance.
Conversely, the bearish engulfing pattern occurs when a smaller bullish candle is followed by a larger bearish candle that engulfs the previous candle’s body entirely. This pattern suggests a potential reversal from an uptrend to a downtrend. The bearish engulfing pattern is most potent when it forms at the top of a chart, indicating a strong selling pressure. Traders can take a short position after the low of the engulfing candle is breached, setting a stop loss above the high of the previous candle. As with the bullish engulfing pattern, volume plays a crucial role in confirming the validity of the bearish engulfing pattern.
Engulfing patterns are considered significant because they represent a decisive shift in market sentiment. The larger candle engulfing the previous one indicates the dominance of either buyers or sellers. Traders can capitalize on these patterns by recognizing the potential trend reversals and adjusting their trading strategies accordingly.
It is important to note that while engulfing patterns hold significance, they should not be viewed in isolation. Traders should consider other technical indicators, market conditions, and overall trend analysis to make well-informed trading decisions.
The bullish engulfing pattern holds significance when it forms at the bottom of the chart, indicating a potential trend reversal from a downtrend to an uptrend. However, it is important to exercise caution and wait for confirmation before entering a trade. After the bullish engulfing pattern is formed, traders should look for the next candle to break its high for confirmation. Once the high is breached, traders can enter the trade, placing a stop loss below the low of the engulfing candle.
Sometimes, the price may not provide a favorable risk-to-reward ratio, and it might start falling after an initial rise. In such cases, traders need to be vigilant and observe if any other candlestick patterns emerge as the price continues to decline. If a bearish engulfing pattern forms, it indicates a potential reversal and traders should exit the trade promptly, even if they have made a profit.
While a pullback may seem like an opportunity for further upward movement, the presence of a bearish engulfing pattern suggests otherwise. Exiting the trade when a bearish engulfing pattern appears allows traders to preserve their profits and avoid potential losses.
The profit you booked, it was a little, but you made an entry again. When did you make the entry? You saw bearish engulfing. In the next candle, it had a low break. As soon as your entry was low, you made an entry again. And what was your stop loss? The top was high, now it is SL. Our trade will be the same. We want 1 is to 2. Now we want 1 is to 2. If you do not come out, then this price would have fallen down and your stop loss here would have been hit. So now here you are getting more reward than 1 is to 2 or 1 is to 3. So you have to understand when you have to enter and when you have to come out. So on the same chart, I showed you two candlestick patterns. The candle did its job, but it is not necessary that every time you will get 1 is to 2. Sometimes you have to come out. So you have to trade the price action. You have to see what pattern is being made now, what chart pattern is being made, what volume is trying to tell you. In this example, a lot of things are being cleared up to this point. Now, as we understood, bullish and bearish engulfing have another important candlestick pattern, which you have to understand, which is made up of two candles and that is this. Bullish Harami, now what is this bullish harami? Let’s understand this. I have told you before. all these are Japanese names. So what is this here, we call this candle mother and we call this candle baby. Now it is not engulfed here, but it is made in the middle. So here basically when is its significance when it is made below and when is its significance when it is made above. This is our important part. So what do we see here, try to understand it. So here basically one important thing is that people forget in Harami. The 50% of its body should be closed above it. It is closing below 50%, so this is not your strong bullish Harami and then the volume has to be checked. So 50% should be closing above the body. This is important. So this will be made in the middle and from this we understand the psychology that the price was open from here and the sellers took it down, but a kick start is found.
The bearish harami is another two-candlestick pattern that holds significance in price action analysis. In this pattern, the first candle is a larger green candle, followed by a smaller red candle that is completely engulfed by the body of the previous candle. The positioning and characteristics of the bearish harami pattern indicate a potential reversal from an uptrend to a downtrend.
To identify a bearish harami pattern, traders should look for the red candle to close below 50% of the body of the preceding green candle. This condition signifies the strength of the bearish harami pattern. Furthermore, confirming the pattern with accompanying volume can provide additional validation for traders.
The psychology behind the bearish harami pattern reveals that after an upward move, buyers lose their momentum, and sellers step in to push the price down. The red candle opens above the green candle but fails to maintain the upward movement, closing below the midpoint of the green candle’s body. This shift in market sentiment suggests a potential reversal, prompting traders to consider initiating bearish positions or exiting existing bullish positions.
Trading based on candlestick patterns can provide valuable insights into market dynamics. When analyzing price movements on shorter timeframes, such as a 5-minute chart, observing the candlestick patterns becomes crucial. However, switching to a higher timeframe, like a 15-minute chart, can condense multiple candles into one, simplifying the analysis.
By examining a single candle on the 15-minute chart, we can identify specific patterns. For instance, if we observe a candle with a high and low range, along with an open and close within that range, it forms a rectangular shape. This candle, regardless of its color, represents a hammer pattern. A hammer pattern suggests a potential price reversal when it occurs at the bottom of the chart.
When trading based on the hammer pattern, one can enter a long position once the high of the hammer is broken. The low of the hammer serves as the stop loss (SL) level. Monitoring volume during the breakout can provide additional confirmation for the trade.
Similarly, the evening star pattern can be identified on the 15-minute chart. In this pattern, the price reaches its peak and then starts to decline. The candle that forms the evening star pattern has an open below the previous candle’s close and closes below its open. It resembles a green candlestick with a long upper shadow. When the evening star pattern occurs at the top of the chart, it is often referred to as a shooting star pattern. This pattern suggests a potential price reversal to the downside.
By understanding these candlestick patterns, traders can make informed decisions based on the price action. The accuracy of the patterns tends to increase with higher timeframes, as a single candle on a longer timeframe encompasses the information of multiple candles on a shorter timeframe.
Now, let’s look into another three-candlestick pattern called bullish abandoned baby and bearish abandoned baby. These patterns can be somewhat confusing for traders. In the bullish abandoned baby pattern, the price experiences a decline, followed by a gap-down opening. Here, on the 15-minute chart, we can see a candle with a high and low range, which opens below the previous candle’s close and closes near its high. This candle forms a small green body inside the gap. The bullish abandoned baby pattern indicates a potential trend reversal to the upside.
Conversely, in the bearish abandoned baby pattern, the price sees an upward move, followed by a gap-up opening. On the 15-minute chart, we observe a candle with a high and low range, which opens above the previous candle’s close and closes near its low. This candle forms a small red body inside the gap. The bearish abandoned baby pattern suggests a potential trend reversal to the downside.
Candlestick patterns provide valuable insights for traders when making trading decisions. One such pattern is the Doji, which appears as a candle with an open and close nearly at the same level, resembling a cross or a plus sign. When observing the Doji pattern on a 5-minute chart, if it occurs at the bottom of the chart and is followed by a gap opening, it indicates a higher probability of a price increase. Similarly, if the Doji pattern occurs at the top of the chart, it suggests a potential price decline.
To trade the morning star pattern, traders can wait for the high of the morning star candle to break and enter a long position. The stop loss is set at the low of the three candles forming the pattern. It is important to respect the stop loss and aim for a reward-to-risk ratio of at least 1:2. By trailing the stop loss, traders can potentially maximize their profits.
The concept of abandoned baby patterns involves a candle followed by a gap opening in the opposite direction and a subsequent attempt to reverse the price movement. In the bullish abandoned baby pattern, the gap is down, indicating bearish sentiment initially, but the price shoots up afterward, signaling the strength of the bulls. Traders can enter a long position once the high of the pattern is broken and place the stop loss at the low of the three candles.
Conversely, the bearish abandoned baby pattern occurs at the top of the chart with a gap-up opening, followed by a gap down. Once the low of the pattern is broken, traders can enter a short position with a stop loss placed at the high of the three candles.
When trading based on candlestick patterns, it is important to consider volume as well for confirmation. By following these strategies and adhering to risk management principles, traders can increase their chances of successful trades. Remember to monitor market conditions and adapt to changing circumstances to make informed decisions.
In conclusion, candlestick patterns such as the Doji, morning star, and abandoned baby can provide valuable insights into potential price reversals and trading opportunities. By understanding the entry and stop loss levels associated with these patterns and implementing sound risk management, traders can improve their trading results.