Back to Home

Chapter 6 Candlestick Patterns For Stocks

Investors’ fear, greed and hope greatly influence stock prices. Candlestick analysis shows the interaction between buyers and sellers. It offers a quick picture into the psychology of short term trading; it studies the effect, not the cause. Therefore, combining candlestick with other technical tools helps select entry and exit points.

Hammer

A Hammer is identified by a small real body, i.e. a small range between the opening and closing prices, and a long lower shadow, where the low is significantly lower than the open, high, and close. The body can be empty or filled-in. If the Candlestick occurs after a significant downtrend, it is a bullish Candlestick, whereas if it occurs after a significant up- trend, it is called a ‘Hanging Man’.

Hammer Formation:

Piercing Line

This is a bullish pattern. The first Candlestick is a long black candle and the second candlestick is a long white candle. The second candle opens lower than the first candles’ low, but it closes more than halfway above the first candles’ real body.

Piercing line Formation:

Bullish Engulfing Lines

This pattern is strongly bullish if it occurs after a significant downtrend, i.e. it acts as a reversal pattern. It occurs when a small bearish (filled-in) Candlestick is engulfed by a large (empty) Candlestick.

This is a bullish pattern. The first Candlestick is a long black candle and the second candlestick is a long white candle. The second candle opens lower than the first candles’ low, but it closes more than halfway above the first candles’ real body.

Bullish Engulfing Formation

Morning Star

This is a bullish pattern, signifying a potential bottom. The “star” indicates a possible reversal and the bullish (empty) Candlestick confirms this. The star can be empty or filled-in.

Morning Star Formation:

Evening Star

This is a bearish pattern, signifying a potential top. The “star” indicates a possible reversal and the bearish (filled-in) Candlestick confirms this. The star can be empty or filled-in.

 

Hanging Man

These Candlesticks are bearish if they occur after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies, i.e. a small range between the open and closing prices, and a long lower shadow, i.e. the low was significantly lower than the open, high, and close. The bodies can be empty or filled-in.

Hanging man Formation:

Dark Cloud Cover

This is a bearish pattern. The pattern is more significant, if the second candles’ body is below the center of the previous candles’ body (as illustrated).

 

Bearish Engulfing Lines

This pattern is strongly bearish if it occurs after a significant up-trend, i.e. it acts as a reversal pattern. It occurs when a small bullish (empty) candlestick is engulfed by a large bearish (filled-in) candlestick.

Bearish Engulfing Formation:

Doji

This Candlestick implies indecision. It occurs when the security opened and closed at the same price. These Candlesticks can appear in several different patterns.

 

Dragonfly Doji

This Candlestick also signifies a turning point. It occurs when the open and the close are the same, and the low is significantly lower than the open, high, and closing prices.

 

Gravestone Doji

This Candlestick also signifies a turning point. It occurs when the open, close and low are the same and the high is significantly higher than the open, low and closing prices.

 

Long-legged Doji

This Candlestick often signifies a turning point. It occurs when the open and close are the same, and the range between the high and low is relatively large.

 

Long legged Doji Formation :

 

Doji Star

A star indicates a reversal and a Doji indicates indecision. Thus, this pattern usually indicates a reversal, following an indecisive period. You should wait for a confirmation, for example, an evening star illustration, before trading a Doji star.

 

Doji Star Formation:

Shooting Star

This pattern suggests a minor reversal when it appears after a rally. The star’s body must appear near the low price and the candle should have a long upper shadow.

 

Harami

This pattern is usually seen as a reversal of the current trend. It occurs when a Candlestick with a small body falls within the area of a larger body.

 

Bullish Harami Formation:

Key Takeaways

  • Candlestick patterns form as reversal and continuation types.

  • Adding volume to the Candlestick charting often brings out actionable technical characteristics that are not always visible when volume and price are plotted separately.

  • Candlestick charts provide a unique visual effect that helps display certain market characteristics which are not easily identifiable on a bar or line chart.

1 2 3 4 5 6 7 8 9