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The Monster Guide to Candlestick Patterns

Sebencapital

Published
06/10/23
The Monster Guide to Candlestick Patterns

When analyzing price charts, numerous methods are at your disposal. You can explore Japanese Candlestick Patterns, Renko charts, Bar charts, Line charts, Heikin Ashi, Point and figure charts, and more.

You might be pondering:

"Which one should I opt for?"

The go-to choice, particularly in candlestick trading, is Candlestick Patterns.

And why?

Simply put, it's a straightforward and effective approach.

That's precisely why I've painstakingly crafted this comprehensive guide. Its sole purpose is to equip you with the knowledge to master all Candlestick Patterns and trade like a seasoned pro.

Here's a sneak peek of what you're about to delve into:

  • Understanding Candlestick Patterns: Uncover the essence of a candlestick pattern and gain the expertise to interpret them accurately.
  • Bullish Reversal Candlestick Patterns: Discover the key to identifying bullish reversal candlestick patterns, which signal potential upward momentum.
  • High Probability Bullish Reversal Setups: Learn the art of locating bullish reversal setups with a strong likelihood of success.
  • Bearish Reversal Candlestick Patterns: Master recognizing bearish reversal candlestick patterns, indicating possible downward shifts.
  • High Probability Bearish Reversal Setups: Unlock the secrets to pinpointing bearish reversal setups with a high chance of profitability.
  • Indecision Candlestick Patterns: Navigate the intricacies of indecision candlestick patterns, which often serve as a precursor to significant market moves.
  • Trend Continuation Candlestick Patterns: Get acquainted with trend continuation candlestick patterns, designed to identify opportunities in the ongoing market trend.
  • High Probability Trend Continuation Setups: Acquire the skills necessary to spot trend continuation setups with a remarkable probability of success.
  • Candlestick Cheat Sheet: Discern the core concepts behind any candlestick pattern without committing a single one to memory.

With this comprehensive guide, you'll be well-prepared to navigate the world of candlestick patterns and enhance your trading prowess.

Prepare yourself for a comprehensive exploration of candlestick patterns. This guide is an extensive resource, spanning a substantial 3781 words, so take your time to absorb the information it contains. Feel free to return to it whenever you need a refresher.

Let's dive into the intriguing world of candlestick patterns and equip you with the knowledge and skills to empower your trading journey.

What is a candlestick pattern?

Japanese candlestick patterns can trace their origins to the remarkable Japanese rice trader Munehisa Homma during the 1700s. His groundbreaking insights laid the foundation for what we now know as candlestick patterns.

Fast forward almost three centuries and these invaluable trading tools found their way into the Western world, thanks to the pioneering work of Steve Nison. His book, "Japanese Candlestick Charting Techniques," acted as a bridge, introducing these patterns to a new audience.

Over time, the original concepts have likely undergone modifications and adaptations, resulting in the diverse range of candlestick patterns that traders like you use today.

With that glimpse into the past, we're ready to embark on a journey into the art of reading a candlestick chart. Let's delve into the intricacies of this essential skill.

So, how do you read a Japanese candlestick chart?

Every candlestick pattern in your trading arsenal consists of four vital data points, each revealing crucial information:

  • Open: This is the initial price at the beginning of the period under consideration. It represents where the market commenced trading.
  • High: The high is the highest price reached during that specific period. It showcases the peak level of buying or selling activity.
  • Low: On the flip side, the low represents the lowest price observed during the same time frame. It reflects the deepest trough in the market action.
  • Close: On the other hand, the close is the price at which the market concluded trading within that period. It serves as an indicator of where the market settled.

These four data points collectively form the foundation for understanding the dynamics of each candlestick pattern. They are the key to unlocking valuable insights into market sentiment and potential price movements.

how do you read a Japanese candlestick chart?

Keep in mind this crucial distinction:

In Bullish candlestick patterns, the open price is consistently positioned BELOW the close price.

Conversely, in Bearish candlestick patterns, you'll consistently find the open price positioned ABOVE the close price. This fundamental principle helps discern the direction and sentiment of each candlestick pattern.

Bullish reversal candlestick patterns

Bullish reversal candlestick patterns strongly signal buyers have taken temporary control of the market. However, it's important to note that spotting such a pattern doesn't automatically translate to a trading "edge" in the markets.

Combining candlestick patterns with other analytical tools is advisable to make well-informed trading decisions. This strategic approach allows you to identify high-probability trading setups, which we will investigate later.

As you embark on your journey to master bullish reversal candlestick patterns, here are five indispensable ones to start with:

1. Hammer

2. Bullish Engulfing Pattern

3. Piercing Pattern

4. Tweezer Bottom

5. Morning Star

These patterns are key building blocks in your understanding of bullish reversals and will serve as valuable tools in your trading arsenal.

Let me explain…

1. Hammer

Bullish reversal candlestick patterns

A Hammer is a (1- candle) bullish reversal pattern that forms after a price decline.

Recognizing the Hammer candlestick pattern involves looking for distinct characteristics:

  • Little to No Upper Shadow: The upper shadow, if present, should be minimal or almost non-existent.
  • Closing at the Top ¼ of the Range: The price should conclude near the top 25% of the range of the candlestick.
  • Lower Shadow Significance: The lower shadow should be approximately two to three times the length of the body.

So, what does a Hammer signify?

When the market opens, sellers initially take control and lower the price. However, at the selling climax, a remarkable surge in buying pressure comes into play, propelling the price higher. This buying pressure is so compelling that the candlestick closes above the opening price.

A Hammer represents a bullish reversal candlestick pattern that rejects lower prices.

It's vital to note that spotting a Hammer doesn't guarantee an immediate trend reversal. To enhance the likelihood of a successful trade, you'll need additional "confirmation" techniques, which we'll delve into in more detail later.

Moving on…

2. Bullish Engulfing Pattern

Bullish Engulfing Pattern

A Bullish Engulfing Pattern is a (2-candle) bullish reversal candlestick pattern that forms after a price decline.

Identifying the Bullish Engulfing Pattern is a straightforward process:

  • The First Candle has a Bearish Close: The initial candle in this pattern concludes with a bearish close.
  • The Second Candle "Engulfs" the First Candle's Body: The second candle's body covers the first candle's body without considering the shadows.
  • The Second Candle Closes Bullish: The second candle finishes with a bullish close.

So, what does a Bullish Engulfing Pattern signify?

On the first candle, sellers dominate as they close with a lower price for the period. However, the second candle reveals a remarkable shift in market dynamics, with robust buying pressure driving the price to close above the previous candle's high. This shift indicates that the buyers have gained the upper hand in the battle.

In essence, a Bullish Engulfing Pattern communicates that the buyers have successfully overwhelmed the sellers and are now in control of the market.

Furthermore, it's worth noting that a Hammer is often a Bullish Engulfing Pattern on a lower timeframe due to the way candlesticks form across multiple timeframes. This is just one of the many bullish candlestick patterns you'll explore in today's comprehensive guide.

3. Piercing Pattern

The Piercing Pattern is a two-candle reversal candlestick pattern that comes into play after a price decline. Unlike the Bullish Engulfing Pattern, which closes above the previous open, the Piercing Pattern closes within the previous candle's body. This distinction makes the Piercing Pattern slightly less potent in terms of strength.

To recognize the Piercing Pattern, observe the following characteristics:

  • The First Candle has a Bearish Close: The initial candle in this pattern concludes with a bearish close, indicating that sellers are in control.
  • The Second Candle Closes Beyond the Halfway Mark of the First Candle: The second candle's body should close beyond the midpoint of the first candle's body.
  • The Second Candle Closes Bullish: The second candle concludes with a bullish close.

So, what does a Piercing Pattern signify?

On the first candle, sellers hold sway as they close with a lower price for the period. In the second candle, there is a notable shift in market dynamics as buying pressure surges, driving the price to close bullishly. Importantly, the second candle closes more than halfway into the body of the first candle, indicating the presence of significant buying pressure.

The Piercing Pattern is one of the lesser-known bullish candlestick patterns, but when used effectively, it can be valuable in your trading toolkit.

Next…

4. Tweezer Bottom

Tweezer Bottom

A Tweezer Bottom is a two-candle reversal candlestick pattern that emerges following a price decline. Despite its humorous name, it's a pattern to be taken seriously.

To recognize the Tweezer Bottom, focus on the following characteristics:

  • The First Candle Shows Rejection of Lower Prices: The initial candle in this pattern demonstrates a refusal to trade at lower prices.
  • The Second Candle Re-Tests the Low of the Previous Candle and Closes Higher: The second candle revisits the low point established by the previous candle and concludes with a higher closing price.

So, what does a Tweezer Bottom signify?

On the first candle, sellers attempt to drive the price lower but are met with resistance from buyers, causing a rejection of lower prices. Then, in the second candle, sellers once again endeavor to push the price lower, but they fail and are ultimately overwhelmed by robust buying pressure. This sequence of events, with two attempts to trade lower, indicates that the market is finding it challenging to move downward. The result strongly suggests that the market is likely to head higher.

A Tweezer Bottom signals that the bearish momentum is waning, and a bullish reversal may be on the horizon. It's a powerful tool for traders seeking opportunities in the market.

5. Morning Star

Morning Star

The Morning Star is a three-candle bullish reversal candlestick pattern, often observed following a price decline. It serves as a promising sign of a potential trend reversal.

To recognize the Morning Star, take note of the following attributes:

  • The First Candle has a Bearish Close: The initial candle in this pattern finishes with a bearish close, signifying that sellers are dominant.
  • The Second Candle has a Small Range: The second candle is characterized by a narrow trading range, illustrating a period of market indecision where selling and buying pressures are relatively balanced.
  • The Third Candle Closes Aggressively Higher (More than 50% of the First Candle): The third candle closes with a robust bullish move, surpassing at least 50% of the first candle's body.

So, what does a Morning Star signify?

On the first candle, sellers maintain control as the price concludes lower, highlighting their dominance. However, the second candle reflects a phase of market uncertainty, as neither buyers nor sellers can assert control, resulting in a narrow trading range.

The turning point occurs on the third candle when buyers decisively step in, winning the battle and pushing the price higher. This bullish closing indicates that the sellers are, at least momentarily, exhausted, and the buyers have taken control.

In essence, the Morning Star is a powerful signal that the sellers' influence is waning, and the buyers are poised to take charge, making it a valuable pattern for traders looking for potential reversal opportunities.

Moving on…

How to find high-probability bullish reversal setups

You've already gained insights into various bullish reversal candlestick patterns. Let's take your skills further by learning to identify high-probability trading setups with these patterns.

As a crucial reminder, never trade candlestick patterns in isolation, as it doesn't provide a significant "edge" in the markets. Instead, here's a strategic approach to maximize your trading potential:

  • Market Trend: Begin by assessing the overall market trend. If the market is trending higher, you're searching for bullish opportunities.
  • A pullback to Support: While in an uptrend, patiently wait for a pullback in the price toward a support level. This pullback offers an opportunity to enter at a potentially advantageous price point.
  • Bullish Reversal Candlestick Pattern: When the price pulls back towards support, keep a keen eye out for a bullish reversal candlestick pattern. These patterns signal a possible reversal of the downward movement.
  • Pattern Size: Pay attention to the size of the bullish reversal candlestick pattern. A larger size signifies a strong rejection of lower prices. This is a positive sign that buyers are stepping in with significant force.

By implementing this systematic approach, you'll be better equipped to spot high-probability trading setups. It ensures that you enter the market at optimal points within the prevailing trend, increasing your chances of successful trades. Remember, combining candlestick patterns with trend analysis and support levels can be a potent strategy in your trading arsenal.

Here are a few cherry-picked examples:

Morning Star:

Morning Star

Bullish Engulfing Pattern:

Bullish Engulfing Pattern

Bullish Engulfing Pattern:

Bullish Engulfing Pattern

Note: There will also be losing trades, and this is not the "holy grail."

Now, let's move on…

Bearish reversal candlestick patterns

Bearish reversal candlestick patterns indicate a temporary shift in market sentiment, with sellers gaining the upper hand. However, it's crucial to understand that simply identifying these patterns doesn't automatically provide an "edge" in the markets. Combining candlestick patterns with other analytical tools is essential to enhance your trading strategy. This holistic approach will help you uncover high-probability trading setups.

As you delve into the world of bearish reversals, here are five key patterns that every trader should be acquainted with:

1. Shooting Star

2. Bearish Engulfing Pattern

3. Dark Cloud Cover

4. Tweezer Top

5. Evening Star

These patterns are key to understanding bearish reversals and can serve as invaluable tools for trading endeavors.

Let me explain…

1. Shooting Star

Shooting Star

A Shooting Star is a single-candle bearish reversal pattern that comes into play after a price advance. It's renowned for its distinct appearance and is widely recognized in the world of candlestick patterns.

To identify the Shooting Star, observe the following characteristics:

  • Little to No Lower Shadow: The lower shadow should be minimal or virtually absent.
  • Closing at the Bottom ¼ of the Range: The price should conclude near the bottom 25% of the range of the candlestick.
  • The Upper Shadow is 2-3 Times the Length of the Body: The upper shadow should be approximately two to three times the length of the body.

So, what does a Shooting Star signify?

At the market opening, buyers are in control and drive the price higher, indicating a bullish start. However, a substantial wave of selling pressure enters the scene at the peak of buying enthusiasm, forcing the price lower. This selling pressure is so significant that the candlestick closes below the opening price.

A Shooting Star signifies a bearish reversal and rejects higher prices. It's one of the most renowned bearish candlestick patterns in the trading world.

But remember, merely spotting a Shooting Star doesn't guarantee an immediate trend reversal. To boost the probability of a successful trade, we must seek additional "confirmation" techniques, which we'll explore in more detail later.

Moving on…

2. Bearish Engulfing Pattern

Bearish Engulfing Pattern

The Bearish Engulfing Pattern is a two-candle bearish reversal candlestick pattern that typically materializes after a price advance. This pattern is notable for its ability to signal potential trend reversals.

To identify the Bearish Engulfing Pattern, take note of the following characteristics:

  • The First Candle has a Bullish Close: The initial candle in this pattern concludes with a bullish close, indicating that buyers are in control.
  • The Body of the Second Candle "Covers" the Body of the First Candle: The body of the second candle completely encompasses the body of the first candle without considering the shadow.
  • The Second Candle Closes Bearish: The second candle concludes with a bearish close.

So, what does a Bearish Engulfing Pattern signify?

On the first candle, buyers assert dominance as they close with a higher price for the period. However, the second candle marks a significant shift in market dynamics, with potent selling pressure driving lower prices. This selling pressure is so robust that the second candle closes below the previous candle's low.

Essentially, a Bearish Engulfing Pattern communicates that sellers have triumphed over buyers, gaining market control and suggesting a potential trend reversal.

It's a powerful signal for traders looking to identify bearish opportunities in the market, as it signifies a notable shift in sentiment.

3. Dark Cloud Cover

Dark Cloud Cover

The Dark Cloud Cover is a two-candle reversal candlestick pattern that emerges following a price advance. It's an essential pattern for traders seeking to identify potential trend reversals.

To recognize the Dark Cloud Cover, consider the following characteristics:

  • The First Candle has a Bullish Close: The initial candle in this pattern concludes with a bullish close, indicating buyer dominance.
  • The Body of the Second Candle Closes Beyond the Halfway Mark of the First Candle: The second candle's body should close beyond the midpoint of the first candle's body.
  • The Second Candle Closes Bearish: The second candle concludes with a bearish close.

Now, what does a Dark Cloud Cover signify?

On the first candle, buyers take control, closing at a higher price for the period. However, the second candle introduces a shift in market dynamics as significant selling pressure enters the scene, pushing the price lower. This selling pressure is substantial, and the second candle closes bearishly.

A Dark Cloud Cover indicates sellers have stepped in and exerted pressure, suggesting a possible uptrend reversal. It's a valuable pattern, even though it may not be as strong as the Bearish Engulfing Pattern, and it has the potential to be an effective tool when used appropriately.

This is another lesser-known bearish candlestick pattern that can benefit traders when applied correctly, as we'll discuss later.

Next…

4. Tweezer Top

Tweezer Top

A Tweezer Top is a two-candle bearish reversal candlestick pattern that typically forms following a price advance. It serves as a clear signal of potential trend reversal.

To recognize the Tweezer Top, pay attention to the following characteristics:

  • The First Candle Shows Rejection of Higher Prices: The initial candle in this pattern displays a rejection of higher prices, indicating sellers have stepped in to resist further upward movement.
  • The Second Candle Re-Tests the High of the Previous Candle and Closes Lower: The second candle revisits the high point set by the previous candle and concludes with a lower closing price.

So, what does a Tweezer Top signify?

On the first candle, buyers endeavor to drive the price higher but encounter resistance from sellers. Then, the second candle indicates an intensified battle, with buyers making another attempt to push the price higher. However, this time, strong selling pressure takes the upper hand, overwhelming the buyers and causing the price to close lower.

A Tweezer Top reveals that the market is encountering difficulty moving higher as sellers gain control after two successive buyer attempts to increase prices. This pattern strongly suggests a potential reversal of the prevailing uptrend, making it a valuable tool for traders seeking bearish opportunities in the market.

Tweezer Top may not be as widely recognized as some other bearish patterns. Still, when utilized effectively, it can be useful for a trader's toolkit, as we'll discuss later.

5. Evening Star

Evening Star

The Evening Star is a three-candle bearish reversal candlestick pattern that commonly materializes following an uptrend. It's recognized for its distinctive appearance and is a crucial tool for traders identifying potential trend reversals.

To identify the Evening Star, focus on the following characteristics:

  • The First Candle has a Bullish Close: The initial candle in this pattern concludes with a bullish close, signaling the presence of buyers.
  • The Second Candle has a Small Range: The second candle typically exhibits a narrow trading range, indicative of market indecision where selling and buying pressures are relatively balanced.
  • The Third Candle Closes Aggressively Lower (More than 50% of the First Candle): The third candle concludes with a pronounced bearish move, closing lower than at least 50% of the first candle's body.

So, what does an Evening Star signify?

On the first candle, buyers take the reins, pushing the price higher, indicating a bullish start. However, the second candle unveils a market uncertainty phase, with buyers and sellers struggling for dominance, leading to a narrow trading range.

The turning point arrives at the third candle when sellers assert themselves, winning the battle and lowering prices. This bearish closing reveals that the buyers are temporarily exhausted, and the sellers have gained control.

An Evening Star suggests a shift in market sentiment, with buyers giving way to sellers. It's a potent signal for traders looking to identify bearish opportunities following an uptrend.

Remember, spotting an Evening Star is significant but doesn't guarantee an immediate trend reversal. Consider additional "confirmation" techniques to enhance your trading strategy, which we'll explore in more detail later.

Moving on…

How to find high-probability bearish reversal setups

You've already gained valuable insights into diverse bearish reversal candlestick patterns. Let's elevate your trading skills by understanding how to spot high-probability trading setups using these patterns.

As a fundamental principle, remember that trading solely based on candlestick patterns is not enough to gain an "edge" in the markets. It's essential to complement these patterns with other analytical tools.

Here's a systematic approach to identifying high-probability bearish trading setups:

  • Market Trend: Initiate your analysis by evaluating the prevailing market trend. If the market is trending lower, you're looking for bearish opportunities.
  • A pullback to Resistance: In a downtrend, we patiently await a pullback in the price towards a resistance level. This pullback allows one to enter the market at a favorable price point.
  • Bearish Reversal Candlestick Pattern: When the price retraces towards resistance, be vigilant in searching for a bearish reversal candlestick pattern. These patterns signal a potential reversal of the uptrend.
  • Pattern Size: Pay attention to the size of the bearish reversal candlestick pattern. A larger size indicates a strong rejection of higher prices, emphasizing the potential bearish sentiment.
  • Strong Price Rejection: Once you've identified a strong price rejection through the bearish reversal pattern, consider entering a short position on the opening of the next candle.

Conversely, the same principles can be applied reverse for long setups when the market is trending higher.

By incorporating this systematic approach, you'll be better prepared to spot high-probability trading setups that align with the prevailing trend. It's a strategy that enhances your potential for successful trades while minimizing risks, and it underlines the significance of combining candlestick patterns with broader market analysis.

Here are a few cherry-picked examples:

Bearish Engulfing Pattern:

Bearish Engulfing Pattern:

Bearish Engulfing Pattern

Shooting Star:

Shooting Star

Note: There will also be losing trades, and this is not the "holy grail."

Indecision candlestick patterns

Indecision candlestick patterns indicate that the market is currently experiencing a balance between buying and selling pressure. These patterns signify a temporary standoff in the ongoing battle between buyers and sellers.

Among the indecision candlestick patterns, two stand out as crucial for traders to be familiar with:

1. Spinning Top

2. Doji

These patterns provide key insights into market sentiment and can serve as valuable tools for traders seeking to make informed decisions when market forces are evenly matched. Let's delve deeper into these patterns to understand their significance and potential applications in your trading strategy.

Let me explain…

1. Spinning top

Spinning top

A Spinning Top is an indecision candlestick pattern that portrays a market scenario where both buying and selling forces face a fierce battle for control. This pattern serves as a visual representation of the tussle between bulls and bears.

To recognize the Spinning Top, focus on the following characteristics:

  • Long Upper and Lower Shadows: The candle features extended upper and lower shadows, indicating significant upward and downward price movement.
  • Small Body: The candle is diminutive, suggesting a narrow price range for the period.

So, what does a Spinning Top signify?

In a Spinning Top candlestick pattern, the market opens with buyers and sellers launching aggressive efforts to take control, resulting in extended upper and lower shadows. However, by the session's close, neither party had managed to secure dominance, forming a small body for the candlestick. This small body signifies a lack of decisive action in the market, making the pattern a symbol of heightened volatility and uncertainty. Much like the familiar toy named after, a Spinning Top suggests a moment of balance and transition in the market, where no clear winner has emerged among buyers and sellers.

Spinning top

Moving on…

2. Doji

Doji

A Doji candlestick represents a state of indecision in the financial markets, where both buying and selling pressures are finely balanced, leading to a standoff between bulls and bears.

To recognize a Doji, look for the following defining features:

  • Open and Close Near the Middle of the Range
  • Short Upper and Lower Shadows of Approximately Equal Length

Despite its role as an indecision candlestick pattern, the Doji has notable variations, each with distinctive significance. These variations include:

1. Dragonfly Doji

2. Gravestone Doji

These Doji variations offer traders additional insights into market sentiment and potential trend reversals, making them valuable tools for decision-making.

I'll explain…

1. Dragonfly Doji

Dragonfly Doji

Unlike the typical Doji, which showcases an open and close near the middle of its range, the Dragonfly Doji presents a unique appearance.

In a Dragonfly Doji, both the open and close prices are positioned near the highs of the candle's range, and it features a distinct long lower shadow.

This configuration signals a compelling narrative: the market experienced a rejection of lower prices as robust buying pressure intervened. The result was a notable shift, propelling the market towards the opening price.

With its extended lower shadow, the Dragonfly Doji is a powerful indication of market sentiment. It underscores the resilience of buyers who have stepped in to counter downward pressure, potentially paving the way for a reversal from a downtrend to an uptrend.

Traders often find this pattern to be a significant marker in identifying bullish opportunities in the market.

2. Gravestone Doji

Gravestone Doji

Differing from the typical Doji, where the open and close are situated near the middle of the range, the Gravestone Doji has a distinct character.

In a Gravestone Doji, the open and close prices are positioned close to the lows of the candle's range, prominently featuring a long upper shadow.

This unique configuration conveys a compelling message: the market has witnessed a rejection of higher prices as substantial selling pressure intervenes. This pressure causes the market to retreat lower toward the opening price.

The Gravestone Doji's presence often signifies the potential for a reversal from an uptrend to a downtrend, making it a significant tool for traders to identify bearish market opportunities.

Moving on…

Continuation candlestick patterns

Continuation candlestick patterns are key indicators suggesting that the market is poised to persist in its existing direction. These patterns unveil some of the most promising trading opportunities for trend traders.

Among the set of continuation patterns, four stand out as crucial for traders to understand:

1. Rising Three Method

2. Falling Three Method

3. Bullish Harami

4. Bearish Harami

These patterns offer a comprehensive toolkit for traders looking to identify and capitalize on trends expected to endure. By recognizing these continuation patterns, traders can better align their strategies with the prevailing market dynamics, enhancing their prospects for successful trades.

Let me explain…

1. Rising Three Method

Rising Three Method

The Rising Three Method is a compelling bullish trend continuation pattern that signifies the market's inclination to persist upward. It is a valuable signal for traders aiming to capitalize on an ongoing bullish trend.

To identify the Rising Three Method, observe the following defining characteristics:

  • The First Candle is a Large, Bullish Candle
  • The Second, Third, and Fourth Candles Feature Smaller Ranges and Bodies
  • The Fifth Candle is a Large-Bodied Candle Closing Above the Highs of the First Candle

So, what does a Rising Three Method indicate?

The first candle highlights the undeniable dominance of buyers, concluding the session with remarkable strength. There is a mild retreat in the subsequent three candles as buyers take some profits.

However, this doesn't indicate a substantial selloff, as new buyers seize the opportunity to enter long positions at these levels. The climax arrives with the fifth candle, where buyers regain control and drive the price to new highs, reaffirming the prevailing bullish sentiment.

If you're familiar with Western charting techniques, you'll recognize that the Bullish Flag and the Rising Three Method convey the same message, emphasizing the continuity of a bullish trend.

2. Falling Three Method

Falling Three Method

The Falling Three Method is a potent bearish trend continuation pattern that signals that the market is poised to persist downward. It's a valuable tool for traders seeking to capitalize on an ongoing bearish trend.

To identify the Falling Three Method, pay attention to the following key characteristics:

  • The First Candle is a Large, Bearish Candle
  • The Second, Third, and Fourth Candles Feature Smaller Ranges and Bodies
  • The Fifth Candle is a Large-Bodied Candle Closing Below the Lows of the First Candle

So, what does a Falling Three Method signify?

The first candle underscores the notable dominance of sellers, concluding the session with a strong downward move. The subsequent three candles show a modest rebound as sellers take some profits.

However, this doesn't signify a substantial rally, as new sellers step in to initiate short positions at these levels. The climax arrives with the fifth candle, where sellers regain control and propel the price to new lows, reaffirming the prevailing bearish sentiment.

The Falling Three Method is a valuable indication for traders, pointing to continuing a bearish trend.

Next…

3. Bullish Harami

Bullish Harami

Let's clear the air about Bullish Harami. While many trading resources claim it occurs after a price decline, let's apply common sense to filter out the noise. Think about it this way: A downtrend is established based on the movement of hundreds of candlesticks. Can it truly reverse just because a Bullish Harami appears? It's rather unlikely.

In reality, the Bullish Harami excels as a continuation pattern within an existing uptrend. It signals buyers are taking a momentary pause, suggesting that the price will likely resume its upward trajectory.

Here's how to recognize a Bullish Harami:

  • The First Candle is Bullish and Larger Than the Second Candle: The initial candle is bullish and exhibits a larger size than the second candle.
  • The Second Candle Has a Small Body and Range: The second candle features a diminutive body and a narrow price range. It can be either bullish or bearish.

So, what does a Bullish Harami signify?

The first candle reveals robust buying pressure, concluding the session with a bullish stance. Conversely, the second candle reflects indecision as both buying and selling pressures are relatively balanced. This equilibrium may result from traders taking profits and new traders entering long positions, marking a transitional phase in the market.

The Harami pattern is an Inside Bar with similar connotations and trading purposes.

4. Bearish Harami

Bearish Harami

Bearish Harami, unlike common belief, is most effective as a continuation pattern within a pre-existing downtrend. It signals that sellers momentarily pause, hinting at the likelihood of the price resuming its descent.

Here's how to identify a Bearish Harami:

  • The First Candle is Bearish and Larger Than the Second Candle: The initial candle takes a bearish stance and is notably larger than the second candle.
  • The Second Candle Has a Small Body and Range: The second candle displays a petite body and a limited price range. It can be either bullish or bearish.

So, what message does a Bearish Harami convey?

The first candle reveals compelling selling pressure, concluding the session on a bearish note. The second candle portrays a state of indecision as both buying and selling pressures are roughly balanced. This equilibrium may arise due to traders seizing profits and new traders initiating short positions, marking a transitional phase in the market.

It's essential to note that the Harami pattern can be likened to an Inside Bar, with similar implications and usefulness in trading contexts.

Let's move on…

How to find high-probability trend continuation setups

Now that you've grasped the concept of continuation candlestick patterns and how they appear, let's delve into recognizing high-probability trading setups with these patterns.

Here's your roadmap for making informed trading decisions:

  • Determine the Market's State: Begin by assessing the market's current state. If it's locked within a trading range, proceed to the next step.
  • Identify a Breakout from Resistance: Monitor the market closely for a breakout from the established resistance level. Once this breakout occurs, you're poised for potential trading opportunities.
  • Spot a Continuation Candlestick Pattern: After the breakout from resistance, focus on forming a continuation candlestick pattern, such as the Rising Three Method or Bullish Harami. These patterns indicate that the prevailing trend is likely to persist.
  • Execute Your Trade: When you observe a continuation candlestick pattern, execute your trade by going long upon the breach of the pattern's high.

Remember, this process can be mirrored for short setups when trading in a downtrend. By implementing this approach, you'll be better equipped to identify high-probability trading opportunities and make more informed decisions in your trading endeavors.

Here are a few cherry-picked examples:

A variation of the Falling Three Method on USD/ZAR:

A variation of the Falling Three Method on USD/ZAR

Rising Three Method and Bullish Harami on EUR/USD:

Rising Three Method and Bullish Harami on EUR/USD

This is powerful stuff.

Great!

Let's move on…

Candlestick patterns cheat sheet: How to understand any candlestick pattern without memorizing a single one

You might be thinking:

"Wow! There are so many candlestick patterns. How can I possibly remember them all?"

Well, the good news is, you don't have to.

By understanding the two essential principles I'm about to reveal, you can decipher any candlestick pattern with the finesse of a seasoned pro. Think of it as your very own candlestick pattern cheat sheet.

Here's what you need to grasp:

  • Where the Price Closed Relative to the Range: The first critical factor is to assess where the closing price stands concerning the overall price range of the candlestick. This relationship is paramount in understanding the pattern's significance.
  • The Pattern's Size Relative to Others: The second vital consideration is to gauge the size of the pattern concerning other candlestick patterns. This comparative analysis will provide valuable insights into the pattern's strength and potential implications.

By mastering these two key elements, you'll be well-equipped to read and interpret candlestick patterns proficiently, empowering you to make informed trading decisions and gain a deeper understanding of market dynamics.

Let me explain…

1. Where did the price close relative to the range?

This question lets you know who's in control momentarily.

Look at this candlestick pattern…

Where did the price close relative to the range?

Let me ask you…

Who's in control?

Well, the price closed the near highs of the range, which tells you the buyers are in control.

Now, look at this candlestick pattern…

Where did the price close relative to the range?

Determining market control is a pivotal aspect of candlestick pattern analysis. It's essential to realize that even within a bullish candle, the sellers can dominate.

But how do you discern this control?

The closing price's relationship to the overall price range is the answer. When the price concludes near the lower end of the range, it signals rejection of higher prices and indicates that the sellers have a significant say in the market.

So, to ascertain who's steering the ship, always ask yourself:

"Where did the price close concerning the range?"

By consistently applying this principle, you'll be able to gain valuable insights into market dynamics and make more informed trading decisions.

Next…

2. What's the size of the pattern relative to the other candlestick patterns?

Determining the strength and conviction behind a market move is a crucial aspect of trading analysis. To achieve this, you'll want to compare the size of the current candle to its predecessors.

Here's a guiding principle: If the present candle is notably larger, typically around two times or more extensive than previous candles, it signifies a substantial display of strength behind the market's recent movement.

This comparative assessment enables traders to gauge the level of conviction and decisiveness in the current market conditions, empowering them to make more informed trading decisions and capitalize on potential opportunities.

Here's an example…

What's the size of the pattern relative to the other candlestick patterns?

And if there's no strength behind the move, the size of the current candle is about the same as the earlier ones.

An example…

What's the size of the pattern relative to the other candlestick patterns?

Does it make sense?

Great!

Now, you have what it takes to read any candlestick pattern without memorizing one.

Bonus: How to read candlestick charts and "predict" market turning points with deadly accuracy

In the trading world, it's essential to recognize that the market doesn't adhere to a straight-line trajectory. Instead, it tends to oscillate in a repeated pattern—up and down, up and down, in a continuous sequence.

These alternating patterns can be classified into two fundamental categories:

1. Trending Move

2. Retracement Move

Understanding and distinguishing between these trending and retracement phases is vital for traders, as it enables them to navigate the complexities of the market better and make informed trading decisions.

This is important for candlestick trading, so let me explain…

1. Trending move

A trending move is the "stronger" leg of the trend.

You'll notice larger-bodied candles that move in the direction of the trend.

An example:

Trending move

2. Retracement move

A retracement move is the "weaker leg of the trend.

You'll notice small-bodied candles that move against the trend (otherwise known as counter-trend).

An example:

Retracement move

You might be pondering:

"Why is this understanding important?"

Well, the significance lies in discerning the health of a market trend. In a robust and healthy trend, you can expect to witness a typical pattern of a trending move followed by a retracement move. This alternation indicates that the market is following a sustainable trajectory.

However, when a trend weakens, you'll notice a change in the retracement move. Rather than featuring smaller-bodied candles, these retracements might showcase larger ones. This transformation is an early warning sign of potential trend exhaustion or reversal.

Combining this technique with broader market structural elements, such as Support and Resistance, Trendlines, and more, gives you a powerful tool to accurately identify pivotal market turning points. This insight can be invaluable for traders seeking to make well-informed trading decisions.

Let me give you an example…

  • NZD/CAD Daily:

Now, let's delve into a real trading scenario. On the Daily timeframe, the price is at a critical juncture—right within a Resistance area.

Moreover, there's a confluence of a descending Trendline at play. This confluence suggests a potential reversal to the downside in the cards.

With this in mind, the focus shifts to identifying a shorting opportunity on a lower timeframe.

By doing so, traders aim to capitalize on the market's dynamics and align their positions with the overarching technical indicators, ultimately making well-informed trading decisions.

NZD/CAD Daily
  • NZD/CAD 8-hour:

On the 8-hour timeframe, a compelling shift is underway. The presence of selling pressure becomes evident as the candles within the retracement moves exhibit a noticeable increase in size. This amplification signifies growing strength from the sellers.

Conversely, the buying pressure is waning, manifesting in smaller candles during the trending moves.

In light of these observations, one viable entry strategy presents itself: considering a short position when the price successfully breaks and closes below a critical Support level. This approach capitalizes on the evolving market dynamics. It offers traders a potential opportunity to participate in the downward move, guided by the principles of technical analysis and sound trading strategies.

NZD/CAD 8-hour

This is powerful stuff.

FAQs

1. Is this guide applicable to all instruments or better suited to the Forex market?

The concepts in this guide can be applied to all markets with sufficient liquidity. This includes stocks, futures, bonds, etc.

2. Are the candlestick patterns you’ve seen earlier best suited for a certain time frame?

There’s a timeframe to trade the candlestick patterns; it all boils down to your trading approach and the trading timeframe you’re on.
Doesn’t make sense to look at candlestick patterns on a daily timeframe. You're a short-term trader entering your charts in the 15-minute timeframe.

3. Do you look at the news when you trade?

Doesn’t take into account news when I trade.
Because all the news out there has already been expressed in the market price, and my trading strategy is developed ahead of time without accounting for news. If I were to follow the news instead of my trading strategy, this would no longer follow my trading plan.
Look, if ydon'tn’t follow your trading plan and instead get affected by the news, your actions are no longer consistent. And if you do not have a consistent set of actions, you won’t get consistent results.

So, what’s next?

You’ve just learned that candlestick patterns give you insight into the markets, who's in, who's who’s losing, where the price got rejected, etc.).

However, they don't want to trade candlestick patterns in isolation because they don't offer an edge in the markets.

Instead, use them as too"s to “c" confirm” your bias to help you better time your entries & exits. It's… it’s time to put these techniques into practice.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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