Technical analysis is a research technique for identifying trading opportunities in the market based on the actions of market participants, in order to develop an outlook on a particular stock or index and helps you define the trade, keeping in mind the entry, exit, and risk perspective.
- Purpose: To scan the market for opportunities based on the current trend or market preference.
- Technical analysis stands on a set of assumptions.
- Actions of market participants → Stock charts : Characteristic patterns form over time → Each pattern carries a certain message → Technical analyst : Patterns identification → Point of view → Trade the markets, keeping set of assumptions in perspective
- Uses
- Price at which one should buy and sell a stock
- Risks involved
- Expected reward
- Expected holding period
- Application
- Trades
- TA is best used to identify short term trades.
- TA should not be used to identify long-term investment opportunities. Long-term investment opportunities are best identified using fundamental analysis, and are supplemented with TA to examine entry and exit points.
- Return per trade
- TA based trades are usually short term in nature, yielding small returns over a short period of time. However, identifying successful TAs can consistently provide short-term trading opportunities that can give you small but consistent profits.
- Holding period
- Trades based on TA can last anywhere between a few minutes and a few weeks, and usually not beyond that.
- Risk
- TA based trades are short term, if the trade turns opposite, remember to cut losses and move on to identify another opportunity.
- Trades
- Regardless of the asset you are studying, the concept of technical analysis will remain the same.
- Technical analysis can be applied to any asset class – equities, commodities, forex, fixed income, etc. As long as the asset type contains historical time series data with reference to price variable information, i.e. open, high, low, close, volume, etc.
- Unlike fundamental analysis, for technical analysis the only thing that matters is a stock’s past trading data (price and volume) and what information this data can provide about future movements in a security.
- Key assumptions
- All known and unknown information in the public domain, including insider trading, is reflected in the latest stock price.
- The technical analyst should not be interested in asking why someone bought a stock, as long as he or she knows how the price reacts to one’s action.
- All major moves in the market are the result of a trend which is the foundation of technical analysis i.e., once the trend is established, the price moves in the direction of the trend.
- History tends to repeat itself (Most important assumption) : Human psychology makes market participants react to price movements remarkably similar fashion, each time the price moves in a certain direction. Thus, the price trend tends to repeat itself.
- When a set of factors that have panned out in the past tends to repeat itself in the future, we expect the same outcome to occur, as was observed in the past, provided the factors are the same.
Trade analysis : OHLC
- Open : Opening price → The first price at which the trade is executed once the market is open for trading.
- High : The highest price at which market participants were willing to trade for a given day.
- Low : The lowest price at which market participants were willing to trade for a given day.
- Close : Closing price → The final price at which the market closes for a particular period.
- The close acts as an indicator for intraday strength, hence, the most important price point. The closing price reflects the market sentiment and acts as a reference point for the next trading day. If the close is higher than the open, it is considered a positive day otherwise negative.
Candlesticks
- Components
- Central real body : The actual rectangular body that connects the opening and closing price → The opening is at the top end, and the closing is at the bottom end of the rectangle.
- Upper shadow (Upper wick) : Connects the High point to the Open.
- Lower Shadow (Lower wick) : Connects the Low point to the close.
- Longer the body, stronger the trading (buy or sell) activity
- Shorter the body, weaker the trading (buy or sell) activity
- Types : Bullish candle and Bearish candle
- Bullish candle : When close > open
- Bearish candle : When close < open
- Candlesticks → Trading patterns → Point of view → Set up a trade
- Candlesticks depict the thought process of traders.
- Candlestick patterns
- Single candlestick patterns
- Marubozu
- Bullish Marubozu
- Bearish Marubozu
- Doji
- Spinning tops
- Paper umbrella
- Hammer
- Hanging man
- Shooting star
- Marubozu
- Multiple candlestick patterns : Combination of multiple candles
- Engulfing pattern
- Bullish Engulfing
- Bearish Engulfing
- Harami
- Bullish Harami
- Bearish Harami
- Piercing Pattern
- Dark cloud cover
- Morning Star
- Evening Star
- Engulfing pattern
- Single candlestick patterns
- Candlestick-specific key assumption
- Buy strength (bullish candle) and Sell weakness (bearish candle)
- For buying, ensure it is a bullish green candle day
- For selling, ensure it’s a bearish red candle day
- Be flexible with patterns (quantify and verify)
- The textbook definition of a pattern states certain criteria, but one needs to be a bit flexible to minor variations in the pattern due to market conditions, but within limits. Therefore it is always required to quantify the flexibility.
- Look for a prior trend
- If you are looking for a bullish pattern, the prior trend should be bearish.
- If you are looking for a bearish pattern, the prior trend should be bullish.
- Buy strength (bullish candle) and Sell weakness (bearish candle)
- Stoploss for a long trade : Lowest low of the pattern
- Stoploss for a short trade : Highest high of the pattern
- Time frame : The time period during which a person chooses to study a particular chart.
- Monthly charts
- Weekly charts
- Daily or End of day (EOD) charts
- Intraday charts : 60 mins, 30 mins, 15 mins, and 5 minutes
- The number of candles (data points) increases as and when the time frame reduces. Time frame plays a very important role in defining trading success.
- Gaps
- Gap on daily chart : When a stock closes at one price but opens the next day at a different price.
- Gap up opening
- Gap up opening reflects buyer’s enthusiasm.
- The buyers are ready to buy the stock at a price higher than the previous day’s closing price. Therefore, the bullish buyer’s outlook causes the stock to open directly above the previous day’s close.
- Gap up opening indicates bullish sentiment.
- Gap down opening
- Gap down opening reflects seller’s enthusiasm.
- The sellers are so eager to sell that they are ready to sell at a price lower than the previous day’s closing price.
- Gap down opening portrays bearish sentiment.
- Gap up opening
- Gap on daily chart : When a stock closes at one price but opens the next day at a different price.
Single candlestick patterns
- A specific pattern formed by just one candle. Hence, trading signal is generated based on 1 day trading action.
- The length of candle signifies the range for the day. In general, the longer the candle, the more intense is the buying or selling activity.
- Some attention should be paid to candle length when trading based on candlestick patterns.
- If the candles are short, it can be concluded that the trading activity was subdued, hence, one should avoid trading on the basis of subdued short candles.
- If the candles are too long, it can be concluded that the trading activity was extreme. The problem with lengthy candles would be the placement of stoploss. The stoploss would be deep, and in case the trade goes wrong, the penalty for paying would be painful.
- Risk-taker traders can place the trade on the same day as the pattern forms.
- Risk-averse traders can place the trade on the next day after ensuring that it obeys rule of Buy strength, and Sell weakness.
Marubozu
- A Marubozu can appear anywhere in the chart irrespective of the prior trend. Hence, Marubozu violates the assumption of ‘Look for a prior trend’.
- Marubozu : Candlestick with no upper and lower shadow i.e. A Marubozu has just the real body.
- Green candle : Bullish marubozu
- Red candle : Bearish marubozu
- Bullish Marubozu
- Absence of the upper and lower shadow in a bullish marubozu → Low is equal to the open and High is equal to the close.
- Open = Low and High = Close
- A bullish marubozu indicates that there is so much buying interest in the stock that market participants were willing to buy the stock at every price point during the day, so much so that the stock closed near its high point for the day. No matter what the previous trend has been, action on Marubozu day shows that sentiment has turned and the stock is now bullish.
- The expectation is that with this sudden change in sentiment, there is a bullish bounce, and this bullish sentiment will continue over the next few trading sessions. Therefore a trader should consider buying opportunities with the occurrence of a Bullish Marubozu. The buy price should be around the Marubozu closing price.
- Stoploss : Low of the stock
- So when you initiate a buy trade, if the markets move in the opposite direction, you should exit the stock if the price breaks the Low of Marubozu low.
- Target :
- Bearish Marubozu
- Absence of the upper and lower shadow in a bearish marubozu → Open is equal to the high and Close is equal to low.
- Open = High, and Close = Low
- Bearish Marubozu indicates extreme bearishness.
- A bearish marubozu indicates that there is so much selling pressure in the stock that the market participants actually sold at every price point during the day, so much so that the stock closed near its low point of the day. No matter what the previous trend has been, action on Marubozu day shows that sentiment has turned and the stock is now bearish.
- The expectation is that this sudden change in sentiment will be carried forward over the next few trading sessions, and hence one should look for shorting opportunities. The selling price should be around the closing price of the marubozu.
- Stoploss : High of the stock
- So when you initiate a sell trade, if the markets move in the opposite direction, you should exit the stock if the price breaks the High of Marubozu low.
- Target :
Spinning top
- Small real body + Upper and lower shadows are almost equal in length.
- Small real body
- Open price and close price are very close to each other.
- The colour of the candle does not really matter.
- Upper shadow (Upper wick)
- The upper shadow connects the real body to the high point of the day.
- If it is a red candle, the high and open are linked.
- If it is a green candle, the high and close are linked.
- The upper shadow connects the real body to the high point of the day.
- Lower shadow (Lower wick)
- The lower shadow connects the real body to the low point of the day.
- If it is a red candle, the low and close are linked.
- If it is a green candle, the low and open are linked.
- The lower shadow connects the real body to the low point of the day.
- Small real body
- The bulls tried unsuccessfully to move the market up. The bears tried to take the markets down, and that too did not work. Neither the bulls nor the bears could establish any influence on the market as it is evident from the small real body. Thus a spinning top is a sign of a market where indecision and uncertainty prevail.
- A spinning top in isolation simply reports indecision in market as both the Bulls and the Bears were not able to influence the markets. It does not give the trader a trading signal with a specific entry or exit point.
- However, spinning top concerning the chart trend gives a compelling message based on which you can build your positions in the markets.
- Spinning tops in a downtrend
- In a downtrend, the bears are in complete control as they manage to push the prices lower.
- With the spinning top in the downtrend, the bears could be consolidating their position before another round of selloff.
- The bulls have also tried to contain the fall in prices and have tried to maintain their positions, though not successfully. After all, if they were successful, the day would have resulted in a nice green candle, not really a spinning top.
- Either the bears are pausing before they can resume the downtrend further or the bulls are preparing to break the trend and take the markets higher.
- Outcome : Continuation of downtrend or Reversal of the trend
- In a downtrend, the bears are in complete control as they manage to push the prices lower.
- Spinning tops in an uptrend
- In a uptrend, the bulls are in complete control as they manage to push the prices higher.
- With the spinning top in the uptrend, the bulls could be consolidating their position before another round of buying.
- The bears have also tried to contain the rise in prices and have tried to maintain their positions, though not successfully. After all, if they were successful, the day would have resulted in a nice red candle, not really a spinning top.
- Either the bulls are pausing before they can resume the uptrend further or the bears are preparing to break the trend.
- Outcome : Continuation of uptrend or Reversal of the trend
- In a uptrend, the bulls are in complete control as they manage to push the prices higher.
- Spinning top candle shows confusion and indecision in the market with equal chances of a reversal or continuation. Until the position becomes clear, traders should remain cautious and reduce their position size.
Doji
- Open price should be equal to the close price with virtually a non-existent real body. The upper and lower wicks can be of any length.
- Similar to spinning tops, except it does not have an actual body i.e. open and close prices are equal.
- For practical purposes, even if it has a wafer-thin body, the candle can be considered a Doji. (Be flexible with patterns)
- The colour of the candle does not matter even in case of a wafer-thin real body.
- Similar to spinning tops, a doji in isolation simply reports indecision in market as both the Bulls and the Bears were not able to influence the markets. It does not give the trader a trading signal with a specific entry or exit point.
- In fact, often dojis and spinning tops appear in a cluster indicating indecision in the market.
Paper umbrella
- Long lower shadow with a small upper body.
- The length of the lower shadow should be at least twice the length of the real body (Shadow to real body ratio)
- A single candlestick pattern that helps traders to set up directional trades based on where it appears on the chart i.e., Trend reversal pattern.
- Bearish : Hanging Man → If the paper umbrella appears at the top end of an uptrend rally
- Bullish : Hammer → If the paper umbrella appears at the bottom end of a downward rally
- Hammer (Bullish)
- Paper umbrella that occurs at the bottom of the trend.
- A hammer consists of a small real body at the upper end of the trading range with a long lower shadow.
- Bottom reversal patten.
- The longer the lower shadow, the more bullish the pattern.
- Open and close prices should be close to each other.
- The colour of hammer does not really matter (as open and close prices are close to each other) as long as it qualifies ‘the shadow to real body’ ratio.
- The prior trend for the hammer should be a downtrend.
- Trading actions behind bullish hammer formation
- The market is in a downtrend where the bears have complete control over the markets.
- During a downtrend, each day the market will open lower than the previous day’s close and and again closes lower to form a new low.
- On the day the hammer pattern forms, the market trades lower as expected, and makes a new low.
- However, at the low point, some amount of buying interest emerges, which pushes up the price to such an extent that the stock closes near the high point of the day.
- The price action on the hammer formation day indicates that the bulls attempted to break the further downside in the price, and they were quite successful.
- This action by the bulls has the potential to change the sentiment in the stock. That’s why you should look for buying opportunities.
- Stoploss : Low of the hammer
- Target :
- Hanging man (Bearish)
- Paper umbrella that occurs at the top end of a trend.
- A hanging man consists of a small real body at the upper end of the trading range with a long lower shadow.
- A Hanging man indicates a market high. Hence, prior trend of hanging man should be an uptrend.
- Top reversal pattern.
- The longer the lower shadow, the more bearish the pattern.
- The colour of hammer does not really matter (as open and close prices are close to each other) as long as it qualifies ‘the shadow to real body’ ratio.
- Trading actions behind bearish hanging man formation
- The market is in a uptrend where the bulls have complete control over the markets.
- During a uptrend, each day the market will open higher than the previous day’s close and and again closes higher to form a new highs and higher lows.
- On the day the hanging man pattern forms, the market trades higher as expected, and makes a new high.
- However, at the high point, some amount of selling interest emerges, which pushes down the price to such an extent that the stock closes near the low point of the day. The bears have managed to make an entry, emphasized by a long lower shadow of the hanging man.
- The price action on the hanging man formation day indicates that the bears attempted to break the further upside in the price, and they were quite successful.
- This action by the bears has the potential to change the sentiment in the stock. That’s why you should look for selling opportunities.
- Stoploss : High of the hanging man
- Target :
Shooting star
- Shooting star is a bearish pattern which appears at the top end of the trend.
- Long upper shadow with a small lower body (Inverted paper umbrella).
- A shooting star consists of a small real body at the lower end of the trading range with a long upper shadow.
- The length of the upper shadow should be at least twice the length of the real body (Shadow to real body ratio)
- The colour of shooting star does not really matter (as open and close prices are close to each other) as long as it qualifies ‘the shadow to real body’ ratio.
- The shooting star is a bearish pattern; hence the prior trend should be bullish.
- The longer the upper shadow, the more bearish the pattern.
- Trading actions behind bearish hanging man formation
- The market is in a uptrend where the bulls have complete control over the markets.
- During a uptrend, each day the market will open higher than the previous day’s close and and again closes higher to form a new highs and higher lows.
- On the day the shooting star pattern forms, the market trades higher as expected, and makes a new high.
- However, at the high point, some amount of selling interest emerges, which pushes down the price to such an extent that the stock closes near the low point of the day. The bears have managed to make an entry, emphasized by a long upper shadow of the shooting star.
- The price action on the shooting star formation day indicates that the bears attempted to break the further upside in the price, and they were actually quite successful in pushing the prices down.
- This action by the bears has the potential to change the sentiment in the stock. That’s why you should look for selling opportunities.
- Stoploss : High of the shooting star
- Target :
Multiple candlestick patterns
- A specific pattern formed by combination of multiple candles. Hence, the trading opportunity evolves over at least 2 trading sessions.
- Risk-taker traders can place the trade on the same day as the pattern forms.
- Risk-averse traders can place the trade on the next day after ensuring that it obeys rule of Buy strength, and Sell weakness.
Engulfing
- Two candlestick pattern i.e., the engulfing pattern evolves over 2 trading sessions.
- Typical engulfing pattern consists of a small candle on day 1 (T1) and a relatively long candle on day 2 (T2), which appears as if it engulfs the candle on day 1 (T1).
- Bullish Engulfing : If the engulfing pattern appears at the bottom of the trend.
- Bearish Engulfing : If the engulfing pattern appears at the top end of the trend.
- Bullish Engulfing
- Engulfing pattern which appears at the bottom of the downtrend.
- Bullish pattern.
- Prerequisites for bullish engulfing
- The prior trend should be a downtrend.
- The first day of the pattern (T1) should be a bearish red candle confirming bearishness in the market.
- The candle on the 2nd day of the pattern (T2) should be green, long enough to engulf the red candle of T1.
- Trading actions behind bullish engulfing formation
- The market is in a downtrend with the continuous fall in prices.
- On the first day of the pattern (T1) the market opens lower and makes a new low. This creates a red candle in the process.
- On the second day of the pattern (T2), the stock opens near the closing price of T1 and attempts to make a new low. However, there is a sudden buying interest at this low point of the day, which prompts the prices to close higher than the previous day’s open. This price action forms a green candle.
- The price action on T2 also shows that the bulls made a very sudden and strong attempt to break the bearish trend, and they did so quite successfully. This is evidenced by the long green candle on T2.
- The bears would not have expected the bull’s sudden action on T2 and hence the bull’s action causes the bear to be somewhat nervous.
- The bullish momentum is expected to continue in the next few trading sessions, leading to a rise in prices and hence traders should look for buying opportunities.
- Stoploss : Lowest low between T1 and T2
- Target :
- Bearish Engulfing
- Engulfing pattern which appears at the top end of the uptrend.
- Bearish pattern.
- Prerequisites for bearish engulfing
- The prior trend should be a uptrend.
- The first day of the pattern (T1) should be a bullish green candle confirming bullishness in the market.
- The candle on the 2nd day of the pattern (T2) should be red, long enough to engulf the green candle of T1.
- Trading actions behind bearish engulfing formation
- The market is in a uptrend with the continuous rise in prices affirming absolute control of bulls.
- On the first day of the pattern (T1) the market opens higher and makes a new high. This creates a green candle in the process.
- On the second day of the pattern (T2), the stock opens near the closing price of T1 and attempts to make a new high. However, there is a sudden selling pressure at this high point of the day, which prompts the prices to close lower than the previous day’s open. This price action forms a red candle.
- The price action on T2 also shows that the bears made a very sudden and strong attempt to break the bullish trend, and they did so quite successfully. This is evidenced by the long red candle on T2.
- The bulls would not have expected the bear’s sudden action on T2 and hence the bear’s action causes the bulls to be somewhat nervous.
- The bearish momentum is expected to continue in the next few trading sessions, leading to a fall in prices and hence traders should look for selling opportunities.
- Stoploss : Highest high between T1 and T2
- Target :
- Bearish Engulfing + Doji
- Strongly bearish pattern.
- Trading actions behind bearish engulfing followed by doji formation
- The market is in a uptrend with the continuous rise in prices affirming absolute control of bulls.
- On the first day of the pattern (T1) the market opens higher and makes a new high. This creates a green candle in the process.
- On the second day of the pattern (T2), the stock opens near the closing price of T1 and attempts to make a new high. However, there is a sudden selling pressure at this high point of the day, which prompts the prices to close lower than the previous day’s open. This price action forms a red candle.
- The price action on T2 also shows that the bears made a very sudden and strong attempt to break the bullish trend, and they did so quite successfully. This is evidenced by the long red candle on T2.
- The bulls would not have expected the bear’s sudden action on T2 and hence the bear’s action causes the bulls to be somewhat nervous.
- On the third day of the pattern (T3), though the opening is weak, it is not much lower than close of T2. This is not very comforting for the bulls, as they expect the markets to strengthen.
- During P3, the market attempts to move higher (the upper shadow of the Doji); However, the high is not sustained. Even the low is not sustained and eventually, the day turns flat, forming a Doji.
- Doji indicates indecision & uncertainty in the market.
- On T2 the bulls were nervous and on T3 the bulls were uncertain.
- Panic + Uncertainty → Disaster.
- The bearish disaster is expected in the next few trading sessions and hence traders should look for selling opportunities.
Piercing line pattern
- Modified bullish engulfing pattern which appears at the bottom of the downtrend.
- Bullish pattern.
- Prerequisites for piercing line pattern
- The prior trend should be a downtrend.
- The first day of the pattern (T1) should be a bearish red candle confirming bearishness in the market.
- The candle on the 2nd day of the pattern (T2) should be green, long enough to partially engulf the red candle of T1. The engulfing should be between 50% and less than 100%.
Dark cloud cover
- Modified bearish engulfing pattern which appears at the top end of the uptrend.
- Bearish pattern.
- Prerequisites for dark cloud cover
- The prior trend should be a uptrend.
- The first day of the pattern (T1) should be a bullish green candle confirming bullishness in the market.
- The candle on the 2nd day of the pattern (T2) should be red, long enough to partially engulf the green candle of T1. The engulfing should be between 50% and less than 100%.
Harami
- Two candlestick pattern i.e., the harami pattern evolves over 2 trading sessions.
- Typical harami pattern consists of a long candle on day 1 (T1) and a small candle on day 2 (T2) which appears as if it has been tucked inside the T1’s long candle.
- The second candle is generally opposite in colour to the first candle.
- Trend reversal pattern
- Bullish Harami
- Bearish Harami
- Bullish Harami
- Harami pattern that appears at the lower end (bottom end) of a downtrend, over a two day period.
- First day of pattern (T1) is a long red candle, and Second day of pattern (T2) is a small green candle.
- The opening price of T2 should be higher than the closing price of T1.
- The closing price of T2 should be less than opening price of T1.
- Trading actions behind bullish harami formation
- The market is in a downtrend, causing the prices to fall, giving the bears complete control over the markets.
- On the first day of the pattern (T1), the market trades lower and makes a new lows and closes negatively, thus a red candle with a new low is formed, consolidating the bears position in the market.
- On the second day of the pattern (T2), the market unexpectedly opens at a higher price than the previous day’s closing price. Seeing a higher opening price, bears panic, as they would have expected a lower opening price otherwise.
- The market gains strength on T2 and manages to close on a positive note, thus forming a green candle. However, the closing price of T2 is just below the open price of the previous day (T1).
- Price action on T2 forms a small green candle that appears to be contained within a longer red candle of T1.
- On a standalone basis the small green candle looks harmless, but what really causes panic is that the bullish candle appears suddenly when it is least expected.
- The green candle not only encourages the bulls to take long positions but also makes the bears restless.
- It is expected that the panic among the bears will spread rapidly, which will further push the bulls. This tends to push prices higher. Hence one should look for buying opportunities.
- Stoploss : Lowest low price between T1 and T2
- Bearish Harami
- Harami pattern that appears at the top end of an uptrend, over a two day period.
- First day of pattern (T1) is a long green candle, and Second day of pattern (T2) is a small red candle.
- The opening price of T2 should be lower than the closing price of T1.
- The closing price of T2 should be greater than opening price of T1.
- Trading actions behind bearish harami formation
- The market is in a uptrend, causing the prices to rise, giving the bulls complete control over the markets.
- On the first day of the pattern (T1), the market trades higher and makes a new high and closes positively, thus a green candle with a new high is formed, consolidating the bulls position in the market.
- On the second day of the pattern (T2), the market unexpectedly opens at a lower price than the previous day’s closing price. Seeing a lower opening price, bulls panic, as they would have expected a higher opening price otherwise.
- The market continues to trade lower on T2 and manages to close on a negative note, thus forming a red candle. However, the closing price of T2 is just above the open price of the previous day (T1).
- Price action on T2 forms a small red candle that appears to be contained within a longer green candle of T1.
- On a standalone basis the small red candle looks harmless, but what really causes panic is that the bearish candle appears suddenly when it is least expected.
- The red candle not only encourages the bears to take short positions but also makes the bulls restless.
- It is expected that the panic among the bulls will spread rapidly, which will further push the bears. This tends to push prices lower. Hence one should look for selling opportunities.
- Stoploss : Highest high price between T1 and T2
Morning star
- Morning star appears at the bottom end of a downtrend.
- Bullish candlestick pattern that evolves over a 3 day period in a particular order i.e., 3 consecutive candlesticks.
- The first day of the pattern (T1) should be a bearish red candle confirming bearishness in the market.
- The second day of the pattern (T2) should open with a gap down, followed by either a doji or a spinning top on T2.
- The third day of the pattern (T3) should open with gap up, followed by the green candle with closing price of T3 higher than the opening price of T1.
- Downtrend reversal pattern.
- Trading actions behind morning star formation
- The market is in a downtrend, causing the prices to fall, giving the bears complete control over the markets.
- On the first day of the pattern (T1), the market trades lower and makes a new lows and forms a long red candle, showing sell-off acceleration in the market.
- On the second day of the pattern (T2), the bears show dominance with a gap down opening. This confirms the position of the bear.
- After the gap down opening, not much happens during the day (T2) resulting in either a Doji or a spinning top and therefore indicates indecision in the market.
- The doji or spinning top phenomenon causes some discomfort within the bears, as they would have otherwise expected another down day especially in the backdrop of a promising gap down opening.
- On the third day of the pattern (T3), the stock opens with a gap up, followed by a green candle that manages to close above the opening of red candle of T1.
- In the absence of a doji or spinning top of T2, it appears that T1 and T3 have formed a bullish engulfing pattern.
- T3 is where all the action unfolds. On the gap up opening itself, the bears would get a little irritable. Buoyed by the gap up opening, the buying continues throughout the day, so much so that it manages to recover all the losses of T1.
- The expectation is that the bullishness on P3 is likely to continue over the next few trading sessions, and hence one should look for buying opportunities.
- Stoploss : Lowest low of the pattern.
Evening star
- Morning star appears at the top end of an uptrend.
- Bearish candlestick pattern that evolves over a 3 day period in a particular order i.e., 3 consecutive candlesticks.
- The first day of the pattern (T1) should be a bullish green candle confirming bullishness in the market.
- The second day of the pattern (T2) should open with a gap up, followed by either a doji or a spinning top on T2.
- The third day of the pattern (T3) should open with gap down, followed by the red candle with closing price of T3 lower than the opening price of T1.
- Trading actions behind evening star formation
- The market is in a uptrend, causing the prices to rise, giving the bulls complete control over the markets.
- On the first day of the pattern (T1), the market trades higher and makes a new high and forms a long green candle, showing buying acceleration in the market.
- On the second day of the pattern (T2), the bulls show dominance with a gap up opening. This confirms the position of the bulls.
- After the gap up opening, not much happens during the day (T2) resulting in either a Doji or a spinning top and therefore indicates indecision in the market.
- The doji or spinning top phenomenon causes some discomfort within the bulls, as they would have otherwise expected another up day especially in the backdrop of a promising gap up opening.
- On the third day of the pattern (T3), the stock opens with a gap down, followed by a red candle that manages to close below the opening of green candle of T1.
- In the absence of a doji or spinning top of T2, it appears that T1 and T3 have formed a bearish engulfing pattern.
- T3 is where all the action unfolds. On the gap down opening itself, the bulls would get a little irritable. Buoyed by the gap down opening, the sell-off continues throughout the day, so much so that it manages to recover all the losses of T1.
- The expectation is that the bearishness on P3 is likely to continue over the next few trading sessions, and hence one should look for selling opportunities.
- Stoploss : Highest high of the pattern.
