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.
