Are you using as your default chart type for price action analysis?Most likely, the answer is yes. In that case, why not make the most out of it by mastering candlestick patterns?According to Thomas Bulkowski’s, there are 103 candlestick patterns (including both bullish and bearish versions). While the encyclopedia is great for reference, there is no need to memorise the 929-page compendium.Simply learn these 10 candlestick patterns for an illuminating foundation.Basic Sentiment Candlesticks1.2.Reversal Candlestick Patterns22.214.171.124.126.96.36.199.1.
DojiWhat does it look like?It looks like a cross, with the same opening and closing prices.What does it mean?Simple. In a Doji candlestick, price is essentially unchanged.
Hence, it represents market indecision. It’s like an compressed into one candlestick.How do we trade it?.
Trade it like a reversal signal (if there is a trend to reverse). Treat it as a signal to stand aside (if there is no trend to reverse)Read:2. MarubozuWhat does it look like?A Marubozu is the polar opposite of a Doji. Its opening price and closing price are at the extreme ends of the candlestick.Visually, it is a block.What does it mean?A Marubozu that closes higher signifies powerful bullish strength while one that closes lower shows extreme bearishness.How do we trade it?The Marubozu is more useful as a learning tool than as a pattern for trading. Together with the Doji candlestick, they highlight the extremes of the candlestick spectrum.If you must trade the Marubozu pattern, consider the following. Continuation pattern in a strong break-out aligned with the market bias. Part of another candlestick pattern (discussed below)3.
Harami CandlestickWhat does it look like?Just remember that means pregnant in old Japanese. The first candlestick is the mother, and the second candlestick is the baby.Focus on their bodies. The body of the baby bar must be entirely within the body of the mother bar.Typically, in a bullish Harami, the first bar closes lower than it opens while the second bar closes higher.
Similarly, in a bearish Harami, the first bar closes higher than it opens while the second bar closes lower.What does it mean?It means that the market has come to a muted reversal.The candle body stands for the real price change of the candle regardless of its intra-candle excursions. Hence, it represents the real and conclusive movement of the candlestick. The smaller candle bodies point to decreased volatility. Thus, it is not surprising that many Harami candlestick patterns are also.Compared with the Engulfing candlestick pattern below, it is a weaker reversal pattern.How do we trade it?.
In a bull trend, use the bullish Harami to pinpoint the end of bearish retracement. In a bear trend, use the bearish Harami to pinpoint the end of bullish retracement.Read:4. Engulfing CandlestickWhat does it look like?Simply flip a Harami pattern horizontally and you will get an Engulfing pattern.The body of the second candle completely engulfs the body of the first.What does it mean?Again, the focus on the candle bodies looks for a real reversal.
In this case, the second candle body fully engulfs the first and represents a strong reversal signal.How do we trade it?. In a bull trend, buy above the bullish Engulfing pattern for bullish continuation. In a bear trend, sell below the bearish Engulfing pattern for bearish continuation.5. Piercing Line / Dark Cloud CoverWhat does it look like?The Piercing Line and the Dark Cloud Cover refer to the bullish and bearish variants of the same two-bar pattern.The first candlestick of the Piercing Line pattern is bearish. The second candlestick:. Opens below the low of the first candlestick; and. Closes above the mid-point of the first candlestick.As for the Dark Cloud Cover pattern, the first candlestick is bullish.
The second candlestick:. Opens above the high of the first candlestick; and. Closes below the mid-point of the first candlestick.Due to the first criterion of both patterns, the second bar must open with a gap away from the close of the first bar. Hence, these candlestick patterns are unusual in intraday time-frames where gaps are uncommon.What does it mean?It means some traders are sorely disappointed.In the Piercing Line pattern, the second bar opened with a gap down, giving an initial hope of a strong bearish follow-through. However, not only did the bearishness fail to materialise, it proceeded to erase more than half of the bearish gains from the first bar. This bullish shock offers a great long trade.Likewise in the Dark Cloud Cover pattern, the first gap up prompted hope from the bulls before the lower close crushed it.How do we trade it?.
Find major bullish reversals with the Piercing Line pattern (preferably after a break of a bear trend line). Find major bearish reversals with Dark Cloud Cover pattern (preferably after a break of a bull trend line)6. Hammer / Hanging Man CandlesticksWhat does it look like?Let’s get this straight. Both the Hammer and the Hanging Man patterns look exactly the same.Both have a:.
Candle body near the top of the candlestick; and. A long lower shadow (around twice of the candle body).(Color of the candle body does not matter.)The difference is this. The Hammer pattern is found after a market decline and is a bullish signal. However, the Hanging Man appears (as an ill-omen) at the end of a bull run and is a bearish signal.What does it mean?The Hammer pattern traps traders who sold in the lower region of the candlestick, forcing them to cover their shorts. As a result, they produce buying pressure for this bullish pattern. Its bar pattern equivalent is the bullish.The Hanging Man pattern is a seemingly bullish candlestick at the top of an upwards trend. Infected by its optimism, traders buy into the market confidently.
Thomas Bulkowski Trading Classic Chart Patterns Pdf
Hence, when the market falls later, it jerks these buyers out of their long positions. This also explains why it is better to wait for bearish confirmation before going short based on the Hanging Man pattern.How do we trade it?. In a downtrend, buy above the Hammer pattern for a reversal play. (You can also trade the Hammer pattern like a bullish Pin Bar.). In a uptrend, sell below the Hanging Man pattern for a reversal play after bearish confirmation.7.
Inverted Hammer / Shooting Star CandlesticksWhat does it look like?Simply invert the Hammer pattern.The Inverted Hammer is visually identical to the Shooting Star pattern.The difference is in where you find them. An Inverted Hammer is found at the end of a downtrend while a Shooting Star is found at the end of a uptrend.What does it mean?The Inverted Hammer is a bullish pattern. In a down trend, the Inverted Hammer pattern emboldens the sellers. Hence, when the Inverted Hammer fails to push the market down, the bullish reaction is violent.The bearish Shooting Star pattern implies a different logic.
The Shooting Star traps buyers who bought in its higher range, forcing them to sell off their long positions and hence creating selling pressure. Its bar pattern equivalent is the bearish.How do we trade it?. In a downtrend, buy above the Inverted Hammer pattern for a reversal play after bullish confirmation. In a uptrend, sell below the Shooting Star pattern for a reversal play. (You can also trade it like a bearish Pin Bar.)8. Morning Star / Evening StarWhat does it look like?Both star patterns are three-bar patterns.In candle-speak, a star refers to a candlestick with a small body that does not overlap with the preceding candle body.
Since the candle bodies do not overlap, forming a star will always involve a gap. Thus, it is uncommon to find Morning Stars and Evening Stars in intraday charts.A Morning Star comprises (in sequence):. A long bearish candlestick. A star below it (either bullish or bearish). A bullish candlestick that closes within the body of the first candlestickAn Evening Star comprises (in sequence):. A long bullish candlestick. A star above it (either bullish or bearish).
A bearish candlestick that closes within the body of the first candlestickThis pattern is similar to the.What does it mean?The first candlestick in the Morning Star pattern shows the bears in control. The star hints at a transition to a bullish market. Finally, the strength of the last candlestick confirms the bullishness.The Evening Star expresses the same logic. The first candlestick shows the bulls in control. Uncertainty sets in with the star candle. The last candlestick confirms the bearishness.How do we trade it?We apply both patterns to catch reversals as well as continuations. Buy above the last bar of the Morning Star formation.
Sell below the last bar of the Evening Star formation9. Three White Soldiers / Three Black CrowsWhat does it look like?Each of the three candlesticks in the Three White Soldiers should open within the previous candle body and close near its high.Each of the three candlesticks in the Three Black Crows should open within the previous candle body and close near its low.What does it mean?In the Three White Soldiers pattern, each bar opens within the body of the previous candlestick and suggests a potential fall. However, each bar ends up with a strong and high close. After three instances, the bullishness is undeniable.In the Three Black Crows pattern, each bar opens within the body of the previous candlestick, suggesting bullishness. However, as each bar closes lower, the bearishness is clear.How do we trade it?These patterns are effective for trading reversals. Buy above the Three White Soldiers after a substantial market decline. Sell below the Three Black Crows after a substantial market riseRead:10.
Hikkake(Despite having a Japanese name, the Hikkake is not one of the classic candlestick patterns. However, it is an interesting pattern that illustrates the.)What does it look like?To find a Hikkake pattern, first look for an.For a bullish Hikkake, the candlestick after the inside bar must have a lower low and a lower high to signify a bearish break-out of the inside bar.
When this bearish break-out fails, we get a long Hikkake setup.For a bearish Hikkake, the next candlestick must have a higher high and higher low. When this bullish break-out of the inside bar fails, the market forms a short Hikkake setup.If you need help looking for the Hikkake pattern,.What does it mean?The Hikkake pattern pinpoints the failure of inside bar traders.Trading the break-out of inside bars is a popular strategy.
When the break-out fails, we expect the price to blaze in the other direction.How do we trade it?We use Hikkake for. Buy if a downside break-out of an inside bar fails within three bars. Sell if an upside break-out of an inside bar fails within three barsRead:What’s Next? Learn More Candlestick PatternsOf course, you should not limit yourself to the 10 candlestick patterns above.However, you should familiarise yourself with one pattern before moving to the next. Trying to look out for dozens of patterns without knowing what they are trying to tell you lands you in a confusing mess.Start with, which is the closest you can get to the source of candlestick patterns without picking up a Far Eastern language with three scripts.
Compare with Bar PatternsDespite differences in nomenclature, bar patterns and candlestick patterns are not mutually exclusive. In fact, integrating both will greatly improve your price action analysis.Read:In particular, you would find that candlestick patterns brought along with it a deep focus on analysing the candle body. The comparison of the candle body (the range between the open and close), which is largely ignored by bar patterns, adds great value to price action analysis.The pairings below will get you started on studying the similarities and differences between bar patterns and candlestick patterns. Harami –. Engulfing –. Hammer/Shooting Star –.
Piercing Line/Dark Cloud Cover –. Morning Star/Evening Star –. Three White Soldiers/Three Black Crows –Study Candlestick Trading StrategiesNote that we based the trading methods above on our own experience. They might not correspond strictly to Steve Nison’s book.While you can refer to books and other online resources on candlestick patterns for a start, the best conclusion is always based your own observation and testing.Get started with candlestick trading with the strategies below.Are you spending too much time learning patterns? And too little time on learning how to trade?
In very fast timeframes (sub 1 min), you will not find useful candlestick patterns. Also, for intraday trading timeframes (minutes to hours), the candlestick patterns that require a star (i.e.
A gap between candles) are rare. Daily gaps are more common.Most studies on candlestick efficacy are done with daily data, but even those studies are inconclusive on their profitability when used in isolation. Moreover, every market-timeframe combination is different. It’s best to observe candlestick patterns in your selected market and timeframe carefully before trading them.
Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.The website contents are only for educational purposes. All trades are random examples selected to present the trading setups and are not real trades.
All trademarks belong to their respective owners. We are not registered with any regulating body that allows us to give financial and investment advice.Trading Setups Review © 2012–2019.
Stock chart patterns play an important role in any useful technical analysis and can be a powerful asset for any trader at any level. We all love patterns and naturally look for them in everything we do, that’s just part of and using stock chart patterns is an essential part of your.By learning to recognize patterns early on in trading, you will be able to work out how to profit from breakouts and reversals. I am a believer in and do feel that chart patterns are a very powerful tool. Why Are Stock Chart Patterns So Important?On a very basic level are a way of viewing a series of price actions which occur during a stock trading period.
It can be over any time frame – monthly, weekly, daily and intra-day. The great thing about chart patterns is that they tend to repeat themselves over and over again. This repetition helps to appeal to our human psychology and in particular.If you can learn to recognize these patterns early they will help you to gain a in the markets. Just as volume, support and resistance levels, RSI, and can help your technical analysis trading, can contribute to identifying trend reversals and continuations. What Stock Chart Patterns Should I Look Out For?Why not print out this article and you will have the answer right next to you whenever you need it. All of the and what they mean to you as a trader are highlighted here. Keep this by your desk and I promise it will be a huge help in the coming weeks and months.
Just having them in your face each and every day will subconsciously help you learn to recognize them during live trading. PennantA pennant is created when there is a significant movement in the stock, followed by a period of consolidation – this creates the pennant shape due to the converging lines. A breakout movement then occurs in the same direction as the big stock move. These are similar to flag patterns and tend to last between one and three weeks. There will be significant volume at the initial stock movement, followed by weaker volume in the pennant section, and growth in volume at the breakout. Cup And HandleA cup and handle pattern gets its name from the obvious pattern it makes on the chart. The cup is a curved u-shape, while the handle slopes slightly downwards.
In general, the right-hand side of the diagram has low trading volume, and it can last from seven weeks up to around 65 weeks. Ascending TriangleThis triangle usually appears during an upward trend and is regarded as a continuation pattern. It is a bullish pattern. Sometimes it can be created as part of a reversal at the end of a downward trend, but more commonly it is a continuation. Ascending triangles are always bullish patterns whenever they occur.
Triple BottomThe Triple Bottom pattern is used in as a predictor of a reverse position following a long downward trend. The Triple Bottom occurs when the price of the stock creates three distinct downward prongs, at around the same price level, before breaking out and reversing the trend. Descending TriangleThe descending triangle is another continuation pattern, but this triangle is a bearish pattern and is usually created as a continuation during a downward trend. Occasionally it can be seen as a reversal during an upward trend (the opposite of the ascending triangle pattern), but it is considered to be a continuation. Inverse Head And ShouldersThe inverse head and shoulders stock chart pattern is used as a predictor for the reversal of a downward trend. It is also sometimes called the “head and shoulders bottom” or even a “reverse head and shoulders, ” but all of these names mean the same thing within technical analysis.
It gets the name from having one longer peak, forming the head, and two level peaks on either side which create the shoulders. Bullish Symmetric TriangleThe symmetrical triangle pattern is easy to spot thanks to the distinctive shape which is developed by the two trendlines which converge. This pattern occurs by drawing trendlines, which connect a series of peaks and troughs. The trendlines create a barrier, and once the price breaks through these, a very sharp movement in price follows. Start The FREE Course on “Earnings Trades” Today: When companies announce earnings each quarter we get a one-time volatility crush.
And while most traders try to profit from a big move in either direction, you'll learn why selling options short-term is the best way to go. Rounding BottomThis pattern is sometimes also called a “saucer bottom” and demonstrates a long-term reversal showing that the stock is moving from a downward trend towards an upward trend instead.
It can last any time from several months to years. It is very similar to the cup and handle, but in this case, there is no handle to the pattern, hence the name. Flag ContinuationThe flag stock chart pattern forms through a rectangle. The rectangle develops from two trendlines which form the support and resistance until the price breaks out. The flag will have sloping trendlines, and the slope should move in the opposite direction to the original price movement. Once the price breaks through either the support or resistance lines, this creates the buy or sell signal. Double TopThe flag stock chart pattern forms through a rectangle.
The rectangle develops from two trendlines which form the support and resistance until the price breaks out. The flag will have sloping trendlines, and the slope should move in the opposite direction to the original price movement. Once the price breaks through either the support or resistance lines, this creates the buy or sell signal. Bearish Symmetric TriangleThe symmetrical triangle pattern is easy to spot thanks to the distinctive shape which is developed by the two trendlines which converge. This pattern is created by drawing trendlines, which connect a series of peaks and troughs.
The trendlines create a barrier, and once the price breaks through these, it is usually followed by a very sharp movement in price. Falling WedgeThe symmetrical triangle pattern is easy to spot thanks to the distinctive shape which is developed by the two trendlines which converge. This pattern is created by drawing trendlines, which connect a series of peaks and troughs. The trendlines create a barrier, and once the price breaks through these, it is usually followed by a very sharp movement in price. Head And Shoulders TopThe symmetrical triangle pattern is easy to spot thanks to the distinctive shape which is developed by the two trendlines which converge. This pattern is created by drawing trendlines, which connect a series of peaks and troughs.
The trendlines create a barrier, and once the price breaks through these, it is usually followed by a very sharp movement in price. Did I Forget Your Favorite Pattern?Add your comments below and let me know what patterns you like to trade besides the 13 above. There are many more out there, but these will just get you started. Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor.He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.