CANDLESTICK PATTERN
MARKET PROCESSES AND CHALLENGES
POWERED BY TRADINGMAFIA
What will you get from this
book ?
Amethod of application of candle stick.
Candlestick basics.
Different type of candle sticks.
Differenttype ofcandlestickpatterns.
Decisionbased oncandlestickpatterns.
How to use candle stick alongwithother indicators.
When not to use candle stick.
Mypersonaltradingsetups with values.
Basics
Candle Sticks aids in helping market situation efficiently,
one advantage it has over other visual methods is, it is
more visually depicting than in numbers, hence once
learned it can help you find patterns more easily, this
may not help you make the trade, but it sure will help
you get a grasp on what’s going on the market, hence
it helps you to make a wise decision.
To understand it would be good to look the basic
structure of a candle stick to understand what’s being
written in each .pattern’s analysis.
The method of application
•Each pattern
Recognize •Check volume to
Apply
requires different ensure the
type of action •Learn to pattern is •Take decision
from your end. recognize backed by based on the
different patterns activity pattern
in live market recognized
Learn Volume
Anatomy of Candle Sticks
Wicks
ose
Real Body
Wicks
Note
Itisimportant to understand different parts of candle sticks. Because the
certain candle stick patterns have only subtle changes. So, sometimes if
overlooked two patterns can seem very similar. So, look for the tiny details
like, how long is the tail, where the real body ends. Remember, devil is in the
details.
Basic Candles
The white or hollow or The dark/red candle
green candle shows a shows a period that has
period that has closed closed below its
above its opening openingprice.
price.
Green
Base Candle
Models
Red
The Subtle Difference
Between The Base Candles
Upper Shadow/Upper
Wick
High High
Close Open
Real Body
Open Close
Low Low
Lower Shadow/Lower
Wick
• The fat part of the candle is called real body.
• The two thin lines above and below are called wicks or tails.
• The main difference for each type of candles occurs on the price they open and
close. The high and low points remains same for both type of candles
Why Candle Sticks ?
It helps to view the market in a visual language, the
continues pattern of a single type of base candle will
helpus sense, who isputtingmore pressure inmarket.
There are many indicators that are available in stock
market, but there is nothing like candle stick, which is a
visual representation of what is happening in actual
market.
Fundamentally, what you are doing here is pattern
recognition, candle stick ease the process with a visual
representation of data, thus we as humans tend to
easily grasp visual cues than cues based on pure
numbers.
Different Types of Candles
Two Marubozu
A Marubozo candlestick has no upper shadow and
now lower shadow. A white marubozu opens at its low
and closes at its high. A dark marubozu opens at its
highandcloses atitslow.
The greenmarubozo clearlyshows bulls areincontrol
The red marubozo clearlyshows bears areincontrol.
Spinning tops
These candle formations shows that the either party
had a slight advantage during the time frame.
If the final candle formed during the time period is
green it means, bulls had a slight power over bears, if
red it means the other way.
DojiCandle Sticks
These Doji Candlesticks show an even more extreme
version of what we saw in the spinning tops above.
Here we havevery long upper and lower shadows and
teeny little real bodies with the close virtually AT the
openingprice.
Whether the close was up (white) or down (dark) isn't
what's mostnotablehere.
What's important is that there was a battle that
extended far above and below the open, with one
side gaining some large advantage within the candle
and then giving it up and retreating just as far in the
other direction,before fightingbacktoastandoff.
Doji Candlesticks can often portend a trend reversal,
especially if put in on heavy volume. But again, we're
getting ahead of ourselves. Just file that in the back of
your mindandwe'llpickitupagainlaterinthissection.
There are differenttypes ofDojiCandleSticks.
Hanging Man or Hammer
The red candle above shows that a lot of the session's
action took place far below the opening price, and the
bulls fought back and closed the session just a bit below
the open.
If this sort of candle shows up in a sustained uptrend, it
may signify a weakening of the bulls and it would be
called a Hanging Man. (It looks like a man hanging by
the neck.).
If we see the same candle after a sustained
downtrend, it could signify that, while the bulls have
not overwhelmed the bears, they have (perhaps for
the first time in a while) fought back hard enough to
cause downward momentum to abate. In this context
the candle is called a Hammer (as in hammering out a
bottom andyou cansee itas lookinglikeahammer).
4 DojisCandle Sticks
Dragon Fly Doji
Standard Doji
Gravestone Doji
Long Legged Doji
DojiUnderlying Action
Dragonfly the
can appear at either
top of an uptrend or the
bottom of a downtrend and
signals the potential for a
changeindirection.
Works well in depicting
BullishSignals
Long Legged Doji This shows the indecision
between the buyers and
thesellers.
Gravestone Doji Works well in signaling
bearishsignals
Standard Doji Does not signify anything,
check previoustrend.
Engulfing Patterns
Engulfing Patterns
The relative size of the bodies in the first and second
days is important. If the first day of the Bullish Engulfing
Pattern is characterized by a very small real body (it
may even be a doji or nearly a doji) but the second
day is characterized by a very long real body, this
strongly indicates that the bearish power is diminishing
and the disparity of white versus red body is indicative
of the emerging bull power. There is higher probability
of a bullish reversal if there is heavy volume on the
second real body or if the second day of the Bullish
Engulfing Pattern engulfs more than one real body
(which essentially means we see two or more small red
bodies preceding the long green body). The reversal of
downtrend needs further confirmation on the third day.
This confirmation may be in the form of a green
candlestick, a large gap up or a higher close on the
thirdday.
Bullish Engulfing Pattern is a pattern characterized by a
large green real body engulfing a preceding small red
real body, which appears during a downtrend. The
green body does not necessarily engulf the shadows
of the red body but totally engulfs the body itself. The
Bullish Engulfing Pattern is an important bottom reversal
signal.
Engulfing Pattern Decisions
Previous Pattern Expected Decision
Trend Future Trend
Bearish Bullish Bullish Long
•
Engulfing •Short +ve
asset Put
Options
•Long Call
Options
Bullish Bullish Risky No decision
Engulfing
Bearish Bearish Risky No decision
Engulfing
Bullish Bearish Bearish • Short
Engulfing • Long Put
Options
•Write Call
Options
While the market sentiment is bearish; we see some subsided selling reflected
by the short, red real body of the first day. Next day shows bull strength with a
closing price at or above the previous day’s open. It means that the
downtrend is now losing momentum and the bulls started to take the lead.
Dark Cloud
Market goes up with an uptrend. Then we see a strong white
candlestick followed by a gap suggesting that bulls retain the control.
However, the rally does not continue. Market suddenly closes at or
near the lows of the day so the second day body moving well into
the prior day’s real body. Longs are shaken somehow and short
sellers now have a benchmark to place a stop, whichisat the new
highof the second day.
General narration
Marketischaracterizedbyan uptrend.
We see a long green candlestick in the first day.
Then we see a red body characterized by an open above the high of
the previous day on the second day.
The second red candlestick closes within and below the midpoint of
the previous green body.
Decisioninmarket
Thecomingtrendisbearish
Short
Sellcalloptions
Buyputoptions
Piercing Pattern
Bullish Piercing Line Pattern is a bottom reversal pattern. A long red candlestick is followed
by a gap lower during the next day while the market is in downtrend. The day ends up as a
strong green candlestick, which closes more than halfway into the prior red candlestick’s
real body.
The market moves down in a downtrend. The first red real body reinforces this view. The
next day the market opens lower via a gap. Everything now goes, as bears want it.
However suddenly the market surges toward the close, leading the prices to close sharply
above the previous day close. Now the bears are losing their confidence and
reevaluating their short positions. The potential buyers start thinking that new lows may not
holdand perhaps itistime to take longpositions.
Pattern of occurring
Market is characterized by downtrend.
We seea long red candlestick.
Then we see a long white candlestick whose opening price is below previous day’s low on
the second day.
The second day’s close is contained within the first day body and it is also above the
midpoint of the first day’s body.
The second day however fails to close above the body of the first day.
Deci si on
Long
Short Put Options
Buy Call options
Neck Patterns
Analysis of neck patterns
The On Neck, In Neck, and Thrusting Patterns resemble
the Piercing Pattern but don't be fooled. They are
somewhat bearishrather thanbullish.
They are not reversal candles, but I've included them
here because they contrast so specifically to the
piercing pattern and illustrate an important idea that
pertainsto"FibonacciRetracements,".
The second candle of each of these patterns opens
below thelow ofthefirstcandle.
The second candle of the On Neck is a short, green,
and thecloses nearthelow ofitspredecessor.
The second candle of the In Neck Pattern is also green
and closes slightly up into the real body of the first
candleofthepattern.
The Thrusting Pattern has a long white second candle,
but that candle's close is below the midpoint of the first
candle.
In all these cases we see a market that is unable to
regain even half of the prior session's loss. A move
below the low of any of these three patterns is an
indicationthatfurtherweakness liesahead.
The most important thing to keep in mind here is that
the midpoint of the first candle has proven to be
resistance to further upside. That's what makes them
potentially bearish.
Harami Pattern
Harami Pattern
Harami Pattern
HaramiCandle Sticks
Analysis
Harami is an archaic Japanese word meaning
"pregnant." The Harami Pattern is formed when a
longish candle that moves in the direction of an existing
trend is followed by a candle with a small real body
that is contained between the open and close of the
longish real body. The long real body is the mother.It
containsthesmallrealbody, thebaby.
In an uptrend a Harami Pattern tends to be bearish,
whileinadowntrend ittends tobe bullish.
It may not be as powerful a reversal pattern as a
hammer or an Engulfing Pattern, and may signify that
momentumwillabate ratherthanstronglyreverse.
The color of the "baby" may be either the same or the
opposite of that of the "mother." More often than not,
though, it will be the opposite. Perhaps the most
powerful sort of Harami Pattern is the Harami Cross in
whichthebabyisa dojicandle.
The Harami Cross is considered to be a major reversal
pattern because ofthepower ofthedojicandle.
Bullish Shooting Star
This gap is important
Shooting stars are powerful patterns that shows a clear change in trend.
Decisions Long
Buy Call Options
Write Put Options
Bearish Shooting Star
This gap is important
Decisions Short
Sell Call Options
Buy Put Options
DojiBearish Star
Portrays Upcoming Downtrend
Decision Short
Sell Call Options
Buy Put Options
Previous Trend Bullish
Bullish DojiStar
Portrays Upcoming Uptrend
Decision Buy
Sell Put Options
Buy Call Options
Previous Trend Bearish
Rising Three
Decisions Long on assets
Sell Put Options
Falling Three
Decisions Short assets
Sell Call Options
Bullish Hammer
The overall direction of the market is bearish, characterized by a downtrend.
Then the market opens with a sharp sell off implying the continuation of the
downtrend.
However, prices suddenly turn upwards, the sell-off is quickly abated and
bullish sentiment continues during the day with a closing price at or near to its
highfor the daywhichcauses the longlowershadow.
Apparently, the market fails to continue in the selling side. This observation
reduces the previous bearish sentiment causing the short traders to feel
increasinglyuneasierwiththeir bearishpositions.
General Depiction
The marketischaracterizedby aprevailingdowntrend.
Then we see a small real body at the upper end of the trading range. Color of this
bodyisnot important.
Wewouldliketoseethelowershadow atleast twiceaslongas therealbody.
There is no (or almost no) upper shadow.
Aligning Volume
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• Once the pattern is recognized compare the volume on the time
when the pattern occurred, if it is not standing out, abort any further
deci si ons. There is no easy way to do this. Volume looks different for
• every other assets. But you can choose the standing out one by
depicting the volume underlay charts.
In the above example
Xaxis showsTimeline
Y axis shows Volume , of an asset we are candle charting.
• Decisionmaking
•Here in the depicted timeline, comparing the volume we
can see that only two points, Time line7 and 12 stands out
prominently.
•So, when applying any candle stick pattern found, make
sure that the recognized pattern is on these prominent
volumes.
Pattern
Recognize
Decision/Conservative
•Low Volume –No Trade
•High Volume –Trade
•Medium Volume –No
Volume Trade
When not to use candle
sticks ?
When marketisinsideways.
When there is no volume.
Continues inconsistent patterns.
Notaligning with any news that is in float.
Hunch, if you are constantly updatedaboutmarket.
• Mypersonalsetups
For positional investment
For Positional Trade
Daily Candle stick.
Volume underlay.
Option chain analysis
For Day Trade
30 Minutescandlestick
Volume underlay
Oscillators-RSI 7/12
