Candlestick formations Flashcards
Candlestick charts are an effective way of visualizing price movements. There are two basic candlesticks:
There are three main parts to a candlestick:
Upper Shadow: The vertical line between the high of the day and the close (bullish candle) or open (bearish candle)
Real Body: The difference between the open and close; colored portion of the candlestick
Lower Shadow: The vertical line between the low of the day and the open (bullish candle) or close (bearish candle)
Bullish Engulfing Pattern
The Bullish Engulfing Candlestick Pattern is a bullish reversal pattern, usually occuring at the bottom of a downtrend. The pattern consists of two Candlesticks:
- Smaller Bearish Candle (Day 1)
- Larger Bullish Candle (Day 2)
The bearish candle real body of Day 1 is usually contained within the real body of the bullish candle of Day 2.
On Day 2, the market gaps down; however, the bears do not get very far before bulls take over and push prices higher, filling in the gap down from the morning’s open and pushing prices past the previous day’s open.
The interpretive power of the Bullish Engulfing Pattern comes from the incredible change of sentiment from a bearish gap down in the morning, to a large bullish real body candle that closes at the highs of the day. Bears have overstayed their welcome and bulls have taken control of the market.
Read more at: https://commodity.com/technical-analysis/bullish-engulfing/
The Bearish Engulfing Candlestick Pattern
The Bearish Engulfing Candlestick Pattern is considered to be a bearish reversal pattern, usually occuring at the top of an uptrend. The pattern consists of two Candlesticks:
- Smaller Bullish Candle (Day 1)
- Larger Bearish Candle (Day 2)
Generally, the bullish candle real body of Day 1 is contained within the real body of the bearish candle of Day 2.
The market gaps up (typically interpreted as a bullish sign) on Day 2; however, the bulls do not push very far higher before bears take over and push prices further down, not only filling in the gap down from the morning’s open but also pushing prices below the previous day’s open (viewed as a bearish sign).
With the Bullish Engulfing Pattern, there is an incredible change of sentiment from the bullish gap up at the open, to the large bearish real body candle that closed at the lows of the day. Bears have successfully overtaken bulls for the day and possibly for the next few periods.
https://commodity.com/technical-analysis/bearish-engulfing/
Dark Cloud Cover
Dark Cloud Cover is a bearish candlestick reversal pattern, similar to the Bearish Engulfing Pattern (see: Bearish Engulfing Pattern). There are two components of a Dark Cloud Cover formation:
- Bullish Candle (Day 1)
- Bearish Candle (Day 2)
A Dark Cloud Cover Pattern occurs when a bearish candle on Day 2 closes below the middle of Day 1’s candle.
In addition, price gaps up on Day 2 only to fill the gap (see: Gaps) and close significantly into the gains made by Day 1’s bullish candlestick.
The rejection of the gap up is a bearish sign in and of itself, but the retracement into the gains of the previous day’s gains adds even more bearish sentiment. Bulls are unable to hold prices higher, demand is unable to keep up with the building supply.
Read more at: https://commodity.com/technical-analysis/dark-cloud-cover/
DOJI
The Doji is an transitional Candlestick formation, signifying equality and/or indecision between bulls and bears. A Doji is quite often found at the bottom and top of trends and thus is considered as a sign of possible reversal of price direction, but the Doji can be viewed as a continuation pattern as well.
A Doji is formed when the opening price and the closing price are equal. A long-legged Doji, often called a “Rickshaw Man” is the same as a Doji, except the upper and lower shadows are much longer than the regular Doji formation. The creation of the Doji pattern illustrates why the Doji represents such indecision. After the open, bulls push prices higher only for prices to be rejected and pushed lower by the bears. However, bears are unable to keep prices lower, and bulls then push prices back to the opening price. Of course, a Doji could be formed by prices moving lower first and then higher second, nevertheless, either way, the market closes back where the day started.
Read more at: https://commodity.com/technical-analysis/doji/
Dragonfly Doji
The Dragonfly Doji is typically interpreted as a bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends.
The Dragonfly Doji is created when the open, high, and close are the same or about the same price (Where the open, high, and close are exactly the same price is quite rare). The most important part of the Dragonfly Doji is the long lower shadow. The long lower shadow implies that the market tested to find where demand was located and found it. Bears were able to press prices downward, but an area of support was found at the low of the day and buying pressure was able to push prices back up to the opening price. Thus, the bearish advance downward was entirely rejected by the bulls.
Read more at: https://commodity.com/technical-analysis/dragonfly-doji/
Evening Star
The Evening Star Pattern is viewed as a bearish reversal pattern, that usually occurs at the top of an uptrend. The pattern consists of three candlesticks:
- Large Bullish Candle (Day 1)
- Small Bullish or Bearish Candle (Day 2)
- Large Bearish Candle (Day 3)
The first part of an Evening Star reversal pattern is a large bullish green candle. On the first day, bulls are definitely in charge, usually new highs were made.
The second day begins with a bullish gap up. It is clear from the opening of Day 2 that bulls are in control. However, bulls do not push prices much higher. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji).
Generally speaking, a bearish candle on Day 2 is a stronger sign of an impending reversal. But it is Day 3 that is the most significant candlestick.
Day 3 begins with a gap down, (a bearish signal) and bears are able to press prices even further downward, often eliminating the gains seen on Day 1.
Read more at: https://commodity.com/technical-analysis/evening-star/
Gravestone Doji
The Gravestone Doji is viewed as a bearish reversal candlestick pattern that mainly occurs at the top of uptrends.
The Gravestone Doji is created when the open, low, and close are the same or about the same price (Where the open, low, and close are exactly the same price is quite rare). The most important part of the Graveston Doji is the long upper shadow.
The long upper shadow is generally interpreted by technicians as meaning that the market is testing to find where supply and potential resistance is located.
The construction of the Gravestone Doji pattern occurs when bulls are able to press prices upward.
However, an area of resistance is found at the high of the day and selling pressure is able to push prices back down to the opening price. Therefore, the bullish advance upward was entirely rejected by the bears.
Read more at: https://commodity.com/technical-analysis/gravestone-doji/
Hammer Candlestick
is viewed as a bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends.
The Hammer formation is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, twice the length as the real body. When the high and the close are the same, a bullish Hammer candlestick is formed and it is considered a stronger formation because the bulls were able to reject the bears completely plus the bulls were able to push price even more past the opening price. In contrast, when the open and high are the same, this Hammer formation is considered less bullish, but nevertheless bullish. The bulls were able to counteract the bears, but were not able to bring the price back to the price at the open. The long lower shadow of the Hammer implies that the market tested to find where support and demand was located. When the market found the area of support, the lows of the day, bulls began to push prices higher, near the opening price. Thus, the bearish advance downward was rejected by the bulls.
https://commodity.com/technical-analysis/hammer/
Hanging Man
The Hanging Man candlestick formation, as one could predict from the name, is viewed as a bearish sign. This pattern occurs mainly at the top of uptrends and can act as a warning of a potential reversal downward. It is important to emphasize that the Hanging Man pattern is a warning of potential price change, not a signal, in and of itself, to go short.
The Hanging Man formation, just like the Hammer, is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, which should be at least twice the length of the real body.
When the high and the open are the same, a bearish Hanging Man candlestick is formed and it is considered a stronger bearish sign than when the high and close are the same, forming a bullish Hanging Man (the bullish Hanging Man is still bearish, just less so because the day closed with gains).
After a long uptrend, the formation of a Hanging Man is bearish because prices hesitated by dropping significantly during the day. Granted, buyers came back into the stock, future, or currency and pushed price back near the open, but the fact that prices were able to fall significantly shows that bears are testing the resolve of the bulls. What happens on the next day after the Hanging Man pattern is what gives traders an idea as to whether or not prices will go higher or lower.
Read more at: https://commodity.com/technical-analysis/hanging-man/
Harami
The Harami (meaning “pregnant” in Japanese) Candlestick Pattern is considered a reversal pattern. The pattern consists of two Candlesticks:
- Larger Bullish or Bearish Candle (Day 1)
- Smaller Bullish or Bearish Candle (Day 2)
The Harami Pattern is considered either bullish or bearish based on the criteria below:
Bearish Harami: A bearish Harami occurs when there is a large bullish green candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. The most important aspect of the bearish Harami is that prices gapped down on Day 2 and were unable to move higher back to the close of Day 1. This is a sign that uncertainty could be entering the market.
Bullish Harami: A bullish Harami occurs when there is a large bearish red candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. Again, the most important aspect of the bullish Harami is that prices gapped up on Day 2 and price was held up and unable to move lower back to the bearish close of Day 1.
Read more at: https://commodity.com/technical-analysis/harami/
Inverted Hammer
The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and can act as a warning of a potential reversal upward. It is important to note that the Inverted pattern is a warning of potential price change, not a signal, in and of itself, to buy.
The Inverted Hammer formation, just like the Shooting Star formation, is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, which should be at least twice the length of the real body.
When the low and the open are the same, a bullish Inverted Hammer candlestick is formed and it is considered a stronger bullish sign than when the low and close are the same, forming a bearish Hanging Man (the bearish Hanging Man is still considered bullish, just not as much because the day ended by closing with losses).
After a long downtrend, the formation of an Inverted Hammer is bullish because prices hesitated their move downward by increasing significantly during the day. Nevertheless, sellers came back into the stock, future, or currency and pushed prices back near the open, but the fact that prices were able to increase significantly shows that bulls are testing the power of the bears. What happens on the next day after the Inverted Hammer pattern is what gives traders an idea as to whether or not prices will go higher or lower.
Read more at: https://commodity.com/technical-analysis/inverted-hammer/
Read more at: https://commodity.com/technical-analysis/inverted-hammer/
Morning Star
The Morning Star Pattern is viewed as a bullish reversal pattern, usually occuring at the bottom of a downtrend. The pattern consists of three candlesticks:
- Large Bearish Candle (Day 1)
- Small Bullish or Bearish Candle (Day 2)
- Large Bullish Candle (Day 3)
The first part of a Morning Star reversal pattern is a large bearish red candle. On the first day, bears are definitely in charge, usually making new lows.
The second day begins with a bearish gap down. It is clear from the opening of Day 2 that bears are in control. However, bears do not push prices much lower. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji).
Generally speaking, a bullish candle on Day 2 is viewed as a stronger sign of an impending reversal. But it is Day 3 that holds the most significance.
Day 3 begins with a bullish gap up, and bulls are able to press prices even further upward, often eliminating the losses seen on Day 1.
Read more at: https://commodity.com/technical-analysis/morning-star/
Piercing Pattern
The Piercing Pattern is viewed as a bullish candlestick reversal pattern, similar to the Bullish Engulfing Pattern (see: Bullish Engulfing Pattern). There are two components of a Piercing Pattern formation:
- Bearish Candle (Day 1)
- Bullish Candle (Day 2)
A Piercing Pattern occurs when a bullish candle on Day 2 closes above the middle of Day 1’s bearish candle.
Moreover, price gaps down on Day 2 only for the gap to be filled (see: Gaps) and closes significantly into the losses made previously in Day 1’s bearish candlestick.
The rejection of the gap down by the bulls typically can be viewed as a bullish sign, and the fact that bulls were able to press further up into the losses of the previous day adds even more bullish sentiment. Bulls were successful in holding prices higher, absorbing excess supply and increasing the level of demand.
Read more at: https://commodity.com/technical-analysis/piercing-pattern/
Shooting star
The Shooting Star candlestick formation is viewed as a bearish reversal candlestick pattern that typically occurs at the top of uptrends.
The Shooting formation is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, generally defined as at least twice the length of the real body.
When the low and the close are the same, a bearish Shooting Star candlestick is formed and it is considered a stronger formation because the bears were able to reject the bulls completely plus the bears were able to push prices even more by closing below the opening price.
The Shooting Star formation is considered less bearish, but nevertheless bearish when the open and low are roughly the same. The bears were able to counteract the bulls, but were not able to bring the price back to the price at the open.
The long upper shadow of the Shooting Star implies that the market tested to find where resistance and supply was located. When the market found the area of resistance, the highs of the day, bears began to push prices lower, ending the day near the opening price. Thus, the bullish advance upward was rejected by the bears.
Read more at: https://commodity.com/technical-analysis/shooting-star/
Tweezers Top or Bottom?
The Tweezer Top formation is viewed as a bearish reversal pattern seen at the top of uptrends and the Tweezer Bottom formation is viewed as a bullish reversal pattern seen at the bottom of downtrends.
Tweezer Top formation consists of two candlesticks:
- Bullish Candle (Day 1)
- Bearish Candle (Day 2)
Tweezer Bottom formation consists of two candlesticks:
- Bearish Candle (Day 1)
- Bullish Candle (Day 2)
Sometimes Tweezer Tops or Bottoms have three candlesticks.
A bearish Tweezer Top occurs during an uptrend when bulls take prices higher, often closing the day off near the highs (typically a strong bullish sign). However, on the second day, how traders feel (i.e. their sentiment) reverses completely. The market opens and goes straight down, often eliminating the entire gains of Day 1.
The reverse, a bullish Tweezer Bottom occurs during a downtrend when bears continue to take prices lower, usually closing the day near the lows (typically a strong bearish sign). Nevertheless, Day 2 is completely opposite because prices open and go nowhere but upwards. This bullish advance on Day 2 sometimes eliminates all losses from the previous day.
Read more at: https://commodity.com/technical-analysis/tweezer-top-bottom/
Gaps or Windows
Windows as they are called in Japanese Candlestick Charting, or Gaps, as they are called in the west, are an important concept in technical analysis. Whenever, there is a gap (current open is not the same as prior closing price), that means that no price and no volume transacted hands between the gap.
A Gap Up occurs when the open of Day 2 is greater than the close of Day 1.
Contrastly, a Gap Down occurs when the open of Day 2 is less than the close of Day 1.
There is much psychology behind gaps. Gaps can act as:
Resistance: Once price gaps downward, the gap can act as resistance.
Support: When prices gap upwards, the gap can act as support to prices in the future.
Read more at:http://https://commodity.com/technical-analysis/windows/
