Bullish Candlestick Patterns - Bearish Candlestick Patterns - Stock Candlestick Patterns - Let's Trade Them!
GPSM | Will Bell | October 12th, 2023
Let's Start Here -
A chart can be read in a variety of ways.
Japanese Candlestick Patterns, Renko, Bar, Line, Heikin Ashi, Point & Figure, and other indicators can be used.
You're probably thinking to yourself, "Will, what am I supposed to do now?" "Should I use one or the other?" ”
The most popular approach, in my opinion, is... Candlesticks...
Why?
It's simple to learn — and it works.
That's why I put together this training content to teach you everything there is to know about candlestick patterns (and how to trade them like a pro).
Here's What I Got For This Training Content Today:
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What is a candlestick pattern, and how do you read one properly
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Reversal candlestick patterns that are bullish
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What are the best ways to find high-probability bullish reversal setups
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Reversal candlestick patterns that are bearish
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What are the best ways to find high-probability bearish reversal setup
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Candlestick patterns of indecision
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Candlestick patterns that show the continuation of a trend
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How to find trend continuation setups with a high probability of success
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How to understand any candlestick pattern without memorizing any of them
Now…
A Little History Lesson
During the 1700s, a Japanese rice trader named Munehisa Homma developed Japanese candlestick patterns.
The Candlestick trading bible is one of the most powerful trading systems in history. It was invented by Homma Munehisa. The father of candlestick chart patterns.
This trader is considered to be the most successful trader in history, he was known as the God of markets in his days, this discovery made him more than $10 billion in today’s dollar.
Nearly 300 years later, Steve Nison introduced it to the western world in his book Japanese Candlestick Charting Techniques.
The original ideas have most likely been modified, resulting in the candlestick patterns you see today.
Anyway, that's a quick rundown of the history of Japanese candlestick patterns.
Let's take a look at how to interpret a candlestick chart...
So, how do you read a Japanese candlestick chart?
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Each candlestick pattern now has four data points:
The opening price is what it says on the tin.
High – The highest price over a set period of time.
Low – The cheapest price for a set period of time.
The price at which a transaction comes to a close.
Here's what I'm talking about:
Remember…
The open of a Bullish candle is always BELOW the close. The open of a Bearish candle is ALWAYS ABOVE the close.
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Bullish Reversals Are Up First
Bullish reversal candlestick patterns indicate that buyers are in charge for the time being. However, just because you see a pattern doesn't mean you should go long right away because it doesn't give you a "edge" in the markets.
Instead, you should use a combination of candlestick patterns and other tools to find a high-probability trading setup (more on that later).
For the time being, here are 5 bullish reversal candlestick patterns to be aware of:
Hammer
Pattern of a Bullish Engulfing
Bearish Engulfihg
Pattern for Piercing
Bottom Tweezer
Star of the Morning
Hammer
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After a price decline, a Hammer is a one-candle bullish reversal pattern that forms.
Here's how you can spot it:
Upper shadow is minimal to non-existent. The price reaches the top 14 percent of the range. The lower shadow is approximately 2 or 3 times the body's length.
This is what a Hammer entails... When the market opened, the sellers took command and drove down the price.
Huge buying pressure stepped in at the selling climax, pushing the price higher. It closed above the opening price due to strong buying pressure.
In simple terms, a hammer is a bullish reversal candlestick pattern that shows lower price rejection.
Just because you see a Hammer doesn't mean the trend will change overnight. To increase the chances of the trade working out, you'll need more "confirmation," which I'll go over in detail later.
Bullish Engulfing Pattern
After a price decline, a Bullish Engulfing Pattern forms, which is a two-candle bullish reversal candlestick pattern. Here's how you can spot it:
The first candle's close is bearish. The second candle's body completely "covers" the first candle's body (without taking into consideration the shadow)
The second candle closes in a bullish fashion. And this is the meaning of a Bullish Engulfing Pattern...
The sellers have the upper hand on the first candle, which closed lower for the period.
Strong buying pressure stepped in on the second candle, and it closed above the previous candle's high — indicating that the buyers have won the battle for the time being.
A Bullish Engulfing Pattern indicates that the buyers have surpassed the sellers and are now in command.
Finally, because of the way candlesticks are formed on multiple timeframes, a Hammer is usually a Bullish Engulfing Pattern on the lower timeframe.
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Piercing Pattern
After a price decline, a Piercing Pattern is a two-candle reversal candlestick pattern that forms.
The Piercing Pattern, unlike the Bullish Engulfing Pattern, which closes above the previous open, closes within the body of the previous candle.
As a result, the Piercing Pattern isn't as strong as the Bullish Engulfing Pattern in terms of strength. Here's how you can spot it:
The first candle's close is bearish. The second candle's body closes past the halfway point of the first candle. The second candle closes in a bullish fashion.
And this is the definition of a Piercing Pattern... The sellers have the upper hand on the first candle, which closed lower for the period.
Buying pressure stepped in on the second candle, and it closed bullishly (more than 50% of the previous body) — indicating that there is buying pressure present.
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Tweezer Bottom
I don't mean the tool you use to pick your nose hair when I say Tweezer (although it sure looks like it).
Instead… After a price decline, a Tweezer Bottom is a two-candle reversal candlestick pattern.
Here's how you can spot it:
The first candle represents the market's rejection of lower prices. The second candle re-tests the previous candle's low before closing higher. And this is what it means to have a Tweezer Bottom...
The sellers pushed the price lower on the first candle, but were met with some buying pressure. The sellers failed to push the price lower on the second candle, and were eventually overwhelmed by strong buying pressure.
In other words, a Tweezer Bottom indicates that the market is having trouble trading lower (after two attempts) and is likely to rise.
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Morning Star
After a price decline, a Morning Star is a three-candle bullish reversal candlestick pattern that forms. Here's how you can spot it:
The first candle's close is bearish.
The range of the second candle is quite small. The third candle opens aggressively higher and closes aggressively higher (more than 50 percent of the first candle) And this is what it means to be a Morning Star...
As the price closes lower on the first candle, the sellers are in control. The markets are indecisive on the second candle, as both selling and buying pressures are balanced (hence the small range of the candle).
The buyers won the battle on the third candle, and the price closed higher. In other words, a Morning Star indicates that the sellers are exhausted and that the buyers are in control for the time being.
What are the best ways to find high-probability bullish reversal setups? You now understand the various bullish reversal candlestick patterns.
Let's take it a step further and see how we can use it to find high-probability trading setups.
You shouldn't trade single candlestick patterns because they don't provide a "edge" in the markets. So, here's how it's done...
Wait for a pullback to Support if the market is trending higher. Wait for a bullish reversal candlestick pattern if the price pulls back towards Support.
If you see a bullish reversal candlestick pattern, make sure it's bigger than the previous candles (signalling strong rejection)
Reversal Candlestick Patterns That Are Bearish
Bearish reversal candlestick patterns indicate that sellers are in charge for the time being. Similarly, just because you see a pattern doesn't mean you should go short right away because it doesn't give you a "edge" in the markets doesn't mean you should.
Instead, you should use candlestick patterns in conjunction with other tools to find a high-probability trading setup.
For the time being, here are 5 bearish reversal candlestick patterns to be aware of:
Star Shooting
Bearish Engulfing Pattern (BEARISH ENGULFING PATTERN)
Coverage of Dark Clouds
Top Tweezer
Evening Star
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Star Shooting
After a price advance, a Shooting Star is a one-candle bearish reversal pattern that forms.
Here's how you can spot it: Lower shadow is minimal to non-existent.
The price settles in the bottom 14 percent of the range. The upper shadow is approximately 2 or 3 times the body's length. And this is what it means to be a Shooting Star...
When the market opened, buyers took command and drove up the price. Huge selling pressure stepped in at the peak of the buying cycle, pushing the price lower.
It closed below the opening price due to the strong selling pressure. In simple terms, a Shooting Star is a bearish reversal candlestick pattern that indicates higher price rejection.
Just because you see a Shooting Star doesn't mean the trend will change overnight. To increase the chances of the trade working out, you'll need more "confirmation," which I'll go over in detail later.
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Bearish Engulfing Pattern
After a price advance, a Bearish Engulfing Pattern forms, which is a two-candle bearish reversal candlestick pattern. Here's how you can spot it:
The first candle's close is bullish. The second candle's body completely "covers" the first candle's body (without taking into consideration the shadow) The second candle closes in a bearish fashion.
A Bearish Engulfing Pattern is defined as follows:
The buyers have the upper hand on the first candle, as it closed higher for the period.
Strong selling pressure stepped in on the second candle, and it closed below the previous candle's low — indicating that the sellers have won the battle for the time being.
A Bearish Engulfing Pattern indicates that the sellers have overcome the buyers and are now in command.
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Dark Cloud Cover
After a price advance, a Dark Cloud Cover is a two-candle reversal candlestick pattern that forms.
The Dark Cloud Cover, unlike the Bearish Engulfing Pattern, which closes below the previous open, closes within the body of the previous candle.
As a result, the Dark Cloud Cover pattern isn't as strong as the Bearish Engulfing pattern in terms of strength.
Here's how you can spot it: The first candle's close is bullish. The second candle's body closes past the halfway point of the first candle.
The second candle closes in a bearish fashion. And this is what it means to have a Dark Cloud Cover...
The buyers have the upper hand on the first candle, as it closed higher for the period.
Selling pressure stepped in on the second candle, and it closed bearishly (more than 50% of the previous body) — indicating that selling pressure is present.
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Tweezer Top
After a price advance, a Tweezer Top is a two-candle reversal candlestick pattern that appears. Here's how you can spot it: The first candle represents the market's rejection of higher prices.
The second candle retraces the previous candle's high and closes lower... and this is what a Tweezer Top is all about...
The buyers pushed the price higher on the first candle, but were met with some selling pressure.
The buyers tried but failed to push the price higher on the second candle, and were eventually overwhelmed by strong selling pressure.
In other words, a Tweezer Top indicates that the market is having trouble trading higher (after two attempts) and is likely to fall.
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Evening Star
After a price advance, an Evening Star is a three-candle bearish reversal candlestick pattern that forms. Here's how you can spot it:
The first candle's close is bullish.
The range of the second candle is quite small. The third candle is aggressively lower as it closes (more than 50 percent of the first candle) And this is what it means to be an Evening Star...
As the price closes higher on the first candle, it indicates that the buyers are in control.
The markets are indecisive on the second candle, as both selling and buying pressures are balanced (hence the small range of the candle).
The sellers won the battle on the third candle, and the price closed lower. In other words, an Evening Star indicates that the buyers are exhausted and the sellers are in control for the time being.
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What are the best ways to find high-probability bearish reversal setups?
The various bearish reversal candlestick patterns have just been taught to you. Let's take it a step further and see how we can use it to find high-probability trading setups.
This is how you do it...
Wait for a pullback towards Resistance if the market is trending lower.
Wait for a bearish reversal candlestick pattern if the price pulls back towards Resistance.
If you see a bearish reversal candlestick pattern, make sure it's bigger than the previous candles (signalling strong rejection) If there is a strong price rejection, go short on the open of the next candle.
For long setups, the reverse is true.
Candlestick patterns of indecision
Indecisive candlestick patterns indicate a balance of buying and selling pressure. Here are two indecisive candlestick patterns to be aware of: Top spinning , Doji
Allow me to explain...
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Spinning Top
A spinning top is a candlestick pattern that shows indecision, with both buying and selling pressure vying for control.
Here's how you can spot it: The upper and lower shadows of the candle are long. The candle's body is quite small.
Here's what a Spinning top entails...
When the market first opened, both buyers and sellers fought hard to gain control (which results in upper and lower shadows) Neither side has gained the upper hand by the end of the session (which results in a small body) In short, a spinning top indicates that the market is highly volatile, but there is no clear winner.
And yes, it resembles the toy you used to play with as a kid.
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Doji
Because both buying and selling pressures are equal, a Doji represents market indecision.
Here's how you can spot it:
The open and close of the candle are in the middle of the range.
The upper and lower shadows are both short and of approximately equal length. Although the Doji is a candlestick pattern that represents indecision, there are several variations that have different meanings. They are as follows:
Doji Dragonfly
Doji's Gravestone
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Dragonfly Doji
Unlike a regular Doji, which opens and closes near the middle of the range, the Dragonfly Doji opens and closes near the range's highs, with a long lower shadow.
This indicates that lower prices have been rejected as buying pressure has pushed the market higher towards the opening price.
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Gravestone Doji
Unlike a regular Doji, which opens and closes near the middle of the range, the Gravestone Doji opens and closes near the range's lows, with a long upper shadow.
This indicates that higher prices have been rejected as selling pressure has pushed the market lower towards the opening price.
Candlestick patterns that continue
Continuation candlestick patterns indicate that the market will most likely trade in the same direction.If you're a trend trader, these candlestick patterns can provide some of the most profitable trading opportunities.
So, here are four continuation patterns to be aware of:
The Method of the Rising Three
Method of the Falling Three
Harami is a bullish character.
Harami, the Bearish
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Rising Three Method
The Rising Three Method is a bullish trend continuation pattern that indicates that the market will likely continue to rise.
Here's how you can spot it:
The first candle is a large bullish candle with a large body.
The range and body of the second, third, and fourth candles are smaller. The fifth candle has a large body and closes above the first candle's highs.
Here's what the Rising Three Method entails...
The buyers have the upper hand on the first candle, as they closed the session strongly.
Buyers are taking profits on the second, third, and fourth candles, resulting in a slight decline. It is not, however, a strong selloff, as new buyers are entering long at these prices.
The buyers reclaim control on the fifth candle and push the price to new highs.
If you're familiar with western charting, you'll notice that the Bullish Flag and Rising Three Method are nearly synonymous.
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Falling Three Method
The Falling Three Method is a bearish trend continuation pattern that indicates that the market will continue to trend lower. Here's how you can spot it:
A large bearish candle is the first candle. The range and body of the second, third, and fourth candles are smaller. The fifth candle has a large body and closes below the first candle's lows.
Here's what the Falling Three Method entails...
The sellers have the upper hand on the first candle, as they closed the session sharply lower. Sellers took profits on the second, third, and fourth candles, resulting in a slight advance.
However, it is not a strong rally because new short sellers are entering at these prices. The sellers reclaim control on the fifth candle and drive the price to new lows.
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Bullish Harami
Here's how it works: The Bullish Harami, according to most trading websites and books, occurs after a price decline. But I can't agree with you. This is one of those situations where common sense is required to filter out the nonsense.
Consider the following scenario: The prices of a few hundred candlesticks are used to create a downtrend.
Do you believe it will reverse as a result of the formation of a Bullish Harami?
Unlikely.
The Bullish Harami, on the other hand, is best used as a continuation pattern in an uptrend. It indicates that buyers are "taking a break," and the price will likely rise.
Now let's move on... A Bullish Harami can be identified in the following ways: The first candle is larger and bullish than the second.
The second candle is small in size and has a limited range (it can be bullish or bearish) And here's what it means to be a Bullish Harami...
As the first candle closes bullishly, it reveals strong buying pressure. The second candle depicts indecision, as the buying and selling pressures are nearly identical (likely because of traders taking profits and new traders entering long positions)
Note: The Harami can be used as an Inside Bar. They have the same meaning and can be used interchangeably.
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Bearish Harami
In a downtrend, a bearish Harami works best as a continuation pattern. It indicates that the sellers are "taking a break," and the price will most likely fall.
A Bearish Harami can be identified in the following ways:The first candle is larger than the second and bearish.
The second candle is small in size and has a limited range (it can be bullish or bearish)
Here's what a Bearish Harami entails...
As the first candle closes bearishly, it reveals strong selling pressure.
The second candle depicts indecision, as the buying and selling pressures are nearly identical (likely because of traders taking profits and new traders entering short positions)
Let's get this party started...
How to find trend continuation setups with a high probability of success…
You now know what continuation candlestick patterns are and how they appear.
Now I'll show you how to use these patterns to spot high-probability trading setups.
Here's how to go about it...
Wait for the market to break out of Resistance if it's in a range. Wait for the market to form a continuation candlestick pattern if it breaks out of Resistance (like Rising Three Method or Bullish Harami)
Go long on the break of the highs if the market forms a continuation candlestick pattern. For short setups, the reverse is true.
You're probably thinking to yourself, "What am I supposed to do now?
There are so many different candlestick patterns to choose from." How am I going to remember them all? ”
You don't have to, though.
Because if you grasp the next two concepts, you'll be able to read any candlestick pattern like a pro (think of it like a candlestick pattern cheat sheet).
