CandleStick

Technical Analysis

Theory & Patterns

Refer following sites for more candlestick patters

http://www.candlesticker.com/
http://www.candlestickfx.com/

Select links from top of these pages

Note
Only few important Bullish / Bearish patterns are covered in this document. Refer above
links for more patterns

Candlestick Technical Analysis Page: 1 of 15

What is Candlestick Trading?

The best way to explain is by using a picture:

Candlesticks can be used for any time frame, whether it be one minute, 30-minutes, one
hour, day, week or month - whatever you want! Candlesticks are used to describe the
price action during the given time frame.

Candlesticks are formed using the open, high, low, and close of the chosen time period.

 If the close is above the open, then a hollow candlestick (usually displayed as
white) is drawn.
 If the close is below the open, then a filled candlestick (usually displayed as
black) is drawn.
 The hollow or filled section of the candlestick is called the "real body" or body.
 The thin lines poking above and below the body display the high/low range and
are called shadows.
 The top of the upper shadow is the "high".
 The bottom of the lower shadow is the "low".

Candlestick Technical Analysis Page: 2 of 15

Just like humans, candlesticks have different body sizes. Long bodies indicate strong
buying or selling. The longer the body is, the more intense the buying or selling pressure.
This means that either buyers or sellers were stronger and took control. Short bodies
imply very little buying or selling activity.

Long white candlesticks show strong buying pressure. The longer the white candlestick,
the further the close is above the open. This indicates that prices increased considerably
from open to close and buyers were aggressive.

Long black (filled) candlesticks show strong selling pressure. The longer the black
candlestick, the further the close is below the open. This indicates that prices fell a great
deal from the open and sellers were aggressive.

The upper and lower shadows on candlesticks provide important clues about the trading
session. Upper shadows signify the session high. Lower shadows signify the session low.
Candlesticks with long shadows show that trading action occurred well past the open and
close. Candlesticks with short shadows indicate that most of the trading action occurred
near the open and close.

Candlestick Technical Analysis Page: 3 of 15

Spinning Tops

Candlesticks with a long upper shadow, long lower shadow and small real bodies are
called spinning tops. The color of the real body is not very important. The pattern
indicates the indecision between the buyers and sellers.

The small real body (whether hollow or filled) shows little movement from open to close,
and the shadows indicate that both buyers and sellers were fighting but nobody could
gain the upper hand. Even though the session opened and closed with little change, prices
moved significantly higher and lower in the meantime. Neither buyers nor sellers could
gain the upper hand, and the result was a standoff.

If a spinning top forms during an uptrend, this usually means there are not many buyers
left and a possible reversal in direction could occur. If a spinning top forms during a
downtrend, this usually means there are not many sellers left and a possible reversal in
direction could occur.

Marubozu

Marubozu means there are no shadows from the bodies. Depending on whether the
candlestick's body is filled or hollow, the high and low are the same as its open or close.

A White Marubozu contains a long white body with no shadows. The open price equals
the low price and the close price equals the high price. This is a very bullish candle as it
shows that buyers were in control the entire session. It usually becomes the first part of a
bullish continuation or a bullish reversal pattern.

A Black Marubozu contains a long black body with no shadows. The open equals the
high and the close equals the low. This is a very bearish candle as it shows that sellers
controlled the price action the entire session. It usually implies bearish continuation or
bearish reversal.

Candlestick Technical Analysis Page: 4 of 15

Doji

Doji candlesticks have the same open and close price or at least their bodies are
extremely short. A doji should have a very small body that appears as a thin line. Doji
candles suggest indecision or a struggle for positioning between buyers and sellers. Prices
move above and below the open price during the session, but close at or very near the
open price. Neither buyers nor sellers were able to gain control and the result was
essentially a draw.

There are four special types of Doji candlesticks. The length of the upper and lower
shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus
sign.

When a Doji forms on your chart, pay special attention to the preceding candlesticks. If a
Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus),
the Doji signals that the buyers are becoming exhausted and weakening. Even after the
doji forms, further downside is required for bearish confirmation.

If a Doji forms after a series of candlesticks with long filled bodies (like Black
Marubozus), the Doji signals that sellers are becoming exhausted and weak. Bullish
confirmation could come from a gap up, long white candlestick.

Candlestick Technical Analysis Page: 5 of 15

Bearish Candlestick Reversal Patterns

Bearish Dark Cloud Cover Pattern

Bearish Dark Cloud Cover Pattern is a two-candlestick pattern signaling a top reversal
after an uptrend. We see a strong white real body in the first day. The second day opens
strongly above the previous day high (it is above the top of the upper shadow). The
second black candlestick closes within and below the midpoint of the previous white
body.

If the black candlestick does not close below the halfway point of the white candlestick
then it is better to wait for confirmation following the dark cloud cover and even if it
does, a confirmation may still be necessary. This confirmation may be in the form of a
black candlestick, a large gap down or a lower close on the next trading day.

Example:-

Candlestick Technical Analysis Page: 6 of 15

Bearish Engulfing

Bearish Engulfing Pattern is a large black real body, which engulfs a small white real
body in an uptrend (it need not engulf the shadows). The Bearish Engulfing Pattern is an
important top reversal signal.

Relative sizes of the first and second days are important. If the first day of the Bearish
Engulfing Pattern is a very small real body (it may even be almost a doji or is a doji) but
the second day has a very long real body, this shows an increase in bearish force.

A confirmation in the third day is required to be sure that the uptrend has reversed. The
confirmation may be in the form of a black candlestick, a large gap down or a lower close
on the third day.

Example:-

Candlestick Technical Analysis Page: 7 of 15

Bearish Evening Star

This is a major top reversal pattern formed by three candlesticks. The first candlestick is a
long white body. The second one is a small real body that may be white or black. It is
marked with a gap in higher direction thus forming a star. Finally we see the black
candlestick with a closing price well within first session’s white real body. This pattern
clearly shows that the market now turned bearish.

An ideal Bearish Evening Star Pattern has a gap before and after the middle real body.
The second gap is rare, but lack of it does not take away from the power of this
formation.

The stars may be more than one, two or even three. The color of the star and its gaps are
not important. The reliability of this pattern is very high, but still a confirmation in the
form of a black candlestick with a lower close or a gap-down is suggested.

Example:-

Candlestick Technical Analysis Page: 8 of 15

Bearish Harami & Three Inside Down

Bearish Harami Pattern is a two-candlestick pattern composed of a small black real body
contained within a prior relatively long white real body. “Harami” is an old Japanese
word for “pregnant”. The long white candlestick is “the mother” and the small
candlestick is “the baby”. This shows the bulls upward drive has weakened and now a
trend reversal is possible.

The Bearish Harami Pattern does not necessarily mean a market reversal. It rather
predicts that the market may not continue with its previous uptrend. A confirmation of the
reversal on the third day is required to be sure that the uptrend has reversed. This
confirmation may be in the form of a black candlestick, a large gap down or a lower close
on the next trading day (the third day).

When we consider these 3 candles (i.e. 3 days), the pattern is also called as "Three Inside
Down" as shown below;

The Bearish Three Inside Down pattern is another name for the Confirmed Bearish
Harami Pattern. The third day confirms the bearish trend reversal.

Candlestick Technical Analysis Page: 9 of 15

Bearish Kicking

A White Marubozu is followed by a sharply lower gap when it opens during the second
day. The second day opening is even below the prior session’s opening (forming a Black
Marubozu). Such a pattern is called a Bearish Kicking Pattern.

Bearish Kicking Pattern sends a strong signal suggesting that the market is now heading
downward. The prices on the second day never enter into the previous day's range.

Both of the candlesticks do not have shadows (or very small shadows if any). The
Bearish Kicking Pattern is highly reliable but still a confirmation may be necessary and
this confirmation may be in the form of a black candlestick, a large gap down or a lower
close on the next trading day.

Bearish Hanging Man or Hammer

The Bearish Hanging Man Pattern is a single candlestick and a reversal pattern. It is very
similar to the Bearish Dragonfly Doji Pattern. In case of the Bearish Dragonfly Doji
Pattern, the opening and closing prices are identical whereas the Bearish Hanging Man
Pattern has a small real body.

The hanging man signals a market top or a resistance level. Hanging Man Pattern signals
that selling pressure is starting to increase. Ideally, the lower shadow of the Bearish
Hanging Man Pattern must be two or three times the height of the real body.

The Bearish Dragonfly Doji Pattern is a more bearish signal than the Bearish Hanging
Man Pattern and it is also more reliable than the Bearish Hanging Man Pattern. If a
Bearish Hanging Man Pattern is characterized by a black real body, it shows that the
Candlestick Technical Analysis Page: 10 of 15
close was not able to get back to the opening price level, which has potentially bearish
implications. We need a confirmation of the reversal on the next day for a more definite
proof about the reversal of the uptrend. This confirmation may be in the form of a black
candlestick, a large gap down or a lower close on the next trading day.

Shooting Star or Inverted Hammer

Shooting Star pattern is a top reversal pattern which is highly reliable for reversing an
uptrend to a downtrend. This clearly indicated that buyers have no strength and sellers are
pushing the price down forming a Inverted Hammer indicating bear is now in control.
The inverted hammer candlestick shadow length should be more than 2 times the length
of the full body.

The Shooting Star pattern is highly reliable but requires confirmation. Observe the next
candlestick should also be a bearish candlestick which closes below previous inverted
hammer candlestick.

Candlestick Technical Analysis Page: 11 of 15

Bullish Candlestick Reversal Patterns

Morning Star

This is a three-candlestick formation that signals a major bottom. We see a long black
candlestick in the first day. Then we see a small body on the second day gapping in the
direction of the previous downtrend. Finally we see a white candlestick on the third day.
Third candlestick shows that the market turned bullish now.

An ideal Bullish Morning Star Pattern preferably has a gap before and after the middle
candlestick. The second gap is rare, but lack of it does not take away from the power of
this formation.

The stars may be more than one, two or even three. The color of the star and its gaps are
not important. The reliability of this pattern is very high, but still a confirmation in the
form of a white candlestick with a higher close or a gap-up is suggested.

Example:-

Candlestick Technical Analysis Page: 12 of 15

Bullish Engulfing

Bullish Engulfing Pattern is a pattern characterized by a large white real body engulfing a
preceding small black real body, which appears during a downtrend. The white body does
not necessarily engulf the shadows of the black body but totally engulfs the body itself.
The Bullish Engulfing Pattern is an important bottom reversal signal.

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.

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 black bodies preceding the long
white body). The reversal of downtrend needs further confirmation on the third day. This
confirmation may be in the form of a white candlestick, a large gap up or a higher close
on the third day.

The Bullish Three Outside Up Pattern is simply another name for the Confirmed Bullish
Engulfing Pattern. The third day is confirmation of the bullish trend reversal.

Candlestick Technical Analysis Page: 13 of 15

Bullish Harami

Bullish Harami Pattern is characterized by a small white real body contained within a
prior relatively long black real body. “Harami” is an old Japanese word for “pregnant”.
The long black candlestick is “the mother” and the small candlestick is “the baby”.

While the market is characterized by downtrend and bearish mood; there is heavy selling
reflected by a long, black real body however it is followed by a small white body in the
next day. This may signal a trend reversal since the second day’s small real body shows
that the bearish power is diminishing.

The second candlestick has a minute real body relative to the prior candlestick.
Furthermore this small body is completely inside the larger one. The Bullish Harami
Pattern does not necessarily imply that a rally will follow. We may need a third day
confirmation to be sure that the downtrend has really reversed. This confirmation of the
trend reversal may be signaled by a white candlestick, a large gap up or by a higher close
on the third day.

The Bullish Three Inside Up Pattern is another name for the Confirmed Bullish Harami
Pattern. The third day is confirmation of the bullish trend reversal.

Candlestick Technical Analysis Page: 14 of 15

Bullish Piercing Line

Bullish Piercing Line Pattern is a bottom reversal pattern. A long black candlestick is
followed by a gap lower during the next day while the market is in downtrend. The day
ends up as a strong white candlestick, which closes more than halfway into the prior
black candlestick’s real body.

An ideal piercing pattern will have a real white body that pushes more than half way into
the prior session’s black real body. A confirmation of the trend reversal by a white
candlestick, a large gap up or by a higher close on the next trading day is suggested.

Bullish Kicking Pattern

The Bullish Kicking Pattern is a White Marubozu following a Black Marubozu. After the
Black Marubozu, market gaps sharply higher on the opening and it opens with a gap
above the prior session’s opening thus forming a White Marubozu.

This Bullish Kicking Pattern is a strong sign showing that the market is headed upward.
Both of the patterns do not have any shadows or they have only very small shadows (they
both are Marubozu). The Bullish Kicking Pattern is highly reliable, but still, a
confirmation of the reversal on the third day should be required. This confirmation may
be in the form of a white candlestick, a large gap up or a higher close on the third day.

End of document.

Candlestick Technical Analysis Page: 15 of 15