Very Important Notes

 The patterns do not have to be perfectly formed to provide a valid signal. Always view candlestick lines
and patterns in the context of the other technical evidence.
 Allow more flexibility with candlestick indicators with equities. For those who monitor the equity
markets, as you experiment with candlestick techniques, you should discover which patterns may have
to be modified.
Hammer and Hanging-Man
The hammer and hanging man can be recognized by three criteria:
1. The real body is at the upper end of the trading range. The colour of the real body is not important.
2. A long lower shadow should be twice the height of the real body
3. It should have no, or a very short, upper shadow.
Note: The hanging man and hammer candlesticks look identical. The hammer/hanging man shape shows
strong selling during the period, but by the close the buyers have regained control. The only difference is
context.

 The hammer is a bottoming pattern that forms after a price decline and indicates of potentially higher
prices to come.
o Hammers are most effective when they are preceded by at least three or more declining
candles.
o Confirmation the price could start heading higher occurs if the candle following the hammer
closes above the closing price of the hammer (which shows strong buying).
o Candlestick traders use it as a signal to enter long positions or exit short positions during or
after the confirmation candle. (For those taking new long positions, a stop loss can be placed
below the low of the hammer's shadow).
o On the other hand, if the price closes below the low price of the hammer candle, that signals
another potential price decline.
 The hanging man occurs after a price advance and warns of potentially lower prices to come.
o The hanging man is most effective when it is preceded by at least three or more increasing
candles.
o Confirmation the price could start declining occurs if the candle following the hanging man
closes lower the closing price of the hanging man (which shows strong selling).
o Candlestick traders use it as a signal to exit long positions or enter short positions. (For those
taking new short positions, a stop loss can be placed above the high of the hanging man's
shadow).
o On the other hand, if the price closes above the high price of the hanging man candle, that
signals another potential price advance.
Engulfing Pattern
1. The market has to be in a clearly definable uptrend or downtrend, even if the trend is short term.
2. Two candlesticks comprise the engulfing pattern. The second real body must engulf the prior real body
(it need not engulf the shadows).
3. The second real body of the engulfing pattern should be the opposite colour of the first real body. (The
exception to this rule is if the first real body of the engulfing pattern is so small it is almost a doji (or is a
doji). Thus, after an extended downtrend, a tiny white real body engulfed by a very large white real
body could be a bottom reversal. In an uptrend, a minute black real body enveloped by a very large
black real body could be a bearish reversal pattern).

Some factors that would increase the likelihood that an engulfing pattern would be an important reversal
indicator would be:

 If the first day of the engulfing pattern has a very small real body and the second day has a very long
real body.
 If the engulfing pattern appears after a protracted or very fast move.
 If there is heavy volume on the second real body of the engulfing pattern. This could be a blow off.
Dark Cloud Cover
Dark cloud cover is a two candlestick pattern that is a top reversal after a uptrend or, at times, at the top of a
congestion band. The first day of this two candlestick pattern is a strong white real body. The second day's
price opens above the prior session's high. However, by the end of the second day's session, the market
closes near the low of the day and well within the prior day's white body.
The following is a list of some factors that intensify the importance of dark-cloud covers:

 The greater the degree of penetration of the black real body's close into the prior white real body, the
greater the chance for a top.
 If the second body (that is, the black body) of the dark-cloud cover opens above a major resistance
level and then fails, it would prove the bulls were unable to take control of the market.
 If, on the opening of the second day there is very heavy volume, a buying blow off could have
occurred.

Piercing Pattern

 This is the reversal of the Dark Cloud Cover.

 It is similar to on-neck line, in-neck line and thrusting line. The main difference is the extent to the
second candlestick’s penetration into the previous one.

Morning / Evening Star

Some factors that would increase the likelihood that an evening or morning star could be a reversal would
include:

 If there is a gap between the first candlestick's and star's real bodies and then in the star's and third
candlestick's real bodies.
 If the third candlestick closes deeply into the first candlestick's real body.
 If there is light volume on the first candlestick session and heavy volume on the third candlestick
session. This would show a reduction of the force for the prior trend and an increase in the direction
force of the new trend.

Morning / Evening Doji Star

Note: A doji star during an uptrend is often the sign of an impending top. It is important to note that if the
session after the doji star is a white candlestick which gaps higher, the bearish nature of the doji star is
negated. Similarly, if, during a downtrend, a black candlestick gaps under the doji star, the potentially bullish
implications of the doji star is voided. This is why it is important to wait for confirmation in the net session or
two with doji stars.
An abandoned baby is a very rare variation of the morning/evening doji star where the shadows do not touch.

Shooting Star

 It is usually not a major reversal signal as is the evening star.

  An ideal shooting star has a real body which gaps away from the prior real body. However, this gap is
not always necessary. Refer to ‘Very Important Notes.’

Inverted Hammer

 It is important to wait for bullish verification on the session following the inverted hammer. Verification
could be in the form of the next day opening above the inverted hammer's real body. The larger the
gap the stronger the confirmation.

Harami