READ CANDLESTICKS LIKE A BOOK

By Sunny Jain
CANDLESTICK PATTERNS

DOJI

A doji candlestick is formed when the open is equal to or very near to the closing price. It can be a green,
red, or no color candle. The color does not have much significance. Why this candle is one of the most
important candles is due its definition. This candle is simply defined as an indecision, or no direction
candle. When the price is trending up and a doji candle forms, price action is trying to tell us that the
bulls are losing their steam and not sure whether they want to continue taking price up. This does not
imply bearishness. All it is saying is that price may rest there for some time till there is further clarity of
more bullishness.

The same goes for a doji candle being formed in a downtrend. A doji can be a reversal candle or
continuation candle. It can either pause and go or pause and reverse.

It is risky and unwise to use these candles on a standalone basis. Always look for some confirmation with
the formation of a doji. Look for these candles near support and resistance areas, or in alignment with
some moving averages.

We will go into much more detail in the seminar/webinar. I will show you exactly where to look for
these candles and what an impact they can have in particular places.

Please understand and memorize the definition of this candle as it holds a lot of importance. This candle
alone can change your trading forever.
ENGULFING CANDLES

Bullish Engulfing

A bullish engulfing candle is one which completely overlaps the preceding candle and one which gives a
strong bullish closing. When a candle like this is formed it means that the bulls are trying to take control
and may take the price higher. Another way to look at this candle is that a lot of buying was done in that
one single candle (it can be any timeframe). We need to understand that only buyers were there from
the low to the close of this candle. This strongly indicates that bulls have attempted to enter and for that
one candle they have succeeded. It would be a bad idea to short at this point.

Again, we should not take a long position based on this standalone candle. We need further
confirmation whether the bulls are really in or was it just a fake spike to scare off the bears.

If the stock is in an uptrend and we see price retracing and this candle forms, it can be a good indication
of price continuing its up move. We can also look for this candle around moving averages and good
support areas.
Bearish Engulfing

A bearish engulfing candle is the exact opposite of a bullish engulfing candle. This candle implies bears
trying to take control and take price lower.

A bullish or bearish engulfing candle can be used as continuation or reversal signal. If a bearish engulfing
is formed in an uptrend, this can be an indication of a reversal. And when a bullish engulfing candle is
formed in a downtrend, we can consider this as bulls trying to gain control from here. These candles
should just be taken as hints and an alert.

In the seminar/webinar we will discuss how and where to look for this formation. It can have a huge
impact depending on where it forms.
HAMMER/PIN BAR

A hammer or what I like to call it, pin bar, is one of my favorite and one of the most important
candlesticks to know.

It can be formed in two ways: either a normal hammer or an inverse one.

If price is trending upwards, and we see a hammer candle, there is a good chance price may reverse
from there. It is even a stronger sign if an inverse candle is formed in this scenario. Again, the color of
the candles does not matter. It can be a bullish or bearish candle. Depending on the timeframe, you may
see multiple hammers being formed and this makes the case for a reversal even stronger.

In an uptrend what a hammer is trying to tell you is that the bears came in hard and tried to push price
lower but the bulls did not allow them to. You may think this is a bullish sign and yes you are not wrong.
But, what we also need to keep in mind is that bears are attempting to pause price or reverse it. And so
usually if price breaks the low of the hammer it can be a good indication that bulls have lost and the
bears may take control from here.

Now, in an uptrend, if an inverse hammer is formed, this is a good sign of a reversal coming. This candle
clearly signifies that bulls tried pushing up but the bears hit hard and immediately brought the price
down and closed near to the open.
In a downtrend, a hammer indicates that bears tried pushing lower but bulls came in with strong force
and stopped the bears for the moment. Agreed that bulls came in with good force but one candle is not
enough to completely change the direction of the overall trend. Usually for reversal, we either need
multiple hammers being formed or a hammer at a significant area i.e. support and resistance zones.

If an inverse hammer is formed in a downtrend, it usually means that bulls tried pushing price up but
couldn’t sustain it. If price breaks the low of this candle it could indicate a continuation of the trend. This
can also be a reversal candle so we will look for further hints to see the price reverse.

When such candles are formed, we need to be alerted. Start keeping a watch and look for
confirmations. Nothing is guaranteed in trading but with these candles we can get good risk to reward
trades which is what matters for success in trading in the long run.

INSIDE CANDLES

You can call it what you may but to me inside candles are formed when the high and the low is within
the preceding candle or candles. I wouldn’t consider these to be the most significant candles, but they
play a very important role in understanding what price is trying to tell us.

If we see an inside candle, it usually means that price is taking a breather and that some accumulation is
going on. In an uptrend, an inside candle will mean that a battle between the bulls and the bears is going
on and neither one is allowing price to move in any particular direction. Inside candles give the best
trading opportunities as you can buy above the high of the outside candle (the preceding candle of the
inside candle). A breakout here will usually take price higher. These set-ups are like contraction and
expansion. The inside candle being formed is the contraction and the breakout is the expansion, so try
taking these types of trades for good moves.

The same applies for an inside candle in a downtrend.

Another name for this type of pattern is known as Harami. I prefer inside candle.

SUMMARY

These, according to me, are the most important candlestick patterns we need to know and which have
the biggest impact on price reversal and continuation. All other patterns can be avoided. With time and
practice you will understand that these are the only ones you need to know.

What is trying to be explained above is that price action is nothing but a tug of war between the bulls
and the bears. In an uptrend, bulls are winning. In a downtrend, bears are winning. And a sideways,
nobody is winning. We need to look for these patterns when one side is winning, never in a sideways
market.

Look for any stock trending and try to identify these patterns. You will notice that these occur again and
again. Our job is to learn how to read these patterns and understand what it is trying to tell us. There
are times it will fool us and that is part of trading, but there are only so many times that will happen.

If we use certain parameters and criteria for identifying these patterns at the right location we can
improve our odds of success multifold. Its all about timing and placement of these candles which
matters most.

This is just a slice of the pie. The most important areas we will cover in the seminar/webinar.
TICK CHARTS STRATEGY

Tick charts are nothing but the zero timeframe where every single price change is marked. It comes in
the form of a line chart. Tick charts allow us to see exactly what price is doing without hiding any detail
whatsoever. Usually traders prefer higher timeframes to avoid all the noise being created. But tick
charts show us everything and if you know how to trade these you think there is nothing cleaner and
more peaceful than these charts.

1. Stock Selection: we will just be focusing on the top gainers/losers. I would advise not to trade
this strategy before 10:00 am as you may get many false signals and price may be quite volatile.
You can select stocks from the Nifty 50 list. From 10:00 am onwards, keep filtering the top
gainers/losers list. I personally like watching only top gainers. Whether it’s a down market or up,
there will always be stocks moving upwards, so I stick to only those.

Watch the top 5 stocks and memorize them or note them down. Either you will get an entry in
these 5 or what I like to do best is wait for a stock to eventually replace the top 5 you have
noted down. That may happen in 30 minutes or 1 hour or may not happen at all. But if it does
happen, and a new stock is added to the top 5 list, watch that stock. Yes we need to be in front
of the screen and be ready when this happens.
2. Timeframe: as discussed this is a tick chart and the timeframe is 0.
3. Entry: this will be clearly explained in the seminar/webinar but I will try my best to explain it
here. Simply put: our entry will be on the breakouts of previous peaks. Suppose its 10 am and
we see price moving up in one direction. Look for a pullback and our entry will be above the high
of the pullback.

Now there are certain criteria and kind of formations we will look for before entering which will
be explained in the session. Best is to look for stocks making higher highs intraday and to look
for entries in these stocks. The reason is that they are gaining momentum and we want to catch
that momentum and ride it all the way up.

With the help of pivot points and moving averages, we will make our entries and exits.
4. Target: our target will differ as per your appetite. Considering these are momentum stocks we
don’t know how far they will travel. I have stayed in positions where the stock went up around
10% after I entered. If trading in cash, I would highly recommend to trail your position and book
profits at different levels. Else, you can book as per your comfort. We can also use moving
averages to help with booking profits.

Use the 20 EMA, 50 EMA, 200 EMA and 500 EMA. We will use these moving averages to help us
trail our positions for maximum gains. We can also use these to enter again and I will show that
in the live session.

5. Stoploss: our immediate stop will be the previous higher low. We want to keep our stops as
small as possible. Also see if price is breaking the 50 EMA and going below it, we can look to exit
 there. That is a clear indication that momentum has slowed down and may not continue
upwards.

The chart may not be so clear to see here so I have sent it separately in the charts folder. This is a chart
of Powergrid and it popped up as gainer in the morning and again around 11:30am. I got an entry
around 12pm when it broke the previous pullback high, as mentioned in the chart. Now one thing we
need to keep in mind is that don’t be in a hurry to enter a trade. Understand that the price moved up
quickly from the lows to the pullback high so it would not be a good idea to put a buy above the pullback
high immediately. Let price rest or pullback again and then look to enter. In this case, price broke the
previous pullback high, immediately pulled back and continued going up from there. The pullback high
was around 208.75, but our entry was at 209. Our stop goes below the previous higher low, meaning at
208.20. With a 70 paise risk, our potential gain was 2.85 rupees. That’s a 4:1 risk to reward.

If trading in cash I would suggest to book profits along the way. You can also keep a 2:1 or 3:1 risk to
reward and book. Or simply wait till price goes below the 50 EMA.

Lets get to the second entry point. Usually when a stock moves up in this fashion it will pullback again
and make another attempt for a new high. And that is exactly what happened in this case. Price retraced
below the pivot level and even went below the 500 EMA. But, after that, price again came above the
pivot level and above all moving averages. So we again look for a pullback and try entering above the
pullback high. I would like to mention that these types of trades can be risky ones as price has already
moved up so much. Also, look to book profits quickly here, in this case maybe one point or so.

In a day, if we get 1-2 trades like this everyday we will make more than enough money. Having patience
as well as the right focus to consistently keeping a watch on the gainers will allow you to take such
profitable trades every day. The lot size of powergrid is Rs.4000. In this case, we easily make more than
2 points and easily gives close Rs.10000 in profits.

You can check the chart folder for more examples.

SUMMARY

This is a very simple strategy if followed religiously. You might be wondering why is our entry only above
a pullback high and not before. Well the reason is because when price pull back from a particular level
that means that level had some significance. It means that a lot of bears were waiting at that level and
the bulls couldn’t sustain anymore. Now if price pulls back and tries to cross that level again, it will
mostly do it in force. It will mean that the bulls have strengthened their army and are ready to take out
the bears sitting at that level. So when this happens, price usually flies from there and will give a big
move within minutes.

Again try and understand what price is doing and what it is trying to say. If price is constantly moving
sideways but hovering above the 20, 50, or 500 EMA, means that price does not want to go lower and
may move up from there.

Book profits at higher levels and don’t be too greedy. If trading in cash, book 75% of your position
quickly and trail 25% till the highest level by keeping your stoploss at your buy level. 25% may look small
but those small extra gains will add up eventually.
THE PULLBACK STRATEGY

In most other strategies we tend to buy above the breakout level. In this strategy we will attempt to buy
much before the anticipated breakout. We will clearly look for excellent risk to reward entries by buying
on pull backs instead of breakouts. This strategy will require you to understand price action thoroughly
as only once you understand this will you be able to decide whether to enter or not. It might be a little
difficult to explain this in writing but will definitely clear it in the seminar/webinar.

1. Stock Selection: we will take stocks only from the top gainers/losers list. But in this strategy,
for it to work well, we will select stocks from the index gainers/losers. After 10am go to
nseindia.com and under the Live Market dropdown select Index. Once that page opens you
will see Sectoral Indices. From that select the most gaining index and the most losing index.
From the gaining one select the top 3 gainers and from the losing index select the top 3
losers. Keep a constant watch on these. We need to take both a buy and sell position to
hedge our bets.
2. Timeframe: we will use the 1 minute timeframe and candlestick charts.
3. Entry: it is best to take a long and short position for this strategy to work best. Sometimes
both will end up giving profits. This is simply done to hedge our bets. If Nifty is in positive
territory there is not guarantee it will sustain or go further up. It is not necessary to take a
long and a short but it is better advised to.

Our entry will happen only after 10am. We can get possible entries before but can be a bit
risky. Once the market settles a bit, we can look for good entries. For a buy position, a stock
needs to have gone up, retrace and hover around the 20, 50 or 200 EMA’s and start to move
up from there. It will be easier to see this in charts than to explain it in writing.

I would highly advise to trade this strategy in cash only as we can the benefit of price going a
bit lower. Will explain in the charts and in the live session.

4. Target: we can book profit as per comfort or keep trailing for bigger gains.
5. Stoploss: please see the chart example
This is a chart of powergrid, the same as earlier. This was a top gainer and the overall power sector was
up today so selected this for trading. See how there was a spike in the morning till 9:40 and followed by
a big pullback till 10:30am. After the pullback price started to consolidate and eventually went above the
moving averages. This should grab our attention now. Usually when a big spike like that happens price
tends to go back up after a pullback. In this case, the pullback lasted longer.

See at point 1 when price was above the moving averages, it pulled back a little and formed a big green
candle. Yes this is a big bullish engulfing candle and indicates that bulls want to regain control. In this
case our buy should be above the high of the pullback, where the green line is. Suppose you are trading
1000 quantity, buy only 500 here. Wait for some confirmation to go all in.

Now see at point 2 how price is hovering above the 20 EMA and sloping upwards. If you also notice, a
flag patter is being formed. Your other order should go above point 2.

See how at point 3 theres a big green candle spike and immediately price pulls back. What you bought at
point 1 can be booked here or held for further gains. See how price is still trading above the 20 EMA and
not going below it. You can add small quantity here as well.

Suppose you book out completely on the big spike towards point 4. Point 4 sees a nice pullback, breaks
below the 9 EMA and stops at the 20. 2-3 candles find support there and price again starts to move up.
You can again enter small quantity here with stop below point 4 low.

If you see at point 5, a big red candle tries pushing price lower but again bounces from the 20 EMA and
starts moving up. You can add small quantity here as well.
Your stoploss for point 1 can be the low of the bullish engulfing candle. Stop for point 2 can be the green
line of point 1 or if price breaks the 20 EMA. Stop for point 3 can be the low of the big red candle. Just
see how our stops are so small in comparison to the targets.

Suppose from point 3 the price doesn’t move up and starts coming down. I would look to average if
price comes close to the 50 EMA and keep my stop below the average. Many times you may see this
happen so don’t panic until it breaks the 50 EMA as well.

I will show you more examples in other charts so you get an idea as to what a magical system this is.
Best part is, even if your stop gets hit, it will only be of half the quantity traded and a very miniscule
stop.
FLAG STRATEGY

Flag patterns are one of the easiest and most profitable ways to trade stocks. We can trade them
intraday or on the daily charts. As any other pattern, it is most effective on higher time frames such as
the daily. But for small and quick gains, we can trade them intraday.

When we talk about intraday, we will only be concerned with the 1 and 5 minute charts. These two
timeframes give the best results and ensure our losses remain small if in case the trade goes against us.
They are also easy to identify on these two timeframes. If you wish to try it on other timeframes feel
free to but I would not recommend doing so.

1) Stock Selection: for intraday, we need stocks which are moving. We need stocks with good
momentum, volatility and liquidity. Hence, we will only be concerned with the top
gainers/losers. You can select stocks from Nifty 50, Nifty 200, Nifty 500 or any other group you
wish to. I personally go with Nifty 200 as those stocks are liquid enough to enter without having
much slippage.

If selecting from Nifty 200, we need to be watching at least the top 5 from list, in case of gainers.
Our entries will need to be quick, if trading the 1 minute, so watch these 5 stocks like a hawk.
During the webinar, I will explain how to select the best stocks for daytrading. The same goes for
the top losers, select the bottom 5 stocks.

2) Timeframe: as mentioned above, we will be trading on the 1 and 5 minute charts. We will trade
these two timeframes in a slightly different manner, but overall the factors will remain the
same. On the 1 minute timeframe we may get an entry as early as 9:25. But on the 5 minute, we
will have to wait a bit longer. We will also go over how to trade this pattern on the daily charts.
3) Entry: our entry will be on the breakout of the flag pattern. We will never look to enter before.
The entry can either be while the stock is breaking out or above a certain level. Will explain with
examples below.
Entry #1: Enter while price is breaking out (1 minute chart). See example below:
Entry #2: Enter above a certain level (1 minute). See example below:
On a 1 minute timeframe, we should look for at least 5-6 candles (pullback or consolidation) for a flag
formation. The longer the pullback or consolidation the stronger the breakout will be. Now on the 5
minute we need at least 2-3 candles (pullback or consolidation). If you go to see, 2 candles on the 5
minute is equivalent to 10 candles on the 1 minute.

Another very important thing we need to consider is that this pattern is best to be traded in the opening
hour of the day. Markets are usually split into 3 parts: the opening, the afternoon, and the closing. The
opening hour would range from 9:15 to 11 am. The afternoon would range from 11am to 1:30 pm. And
the closing would range from 1:30 to 3:30 pm. The markets are always traded and identified in these
three parts of the day. This pattern can be trade in any slot. But it is most effective during the morning
time because that is when the market is most active. You will generally see stocks rising in the morning
part of the day and then continue its run in the closing slot. Markets or stocks usually stagnate or
consolidate during the afternoon time and hence is not a good time to be trading then.

So look to only enter in the morning time from 9:15 to 11am for this strategy. And if at all, during the
latter half of the day, when stocks start moving again.

Some simple factors to keep in mind are that the stock should be above the 9 or 20 EMAS for entries. If
at the they are trading below and this pattern forms, don’t look to enter as it may be a false signal. If the
market is in green, then only look to take buy trades on gainers. If the market is in red, then only look to
take sell trades on losers. This will increase your odds of success. If the market is flat, go for either side.
You can also trade both sides if you can handle it, else just stick to one.

Below is an example of shorting a flag pattern (5 minute):

4) Exit: profit booking can be taken as per the flag pattern rule, risk to reward ratio, or trailing
base. Flag pattern rule means our target will be defined based on the length of the pole. We
calculate the length of the pole and add that length to the breakout point and that becomes our
target. In the case of a short, we would subtract the length of the pole from the breakout point
and that would be our target. For intraday I usually avoid this way as our targets can be quite big
and not feasible for intraday.

We can also book profits as per our risk to reward. Lets say our stoploss for the stock is 2 points,
and if we keep a risk to reward of 1:1 then our target will also be 2 points. If trading in futures I
would advise to keep a risk to reward of 1:1. But in most cases what happens is when a stock
breaks out, it gives a big move within seconds. So sometimes keeping fixed targets may incur in
us missing out easy and quick profits.

The way I trade is to trail my position. If suppose we trade in cash with 100 shares, then I will
book half or 50 shares at 0.50% and keep the remaining 50 shares to sell at cost so I don’t lose
anything. And then as price continues going in our favored direction, keep booking profits.
When a breakout happens, we need to believe that the stock is going to hit circuit. Thinking like
this will enable us to stay in the game for a longer time.
 Another way to book profits is simply to have a monetary target in mind that I am happy with
Rs.1000. This is a very good way of trading as it eliminates the fear and greed factor. Having the
profit and loss amount fixed can avoid over-trading.

There are many methods one can select for profit booking but it is up to you to see which one
suits you best. I personally prefer trailing my position as nobody knows how far a stock can go. If
trading in futures (1 lot) I suggest to book profits early.

5) Stoploss: as per a flag pattern, stoploss usually goes below the flag, or above in the case of a
short. This may result in a big stop which may cause a big loss. Hence, what you can also do is to
keep below the low of the breakout candle, or high of the candle for a short. We need to ensure
our stops are small in case we need to enter again.

If it’s a proper flag pattern, it will give a rapid move upon breakout in which case you can keep
your stop above or below the breakout candle.

Be very selective in trading this pattern. Don’t try to force this pattern upon yourself by connecting any
candle. Look for proper formations and ones which look the best. You will start to recognize this over
time as you trade in it continuously.