12+ Candlestick Formations Every Technical Trader Should Know

HOW TO GUIDE
12+ Candlestick
Formations Every
Technical Trader
Should Know
By Brian Cullen
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Table of Contents
Introduction 3
Candlestick Charts 4
1. Doji: How to Identify 5
2. The Inverted Hammer: How to Identify 10
3. Piercing Patter: How to Identify 12
4. The Bullish Hammer: How to Identify 14
5. Morning Star: How to Identify 16
6. The Shooting Star: How to Identify 18
7. The Hanging Man: How to Identify 20
8. Dark Cloud Cover: How to Identify 22
9. Evening Star: How to Identify 24
10. Harami/“Inside Day”: How to Identify 26
29
12. The Kicker: How to Identify 32
Conclusion 35
Disclosures 37
12+ Candlestick Formations Every Technical Trader Should Know | 2

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Introduction
After all the positive feedback for my How-To Guide: 10 Rules For Technical
Futures Trading
Candlesticks. Candlestick formations are taking place all-day, every day, in
If you are a technical trader, you need to have the insight to notice them
and take action. You constantly work on 2 skills:
1. Identifying market set-ups
2. Employing strategies to trade those set-ups
You need to know when there’s action to be taken—and how to take it.
Your job as a trader is 3-fold:
1. Read the charts
2. Recognize the formation taking place
3. Pinpoint your entry and exit points based on what you know and what you
have learned
This guide will help you in 3 ways:

1. You’ll learn my favorite candlestick patterns
2. It will show you how to identify these candlestick formations
3. I will teach you how to trade them
However you choose to use these tools, please note that these are not to be
treated as a holy grail for trading and nothing is ever guaranteed to dictate
upcoming price action.
Candlestick formations are everywhere!

Make them part of your trading arsenal!

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Candlestick Charts
Characteristics of a Candlestick:
• The rectangle body represents the open and close and dictates if it was an
up day (green) or down day (red).
• The 2 “wicks” of the candle (on the top and bottom) represent the intraday
highs and lows of the trading session.
• In electronic trading, typically an up day is shown in green and a down day
is shown in red.
By looking at a Candlestick chart, you can quickly see (just to mention a few):
• Strings of up days and of down days
• Periods of strength and weakness
• How sustained moves are, and
• How we got to where we are
After each formation and explanation of how the formations come to be, there
will be a series of Candlestick Keys where I will give you my personal opinion on
how I choose to attack the markets when these formations occur. Let’s do this!

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1. Doji: How to Identify
• This is a trend reversal signal.
• Opening price & closing price are basically the same.
• Price is unchanged.
• Looks like a cross.
•
• Could be a bullish reversal signal if market is in a downtrend or a bearish
reversal signal if occurs in an uptrend.
There are 4 major types of Dojis.

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1. REGULAR DOJI REVERSAL
reversal
Downtrend
DOJI: shallow trading

range during day -
possible exhaustion
and indecision

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2. LONG-LEGGED DOJI REVERSAL
LONG-LEGGED
to increase the bullish sentiment ***

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3. DRAGONFLY DOJI BULLISH
downtrend
bullish reversal
Open, high AND close

(at or very close to)
being the same.
LONG lower shadow

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4. GRAVESTONE DOJI BEARISH
open, low AND close are all at

our near the same price. LONG
upper shadow
a bounce
bearish reversal
HOW TO TRADE:
I like to wait for the market to make its decision on if it will reverse or not. But
when it does I look to get involved if the reversal candle takes out the previous
day’s high or low (depending on the reversal). My stops would go directly
under or over the wick of the doji.

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2. The Inverted Hammer: How to Identify
BULLISH
The Inverted Hammer (opposite of The Shooting Star) is a formation that
appears at the end of a down trending market.
• It is a BULLISH alert to a possible reversal.
• It forms when the market trades extremely higher during the day but turns
and trades lower ultimately closing near the OPEN and LOW.
•
momentum and sellers take the market back near the open before the
day is over. The extreme intra-day high suggests that the bulls attempted
to run the market higher but bears regained control before the end of the
day.
• Closing positive on the day gives the candle a bit more of a stronger signal.
• What is impressive about this formation is the size of the upper wick (2x
the body) and the early strength that this market had to not only be turned
• The bulls may not have had the strength to close the day higher but this
formation shows that they at least have shown up and are giving the bears
a run.
• It should be noted that this formation is not necessarily a signal to buy
rather a signal that the downtrend may be coming to an end.

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INVERTED HAMMER
downtrend
upper wick
shows that
buyers DID
show up early
in the day
HOW TO TRADE:
I like to look for the next bullish candle AFTER the Inverted Hammer candle to
take out the upper tail (or “shadow” or “wick” as it’s often referred). Once this
tail has been eclipsed, I am comfortable to get involved to the upside.
The stop orders on those trades have to be below the bottom of the Inverted
Hammer candle. If this proves to be too far for your comfort zone as far as risk is
concerned, you can target a 50% level of the tail. OR traders who are comfortable
with option trading can buy a put to use to hedge this position in lieu of a stop order.

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3. Piercing Pattern: How to Identify
BULLISH
• This is the opposite of the Dark Cloud Cover.
• It is a bullish signal that alerts traders to a possible reversal.
• It occurs at the bottom of a bear trend.
• There is a big down day that is followed by a big up day.
• The 2nd day’s close MUST be at or above the previous up day’s

trading range.

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PIERCING PATTERN
closes higher and is

above 50% of previous
day’s losses
1st candle
is bearish
2nd candle
gap opens lower
but rallies
HOW TO TRADE:
I like to look for the very next candle after the 1st 2 candles that formed the
Piercing Pattern to take out candle #1 high. Once this price level has been
penetrated, I look to enter the market at that time. Some traders like to wait for
the market to CLOSE above this candle and enter on the very next open, but I don’t
mind entering that same day. It is up to you and your level of aggressiveness.
The stop order can go directly below the 2 candles that formed the Piercing
Pattern. OR traders who are comfortable with option trading can buy a put to
use to hedge this position in lieu of a stop order.

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4. The Bullish Hammer: How to Identify
BULLISH
• It is a reversal formation.
• The Bullish Hammer candle starts with a big move to the downside but the
market retraces back to the upside, most often closing positive on the day.
• There is little to no “upper wick” indicating the market failed to trade higher at
any point in the trading day.
•
where buyers quickly took control after a failed attempt by sellers to take the
market lower. This price action is what makes the body small and compact
near or at the top of the candle with the long tail.
• It is ideal, and generally preferred, when the bottom wick is 2x the size of the
“body” of the candle.
• It can be used to signal for traders looking to buy that they should be paying
close attention as the downtrend is losing momentum.

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BULLISH HAMMER
enter on a break
above previous
candle high
at the end of a rather

large downtrend
spikes lower but buyers

come in to push the
market higher. Closes
positive on the day
HOW TO TRADE:
This is a set-up that I am very aggressive with. Every trade has their own comfort
level as far as entry levels and risk and that is 100% ok. Never trade outside of
your comfort zone in fear of missing a move. That said, I look to enter markets
that form Bullish Hammers on the open of the very next trading session. Some
traders like to see the highs of either the Hammer candle or the previous candle
taken out before entry and that’s a good call too.
I look to put my stops below the tail of the Bullish Hammer. There will be times
when the tail is extremely long and stops may have to be to far away from a risk
standpoint. In these cases, I will look to have stop orders just below the 50%
retracement level of the Bullish Hammer.

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5. Morning Star: How to Identify
BULLISH
This is a 3 candle formation that lay out this way:
1.
2. The second candle is a small bodied candle that gap opens lower but does
not have much bearish follow through (it can even close small positive on
the day in certain instances).
3. The third candle is a rather large UP candle that gap opens ABOVE the

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MORNING STAR
3rd candle:
1st candle: gap opens HIGHER and
DOWN BEARISH closes at or above 50%
of 1st candle body
2nd candle:
gap opens LOWER but
closes HIGHER on the day
HOW TO TRADE:
These formations are far and few between. But, in my opinion, that makes all the
more fun to get involved in. When I see one of these develop I look for the entry
to be on a break higher ABOVE the 1st candle of the 3 candle set-up. This would
be above the high of the day on the last bearish candle before the bounce.
For stop orders, I most likely recommend having them just below the body of the
Morning Star candle. With other formations, we have mentioned having the stops
below the entire formation, but this particular formation can be very wide from a
pricing standpoint. So for a target to shoot at, look for a price just under the body
of the bottom candle.

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6. The Shooting Star: How to Identify
BEARISH
The Shooting Star (opposite of an Inverted Hammer) is a formation that has
entually failing
and giving way to the sellers of the market. This indicates that trader sentiment
may be shifting to the downside.
• It is a BEARISH alert to a possible reversal.
• The one rule about the entry is that it has to be on a break of the previous
day’s OPEN.
• It forms when the market trades extremely high during the day but turns
and trades lower ultimately closing near the OPEN and LOW (The OPEN,
LOW and CLOSE all are at roughly the same price).
• The high is double the length of the body of the candle.
• The extreme high suggests that the bulls attempted to run the market
higher and resistance was found. Once this resistance was established the
bears show up and forced the market lower.
• What is impressive about this formation is the size of the upper wick (2x
the body) and the early strength that this market had to not only be turned
• This formation is considered even more bearish if the trading session

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SHOOTING STAR
spikes higher but

sellers come in to
push market lower.
at the end of a Closes negative on
rather large the day
uptrend
enter on a
break below
previous
candle low
HOW TO TRADE:
On this particular formation, the levels where the formation forms can be a bit
wide. Entry prices can be found using the last bullish candle before the Shooting
Star formed. When this low is broken, this is the spot where you can look to enter.
Your stop orders can be just above the entry day’s high (if that is conducive and

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7. The Hanging Man: How to Identify
BEARISH
• This is a reversal candlestick.
• It is a Bearish Formation that forms at the end of an uptrend.
• It is the exact opposite of the Bullish Hammer formation that forms on the
bottom of a downtrend.
• The market opens, trades quite a bit lower but rallies into the close to
settle at or near the open price.
• This is an early indication that sellers have entered the market. Or at the
very least that buying momentum is decreasing.
• This candlestick gets more attention when the next day trading heads
lower and closes below the Hanging Man’s lower wick. This “next day” is
• Look for the lower wick of the candle to be 2x the width of the body of the
candle.
• There should be little to no upper wick indicating that the market failed to
trade higher at any point in the day.
• It is important to note that this is NOT a sell signal, rather a heads-up to

put this market on your radar to be ready.

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HANGING MAN
Uptrend
little to no wick
on top
Next candle
lower
HOW TO TRADE:
Similar to the Shooting Star formation, the formation itself because of the
extreme price action can be very wide. But also similar is the entry technique and
the stop order placement.
Entry prices can be found using the last bearish candle before the Hanging Man
formed. When this high is broken, this is the spot where you can look to enter.
Your stop orders can be just below the entry day’s low (if that is conducive and

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8. Dark Cloud Cover: How to Identify
BEARISH
• It is a bearish signal that alerts traders to a possible reversal.
• It occurs at the top of a bullish trend
• There is a big up day that is followed by a big down day.
• Think of it as 2 spires at the top of a bull run, (1 up / 1 down).
• The 2nd days close MUST be at or below the previous up day’s trading range.
•
twin spires to get involved.

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DARK CLOUD COVER
twin spires:
bullish candle, bearish candle
2nd day’s close is below
50% of 1st candle
trades below
twin spires lows
HOW TO TRADE:
This is the exact opposite as the above Piercing Pattern. In that you want to look
you will get involved. I like to look for the 1st candle’s low to be penetrated to the
downside before getting involved. Some traders will want to wait for the CLOSE to
be below this level, but I am not opposed to the aggressiveness.
Once in the market, I believe a good spot for stop orders is above the entire
formation. OR traders who are comfortable with option trading can buy a call to
use as a hedge to this position. You can use in addition to the stop price as well as
in lieu of the stop order.

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9. Evening Star: How to Identify
BEARISH
This is the exact opposite of The Morning Star but happens on the top of
an uptrend.
This is also a 3 candle formation that lay out this way:

1.
2. The second candle is a small bodied candle that gap opens higher but does
not have much bullish follow through (it can even close small negative on the
day in certain instances).
3. The third candle is a rather large DOWN candle that gap opens BELOW the

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EVENING STAR
2nd candle:
gap opens HIGHER
but closes at or 3rd candle: gap opens LOWER
newar the OPEN Looking for close at or near
on the day 50% of 1st candle body
1st candle:
UP BULLISH
HOW TO TRADE:
As stated above, the Evening Star formation is the exact opposite of the Morning
also very exciting. It takes 3 candles to form. Look for a break below 50% of the
1st candle. This would be the last bullish candle that starts the formation before
the resistance was found.
For stop orders, I most likely recommend having them just above the body of the
Evening Star candle. With other formations we have mentioned having the stops
above the entire formation, but this particualr formations can be very wide from
a pricing standpoint. So for a target to shoot at, look for a price just above the
body of the upper candle.

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10. Harami/“Inside Day”: How to Identify
REVERSAL
• Body of second candlestick must be completely engulfed by the body of
•
bar is bullish (it closes higher than it opens).
•
bar is bearish (closes lower than it opens).
• Enter above the second body in a bullish move or below the second body
in a bearish move.

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BULLISH HARAMI
2nd candle
gap opens
higher and
trades higher
1st candle is bearish.

Strong down day
entire body of 2nd bullish

candle is “inside” the body of
the 1st bearish candle
HOW TO TRADE:
This formation generally does not have much of a waiting period to getting
involved. When the Harami forms, traders should be prepared to enter the
market on the next day. Aggressive traders should be looking to trade the
market right on the open the next trading day. More conservative traders
can look to enter the market when it breaks above the Harami candle high of
the day. This is the candle that is completely inside the long bearish candle
(previous day’s high).
Either way you choose to enter the market, stop orders can go directly below
the formation.

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BEARISH HARAMI
entire body of 2nd candle is

bearish and “inside” the body
previous candle of the previous bullish candle
is strong bullish
uptrend
downtrend
HOW TO TRADE:
This formation is the exact opposite of the Bullish Harami above. Much like
its counterpart, it generally does not have much of a waiting period to getting
involved. When the Harami forms, traders should be prepared to enter the
market on the very next day. Aggressive traders should be looking to trade the
market right on the open the next trading day. More conservative traders can look
to enter the market when it breaks below the Harami candle low of the day. This
is the candle that is completely inside the long bullish candle (previous day’s low).
Either way you choose to enter the market, stop orders can go directly above
the formation.

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REVERSAL
• Exact opposite of Harami.
•
second candlestick.
• Represents a stronger reversal than the Harami.
•
bullish (closes higher than it opens).
•
bearish (closes lower than it opens).
• Direction of the move can be determined by referencing the

second candlestick.
• Enter the market above the bullish candlestick in a bullish movement and
below the bearish candlestick in a bearish movement.
h is higher than
the previous days high and the day’s low is lower than previous day’s low.
If BOTH these things happen and the market settles at either of these 2 points
(above the previous day’s high or below the previous day’s low), this is most often
taken as a sign that the market is poised to make a move in that direction.

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BULLISH ENGULFING
1st day is a
bearish candle 2nd day: gaps open LOWER, closes
higher than previous day’s open.
an “outside” day 1 body BULLISH
BEARISH ENGULFING
2nd day
higher
a bullish high,
candle lower low
bearish

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HOW TO TRADE:
Both of these formations can be covered in one synopsis. They are basically
mirror images of each other but one is possibly on the way up and one is
possibly on the way down.
When you see the market make a low that is below the previous and then close
higher than the previous days high, this tends to bring a lot of excitement to
the market. And rightfully so. These are one of my favorite formations to trade
both to the upside and downside. However, I do tend to play these formations
a bit more conservatively. Why? I feel like we are given the opportunity with the
shallow range that is required for possible entry. I look to get involved in these
As with the Harami formations, I like to keep the stop order placement very
simple and not overthink it. I put them directly outside the formation. This is

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12.The Kicker: How to Identify
REVERSAL
This is commonly perceived as one of the strongest candlestick formation to
trade. It is not a 100% accurate and can fail but it does garner a lot of attention
when it forms.
• They are a key reversal formation.
• They signify an abrupt change in trader’s sentiment and attitude.
•
lower in the market. But it is important to note, they do not have to.
It is a 2 candle formation that has characteristics like this:

1.
2. The second candle gap opens in the OPPOSITE direction.
3. During the 2nd trading day candle at no time does the price action
enter into the body of the 1st trading days candle. (If so, this negates
the formation).

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BULLISH KICKER
2nd candle:
1st candle: gap opens HIGHER
strong bearish than the previous
candle. candle’s open
Closes lower on
the day

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BEARISH KICKER
1st candle:
strong bullish candle.
Closes higher on the
2nd candle:
gaps open
LOWER than
the previous
day’s open
HOW TO TRADE:
There is a reason that these formations are considered by many to be one
of the strongest formations to trade. It is because they can be the rarest and
fundamental data to inject such a strong and emotional reversal.
When they do develop, because of the strong market sentiment involved, I like
to be aggressive BUT use a close stop for 2 reasons. First, the pattern can be
very wide due to the volatile trading that is involved. And secondly, my thought
is that is the market decided to reverse course so rapidly, it is either going to
action and continue on its initial course.

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Conclusion
Thank you for requesting my How-To Guide: 12+ Candlestick Formations Every
Technical Trader Should Know. I am glad you did! I hope it provided some insight
into trading based on what the charts are telling you and you found it helpful.
Whether you are just getting started or you have been trading the futures markets
Traders looking for these opportunities should be proactive rather than reactive.
Trade what the charts are telling you! Sign up for my newsletter and I’ll put the
charts that have my attention in front of you on a daily basis.
I put market setups and chart formations in front of them to make sure they are
Click the link and sign-up for The Cullen Outlook newsletter today. I look
forward to having you join the team.

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THE CULLEN OUTLOOK

The Cullen Outlook has something for broker-assisted and self-directed
The Market’s
Spine, The Market’s Spine Video Series, and the Pre-Dawn Targeting, The
Formation Finder and Trade Idea Snapshot emails.
: To arm
you with the knowledge to see what the chart is telling you. And to help you
you’re ready
to take action.
So what are you looking for? If you like the idea of acquiring a trading style that
sees what others miss, give me a call or email me.
SUBSCRIBE
I look at the markets and analyze charts all day long.

For more than 12 years, I’ve been helping clients learn
how to trade the futures markets using technical analysis.
To help as many as possible, I’ve distilled my approach
into a program I call The Cullen Outlook. Through
publications, webinars and more, I present ideas, tools
and strategies—and most important, a trading style.

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HOW TO GUIDE

1. Doji: How to Identify 5

2. The Inverted Hammer: How to Identify 10

3. Piercing Patter: How to Identify 12

4. The Bullish Hammer: How to Identify 14

5. Morning Star: How to Identify 16

6. The Shooting Star: How to Identify 18

7. The Hanging Man: How to Identify 20

8. Dark Cloud Cover: How to Identify 22

9. Evening Star: How to Identify 24

10. Harami/“Inside Day”: How to Identify 26

12. The Kicker: How to Identify 32

12+ Candlestick Formations Every Technical Trader Should Know | 2

2. Employing strategies to trade those set-ups

2. Recognize the formation taking place

This guide will help you in 3 ways:

2. It will show you how to identify these candlestick formations

3. I will teach you how to trade them

Candlestick formations are everywhere!

12+ Candlestick Formations Every Technical Trader Should Know | 3

• Strings of up days and of down days

• Periods of strength and weakness

• How sustained moves are, and

• How we got to where we are

12+ Candlestick Formations Every Technical Trader Should Know | 4

1. Doji: How to Identify

• This is a trend reversal signal.

• Opening price & closing price are basically the same.

• Looks like a cross.

There are 4 major types of Dojis.

12+ Candlestick Formations Every Technical Trader Should Know | 5

1. REGULAR DOJI REVERSAL

DOJI: shallow trading

12+ Candlestick Formations Every Technical Trader Should Know | 6

2. LONG-LEGGED DOJI REVERSAL

to increase the bullish sentiment ***

12+ Candlestick Formations Every Technical Trader Should Know | 7

3. DRAGONFLY DOJI BULLISH

Open, high AND close

12+ Candlestick Formations Every Technical Trader Should Know | 8

4. GRAVESTONE DOJI BEARISH

open, low AND close are all at

12+ Candlestick Formations Every Technical Trader Should Know | 9

2. The Inverted Hammer: How to Identify

• It is a BULLISH alert to a possible reversal.

12+ Candlestick Formations Every Technical Trader Should Know | 10

12+ Candlestick Formations Every Technical Trader Should Know | 11

3. Piercing Pattern: How to Identify

• It is a bullish signal that alerts traders to a possible reversal.

• It occurs at the bottom of a bear trend.

• There is a big down day that is followed by a big up day.

• The 2nd day’s close MUST be at or above the previous up day’s

12+ Candlestick Formations Every Technical Trader Should Know | 12

closes higher and is

12+ Candlestick Formations Every Technical Trader Should Know | 13

4. The Bullish Hammer: How to Identify

12+ Candlestick Formations Every Technical Trader Should Know | 14

at the end of a rather

spikes lower but buyers

12+ Candlestick Formations Every Technical Trader Should Know | 15

5. Morning Star: How to Identify

12+ Candlestick Formations Every Technical Trader Should Know | 16

12+ Candlestick Formations Every Technical Trader Should Know | 17

6. The Shooting Star: How to Identify