TA 102 PATTERNS

CANDLESTICKS AND CANDLESTICKS PATTERNS

Overall Goals:

1. Develop and follow your strategy no matter what happens in the

market.
2. Always look left on the charts do not focus on the present market
condition.
3. Patience will always and at all times win the game.

Class Overview

 Quick revision on classes on TA 101.

 What are candlesticks.
 How to read candlesticks.
 Classification of candlesticks.
 Types of candlesticks.
 Golden rules to using candlesticks.
 Live examples.
 Assignment.

WHAT ARE CANDLESTICKS.?

Candlestick and candlestick patterns are technical tools that have been
used for centuries and is still used by technical analyst to predict price
direction. Candlesticks build patterns that can most likely predict future
price direction once completed.

Candlestick charting and techniques is one of the most effective ways to

read price movements in the financial market.
HOW TO READ CANDLESTICKS.

The components of candlestick charts are the opening price level, the
closing price level, the high price, and the low price of any Time frame.

Then we have the real body and shadows.

Real Body: The rectangle section of the Candlestick, called the real body
is the range between the open and close. The real body represents the
overall commitment in the market.

Shadows: The thin lines extending out from the Candlestick real bodies
are called shadows and highlight the price extremes for the session.

A Bullish or Green or White Candlestick implies that the closing price

of the session was higher than the opening price. This means that buyers-
maintained control and prices spent more time pushing higher.

A Bearish or Red or Black Candlestick implies that the opening price of

the session was higher than the closing price. This means that sellers-
maintained control and prices spent more time pushing lower.

CLASSIFICATION OF CANDLESTICKS.

There are various candlestick patterns used to determine price direction,

and are usually classified based on:

Numbers. Eg single candlesticks, double candlesticks, triple

candlesticks.

Direction. Eg Continuation candlesticks, patterns predict an extension

in the current price direction. Reversal candlesticks, patterns predict a
change in price direction.
TYPES OF CANDLESTICKS.

The Doji
The Hammer (inverted hammer) and Hanging Man (shooting star)
Harami bullish and bearish
Bullish and Bearish Engulfing Bar
Tweezer tops and bottom
Morning and Evening Star
Three white soldiers and Three black crows

THE DOJI

A Doji candlestick is forms when the price open and close are virtually
equal for the given time period. Doji candlesticks have a very small body
(opening and closing prices of the day are almost identical), and there is
a long shadow either above or below the candlestick body.

Doji generally signals a reversal pattern for technical analysts and look
like a plus sign which usually shows indecision in the market.

Types of Doji

Dragon fly Doji and Gravestone Doji

The Dragon fly doij is a bullish candlestick pattern that looks like a cross.

The Gravestone doji is a bearish candlestick pattern that looks like an

inverted cross.

Keynotes:

 Indecision, vulnerability, uncertainty, all of which can be

considered neutral or lead to a reversal.
 The open and close are at the same level or near.
 Paramount in identifying market tops as it is a sign of showing a
market where buyers and sellers are in balance.
HAMMER (INVERTED HAMMER) AND HANGING MAN
(SHOOTING STAR)

A hammer has a long shadow and a small body (black or white) that is
very close to the high of the day. At the end of a downtrend, the hammer
is considered a bullish reversal signal.

An Inverted hammer also forms in a downtrend and represents a likely

trend reversal. It’s identical to the Hammer except for the longer upper
shadow, which indicates buying pressure after the opening price,
followed by considerable selling pressure, which however wasn’t enough
to bring the price down below its opening value.

Basically, an inverted hammer is a hammer flipped upside down.

Keynotes:

 Bullish reversal when found in a downtrend.

 Must be located in a downtrend.
 The hammer lower shadow tends to be at least twice the length of
the real body which should be at the top of candle.
 The inverted hammer upper shadow tends to be at least twice the
length of the real body which should be at the top of candle.

A hanging man has a long lower shadow and a small body and it is found
at the end of an uptrend. The hanging man is also a reversal pattern.

A shooting star also forms in an uptrend and represents a likely trend

reversal. It’s identical to the hanging man except for the longer upper
shadow.

Basically, a shooting star is a hanging man flipped upside down.

Keynotes:

 Bearish reversal.
 Must be located in an uptrend.
 Hanging man Lower shadow tends to be at least twice the length of
the real body which should be at the top of candle.
  Shooting star upper shadow tends to be at least twice the length of
the real body which should be at the bottom of candle.

The hanging man and the hammer are both candlestick patterns that
indicate trend reversal. The only difference between the two is the nature
of the trend in which they appear. If the pattern appears in a chart with
an upward trend indicating a bearish reversal, it is called the hanging
man. If it appears in a downward trend indicating a bullish reversal, it is
a hammer. Apart from this key difference, the patterns and their
components are identical.

HARAMI CANDLESTICK PATTERN OR HARAMI CROSS

A harami is a candlestick pattern that consists of a large candlestick that

moves in the direction of the trend, followed by a small candlestick. The
small candlestick is completely contained within the prior candlestick’s
body. The harami pattern suggests that the previous trend may be about
to reverse.

The Harami pattern can be either bullish or bearish.

The bullish pattern signals a possible price reversal to the upside. A

bullish harami is a large down candle followed by a small candle. It occurs
during a downtrend.

The bullish harami is confirmed by a price move higher following the

pattern.

The bearish pattern signals a possible price reversal to the downside. A

bearish harami cross is a large up candle followed by a small candle. It
occurs during an uptrend.

The bearish pattern is confirmed by a price move lower following the

pattern.
Keynotes:

 Bullish reversal when found in a downtrend.

 Bearish reversal when found in an uptrend.
 Must be located within their respective trends.
 Second real body is relatively small and contained within the prior
candles real body.
 The dominant force is losing power and potentially changing to the
opposite direction. Pregnant or mother candle gives birth to a small
candle, reversing the trend.

BULLISH AND BEARISH ENGULFING BAR

The bullish engulfing pattern is a reversal pattern at the end of a

downtrend. This formation is completed when a large white or green
candlestick body completely covers a smaller black or red candlestick
body.

A bearish engulfing pattern is important at the end of an uptrend. In this

case, a big black or red candlestick body covers a small white or green
candlestick body.

Keynotes:

 Bearish reversal when found in an uptrend.

 Bullish reversal when found in a downtrend.
 Must be located within respective trend.
 Second real body (open & close) engulfs prior candles real body, not
necessarily the shadow.
 Second candle must be white or green for bullish engulfing and
black or red for bearish engulfing.
 The engulfing indicates a transition of power between buyers and
sellers, with the winner overwhelms the previous trend.
TWEEZER TOPS AND BOTTOM

Tweezer patterns are reversal patterns and occur when two or more
candlesticks touch the same bottom for a tweezer bottom pattern, or when
two or more candlesticks touch the same top for a tweezer top pattern.

A tweezers top is when two candles occur back to back with very similar
highs. A tweezers topping pattern occurs when the highs of two
candlesticks occur at almost exactly the same level following an advance.

Tweezer tops are considered to be a short- term bearish reversals patterns.

A tweezers bottom occurs when two candles, back to back, occur with
very similar lows. A tweezers bottom occurs when two candles, back to
back, occur with very similar lows.

Tweezer bottoms are considered to be short-term bullish reversal

patterns.

Keynotes:

 Tweezer bottom signals a short term bullish reversal.

 Tweezer top signals a short term bearish reversal.
 Two consecutive days in which either the high or the low are equal
to each other. The color of the candle is of no relevance and the
tweezers can be composed of reall bodies, shadows, and/or doji.
Ideally long first body, small second real body.
 Two consecutive highs or lows indicate a support or resistance is in
place. Whatever force the market had on the first session is
dissolving in the second. Particularly important pattern in
weekly/monthly charts.

MORNING AND EVENING STAR

A morning star is a bottom reversal pattern formed by three candlesticks.

The first candlestick has a big black body, for this is still a downtrend. The
second candlestick is a star with a very small body that is below the
previous candlestick and has no connection to the previous body. The
third candlestick has a big, white body that should cover at least 50
percent of the big black.

Keynotes:

 Bullish reversal.
 Must be located within a downtrend.
 Long bearish candle appears at the end of a downtrend. The
following session has a small range and tends to gap lower. This is
followed by a bullish long candle which rallies more than 50% of
the recent bearish candle.

An evening star is a trend reversal pattern after a strong uptrend. This

formation also has three candlesticks. The first has a long white body. The
following candlestick is a star with either a black or white body that has
no connection with the previous candlestick body. The third candlestick
has a big black body that covers at least 50 percent of the big black body.

Keynotes:

 Bearish reversal signal when found in an uptrend.

 Must be located within an uptrend.
 Long bullish candle evident at end of uptrend. The following
session has a small range and tends to gap higher. This is followed
by a bearish long candle which falls more than 50% within the
recent bullish candle.

THREE WHITE SOLDIERS AND THREE BLACK CROWS

Three white soldiers is a bullish candlestick pattern that is used to

predict the reversal of the current downtrend in a pricing chart. The
pattern consists of three consecutive long-bodied candlesticks that open
within the previous candle's real body and a close that exceeds the
previous candle's high.
Keynotes:

 Bullish pattern signalling strength after a down trend or range-

bound market.
 Three consecutive sessions of long white candlesticks, each closing
at or near previous high. Each candle begins at or near the range of
the body of the previous.
 The Three White Soldiers imply a gradual and steady rise; a healthy
market rise. If candles are overextended, one should be cautious of
overbought conditions. If second or third shows weakness, possible
Advance Block pattern.

Three black crows indicate a bearish candlestick pattern that predicts the
reversal of an uptrend. The black crow pattern consists of three
consecutive long-bodied candlesticks that have opened within the real
body of the previous candle and closed lower than the previous candle.

Keynotes:

 Bearish pattern indicative of market correction.

 Three consecutive sessions of long black candlesticks, each closing
lower than the previous, each at or near their lows. Consecutive
candles begin within the range of the body of the previous candle.
 The Three Black Crows pattern indicates a turn to strong selling
pressure. The shadows are generally small and the bodies long.
Pattern best suited for longer term traders who will watch for the
completion of all three to take confirmation of market correction.

RULES TO USING CANDLESTICKS.

1. The location of the candlestick.

2. Candlesticks should not be used in isolation, trade using other
confirmations. Eg trendline, support or resistance., moving
averages, etc.
3. Learn what the wicks and body is telling you. You do not
necessarily need to know the names of the different candle sticks
pattern.
 4. Use multiple time frames, do not really on the use of just one-time
frame.
5. Create a strategy using candlestick and backtest that strategy.

ASSIGNMENT.

1. Craft/create a cheat sheet of the different bullish and bearish

candlestick patterns you know.
2. Identify who is in control in the different candlestick patterns you
crafted above.