Candlestick Patterns

[ehabelmasre]

Harami

The Harami (meaning "pregnant" in Japanese) Candlestick Pattern is a reversal pattern. The pattern consists of two Candlesticks:

Larger Bullish or Bearish Candle (Day 1)
Smaller Bullish or Bearish Candle (Day 2)

harami candlestick chart pattern



The Harami Pattern is considered either bullish or bearish based on the criteria below:

Bearish Harami: A bearish Harami occurs when there is a large bullish green candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. The most important aspect of the bearish Harami is that prices gapped down on Day 2 and were unable to move higher back to the close of Day 1. This is a sign that uncertainty is entering the market.

Bullish Harami: A bullish Harami occurs when there is a large bearish red candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. Again, the most important aspect of the bullish Harami is that prices gapped up on Day 2 and price was held up and unable to move lower back to the bearish close of Day 1.

Harami Candlestick Chart Example

The chart below of the Nasdaq 100 E-mini Futures contract shows an example of both a bullish and bearish Harami candlestick pattern:

harami candlestick chart reversals




The first Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a bullish reversal Harami. First there was a long bearish red candle. Second, the market gapped up at the open. In the case above, Day 2 was a bullish candlestick, which made the bullish Harami even more bullish.

Harami Candlestick Buy Signal

A buy signal could be triggered when the day after the bullish Harami occured, price rose higher, closing above the downward resistance trendline. A bullish Harami pattern and a trendline break is a potent combination resulting in a strong buy signal.

The second Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a bearish reversal Harami. The first candle was a long bullish green candle. On the second candle, the market gapped down at the open. The chart above of the e-mini shows that Day 2 was a bearish candlestick; this made the bearish Harami even more bearish.

Harami Candlestick Sell Signal

A sell signal could be triggered when the day after the bearish Harami occured, price fell even further down, closing below the upward support trendline. When combined, a bearish Harami pattern and a trendline break is a strong indication to sell.

A somewhat opposite two candlestick reversal pattern is the Bearish Engulfing Pattern (see: Bearish Engulfing Pattern) and the Bullish Engulfing Pattern (see: Bullish Engulfing Pattern).

[ehabelmasre]

Inverted Hammer

The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and is a warning of a potential reversal upward. It is important to note that the Inverted pattern is a warning of potential price change, not a signal, in and of itself, to buy.



The Inverted Hammer formation, just like the Shooting Star formation, is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, which should be at least twice the length of the real body.

When the low and the open are the same, a bullish Inverted Hammer candlestick is formed and it is considered a stronger bullish sign than when the low and close are the same, forming a bearish Hanging Man (the bearish Hanging Man is still considered bullish, just not as much because the day ended by closing with losses).

After a long downtrend, the formation of an Inverted Hammer is bullish because prices hesitated their move downward by increasing significantly during the day. Nevertheless, sellers came back into the stock, future, or currency and pushed prices back near the open, but the fact that prices were able to increase significantly shows that bulls are testing the power of the bears. What happens on the next day after the Inverted Hammer pattern is what gives traders an idea as to whether or not prices will go higher or lower.


Inverted Hammer Candlestick Chart Example

The chart below of the S&P 500 Futures contract shows the Inverted Hammer foreshadowing future price increases:
inverted hammer candlesticks occur after a long downtrend




In the chart above of e-mini future, the market began the day by gapping down. Prices moved higher, until resistance and supply was found at the high of the day. The bulls' excursion upward was halted and prices ended the day below the open.

Confirmation that the dowtrend was in trouble occured the next day when the E-mini S&P 500 Futures contract gapped up the next day and continued to move upward, creating a bullish green candle. To some traders, this confirmation candle, plus the fact that the downward trendline resistance was broken, gave the signal to go long.

It is important to repeat, that the Inverted Hammer formation is not the signal to go long; other indicators such as a trendline break or confirmation candle should be used to generate the actual buy signal.

The bearish version of the Inverted Hammer is the Shooting Star formation (see: Shooting Star) that occurs after an uptrend.

[ehabelmasre]

Shooting Star

The Shooting Star candlestick formation is a significant bearish reversal candlestick pattern that mainly occurs at the top of uptrends.

shooting star candlestick chart pattern



The Shooting formation is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, generally defined as at least twice the length of the real body.

When the low and the close are the same, a bearish Shooting Star candlestick is formed and it is considered a stronger formation because the bears were able to reject the bulls completely plus the bears were able to push prices even more by closing below the opening price.

The Shooting Star formation is considered less bearish, but nevertheless bearish when the open and low are roughly the same. The bears were able to counteract the bulls, but were not able to bring the price back to the price at the open.

The long upper shadow of the Shooting Star implies that the market tested to find where resistance and supply was located. When the market found the area of resistance, the highs of the day, bears began to push prices lower, ending the day near the opening price. Thus, the bullish advance upward was rejected by the bears.

Shooting Star Candlestick Chart Example

The chart below of Cisco Systems (CSCO) illustrates a Shooting Star reversal pattern after an uptrend:



In the chart above of CSCO, the market began the day testing to find where supply would enter the market. CSCO's stock price eventually found resistance at the high of the day. In fact, there was so much resistance and subsequent selling pressure, that prices were able to close the day significantly lower than the open, a very bearish sign.

The Shooting Star is an extremely helpful candlestick pattern to help traders visually see where resistance and supply is located. After an uptrend, the Shooting Star pattern can signal to traders that the uptrend could be over and that long positions should probably be reduced or completely exited.

However, other indicators should be used in conjunction with the Shooting Star candlestick pattern to determine sell signals, for example, waiting a day to see if prices continued falling or other chart indications such as a break of an upward trendline.

For aggressive traders, the Shooting Star pattern illustrated above could be used as the sell signal. The red portion of the candle (the difference between the open and close) was so large with CSCO, that it could be considered the same as a bearish candle occuring on the next day. However, caution would have to be used because the close of the Shooting Star rested right at the uptrend support line for Cisco Systems.

Generally speaking though, a trader should wait for a confirmation candle before entering.

The bullish version of the Shooting Star formation is the Inverted Hammer formation (see: Inverted Hammer) that occurs at bottoms. Another similar candlestick pattern in look and interpretation to the Shooting Star pattern is the Gravestone Doji (see: Gravestone Doji).

[ehabelmasre]

Morning Star

The Morning Star Pattern is a bullish reversal pattern, usually occuring at the bottom of a downtrend. The pattern consists of three candlesticks:

Large Bearish Candle (Day 1)
Small Bullish or Bearish Candle (Day 2)
Large Bullish Candle (Day 3)

morning star candlestick chart pattern



The first part of a Morning Star reversal pattern is a large bearish red candle. On the first day, bears are definitely in charge, usually making new lows.

The second day begins with a bearish gap down. It is clear from the opening of Day 2 that bears are in control. However, bears do not push prices much lower. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji).

Generally speaking, a bullish candle on Day 2 is a stronger sign of an impending reversal. But it is Day 3 that holds the most significance.

Day 3 begins with a bullish gap up, and bulls are able to press prices even further upward, often eliminating the losses seen on Day 1.

Morning Star Candlestick Chart Example
The chart below of the S&P 400 Midcap exchange traded fund (MDY) shows an example a Morning Star bullish reversal pattern that occured at the end of a downtrend:

morning star candlestick reversal pattern occurs after downtrends



Day 1 of the Morning Star pattern for the Midcap 400 (MDY) chart above was a strong bearish red candle. Day 2 continued Day 1's bearish sentiment by gapping down. However, Day 2 was a Doji, which is a candlestick signifying indecision. Bears were unable to continue the large decreases of the previous day; they were only able to close slightly lower than the open.

Day 3 began with a bullish gap up. The bulls then took hold of the Midcap 400 exchange traded fund for the entire day. Also, Day 3 broke above the downward trendline that had served as resistance for MDY for the past week and a half. Both the trendline break and the classic Morning Star pattern gave traders a signal to go long and buy the Midcap 400 exchange traded fund.

The Morning Star pattern is a very powerful three candlestick bullish reversal pattern. The bearish equivalent of the Morning Star is the Evening Star pattern (see: Evening Star).

[ehabelmasre]

Piercing Line Pattern

The Piercing Pattern is a bullish candlestick reversal pattern, similar to the Bullish Engulfing Pattern (see: Bullish Engulfing Pattern). There are two components of a Piercing Pattern formation:

Bearish Candle (Day 1)
Bullish Candle (Day 2)

piercing pattern candlestick chart pattern




A Piercing Pattern occurs when a bullish candle on Day 2 closes above the middle of Day 1's bearish candle.

Moreover, price gaps down on Day 2 only for the gap to be filled (see: Gaps) and closes significantly into the losses made previously in Day 1's bearish candlestick.

The rejection of the gap up by the bulls is a major bullish sign, and the fact that bulls were able to press further up into the losses of the previous day adds even more bullish sentiment. Bulls were successful in holding prices higher, absorbing excess supply and increasing the level of demand.


Piercing Pattern Candlestick Chart Example

The chart below of Intel (INTC) stock illustrates an example of the Piercing Pattern:
piercing pattern signals a potential bottom




Piercing Pattern Candlestick Buy Signal

Generally other technical indicators are used to confirm a buy signal given by the Piercing Pattern (i.e. downward trendline break). Since the Piercing Pattern means that bulls were unable to completely reverse the losses of Day 1, more bullish movement should be expected before an outright buy signal is given. Also, more volume than usual on the bullish advance on Day 2 is a stronger indicator that bulls have taken charge and that the prior downtrend is likely ending.

A more bullish reversal pattern is the Bullish Engulfing Pattern (see: Bullish Engulfing Pattern) that completely reverses the losses of Day 1 and adds new gains.

For further study, the bearish equivalent of the Piercing Pattern is the Dark Cloud Cover Pattern (see: Dark Cloud Cover).

[ehabelmasre]

Tweezer Tops and Bottoms

The Tweezer Top formation is a bearish reversal pattern seen at the top of uptrends and the Tweezer Bottom formation is a bullish reversal pattern seen at the bottom of downtrends.

Tweezer Top formation consists of two candlesticks:

Bullish Candle (Day 1)
Bearish Candle (Day 2)

Tweezer Bottom formation consists of two candlesticks:

Bearish Candle (Day 1)
Bullish Candle (Day 2)

Sometimes Tweezer Tops or Bottoms have three candlesticks.



A bearish Tweezer Top occurs during an uptrend when bulls take prices higher, often closing the day off near the highs (a bullish sign). However, on the second day, how traders feel (i.e. their sentiment) reverses completely. The market opens and goes straight down, often eliminating the entire gains of Day 1.

The reverse, a bullish Tweezer Bottom occurs during a downtrend when bears continue to take prices lower, usually closing the day near the lows (a bearish sign). Nevertheless, Day 2 is completely opposite because prices open and go nowhere but upwards. This bullish advance on Day 2 sometimes eliminates all losses from the previous day.



Tweezer Bottom Candlestick Chart Example

A Tweezer Bottom is shown below in the chart of Exxon-Mobil (XOM) stock:
tweezer bottom



The bears pushed the price of Exxon-Mobil (XOM) downwards on Day 1; however, the market on Day 2 opened where prices closed on Day 1 and went straight up, reversing the losses of Day 2. A buy signal would generally be given on the day after the Tweezer Bottom, assuming the candlestick was bullish green.

Intra-day Tweezer Tops and Bottoms

The bullish Tweezer Bottom formation shown on the last page of the daily chart of Exxon-Mobil is shown below with a 15-minute chart spanning the two days the Tweezer Bottom pattern was emerging:



Notice how Exxon-Mobil (XOM) stock went downwards the whole day on Day 1. Then on Day 2, the bearish sentiment of Day 1 was completely reversed and XOM stock went up the whole day. This sudden and drastic change of opinion between Day 1 and Day 2 could be viewed as an overnight transfer of power from bears to bulls.

The 15-minute chart below of the E-mini Russell 2000 Futures contract shows how a three day Tweezer Top usually develops:




On Day 1, the bulls were in charge of the Russell 2000 E-mini. On Day 2, however, the bulls began the day trying to make a new high, but were rejected by the overhead resistance created by the prior day's highs. The market then sank quickly only to recover halfway by the end of the close on Day 2. Day 3 opened with a spectacular gap up, but the bulls were promptly rejected by the bears at the now established resistance line. The Russell 2000 E-mini then fell for the rest of the day. Many classic chartists will recognize this triple Tweezer Top as a Double Top formation

The Tweezer Top and Bottom reversal pattern is extremely helpful because it visually indicates a transfer of power and sentiment from the bulls and the bears. Of course other technical indicators should be consulted before making a buy or sell signal based on the Tweezer patterns.

[ehabelmasre]

Windows (Gaps)

Windows as they are called in Japanese Candlestick Charting, or Gaps, as they are called in the west, are an important concept in technical analysis. Whenever, there is a gap (current open is not the same as prior closing price), that means that no price and no volume transacted hands between the gap.

windows candlestick chart pattern


A Gap Up occurs when the open of Day 2 is greater than the close of Day 1. Contrastly, a Gap Down occurs when the open of Day 2 is less than the close of Day 1.

There is much psychology behind gaps. Gaps can act as:

Resistance: Once price gaps downward, the gap can act as long-term or even permanent resistance.

Support: When prices gap upwards, the gap can act as support to prices in the future, either long-term or permanently.


Windows Example - Gaps as Support & Resistance

The chart below of eBay (EBAY) stock shows the gap up acting as support for prices.

Gap acts as support; gap is filled before moving higher



Often after a gap, prices will do what is referred to as "fill the gap". This occurs quite often. Think of a gap as a hole in the price chart that needs to be filled back in. Another common occurance with gaps is that once gaps are filled, the gap tends to reverse direction and continue its way in the direction of the gap (for example, in the chart above of eBay, back upwards).

The example of eBay (EBAY) above shows the gap acting as support. Traders and investors see anything below the gap as an area of no return, after all, there was probably some positive news that sparked the gap up and is still in play for the company.

The chart below of Wal-Mart (WMT) stock shows many instances of gaps up and gaps down. Notice how gaps down act as areas of resistance and gaps up as areas of support:




gaps as support and resistance

Gaps are important areas on a chart that can help a technical analysis trader better find areas of support or resistance. For more information on how support and resistance work and how they can be used for trading,. Also, Gaps are an important part of most Candlestick Charting patterns; (see: Candlestick Basics) for a list of candlestick pattern charts and descriptions.

[ehabelmasre]

The Engulfing Pattern






Bullish and Bearish Engulfing

The engulfing pattern is the inverse of the harami pattern with the exception that the candlesticks that make up the pattern cannot be the same color. It is similar to the outside reversal pattern. Like the harami pattern, the engulfing pattern consists of two candlesticks with the first candlestick being a relatively short candlestick with a short real body and the second being a large candlestick with a big real body that engulfs the real body of the first candlestick. The engulfing pattern can be either bearish or bullish, depending on its location on the price chart. In addition, the colors of the candlesticks are significant.

Firstly, the engulfing pattern is a trend reversal pattern and must therefore appear in an existing trend. The pattern is more reliable if it appears at or near a support or resistance line, or a trendline. Secondly, the colors of the candlesticks are important. In an uptrend, the first candlestick in the pattern must be light indicating that it closed higher than its open price. The second, larger candlestick must then be dark, indicating that its close was lower than its opening price. The small real body of the first candlestick indicates a degree of indecision and uncertainty about the uptrend. Then large body of the second candlestick indicates that supply has exceeded demand and that the onset of a down trend is very possible. Conversely, in a down trend, the first candlestick in the pattern must be dark in color indicating that it closed lower than its open price. The second, larger candlestick must then be light, indicating that it closed higher than its opening price. The small real body of the first candlestick indicates a degree of indecision and uncertainty in the down trend and the large body of the second candlestick indicates that demand has exceeded supply and that the onset of an uptrend is very possible. Thirdly, the length of the first candlestick's real body is significant as a smaller real body implies greater indecision and uncertainty. Fourthly, volumes on the second candlestick should be higher than on the first.

[ehabelmasre]

The Belt-Hold Line





The Belt-Hold candlestick pattern (or yorikiri as it is know in Japanese) is considered a minor trend reversal pattern that can indicate a bullish or bearish trend reversal, depending on the nature of the pattern and direction of the trend in which it appears. The Belt-Hold pattern is a single candlestick pattern that is similar to a Marubozu candlestick in that it is has a large real body with little or no shadows, indicating the strength of bullish or bearish activity. The single Belt-Hold candlestick that appears in an uptrend is a potential top reversal pattern and the pattern is a Bearish Belt-Hold pattern. The bearish belt-hold line consists of a single dark candlestick that opens at or near its high and closes at or near its low, leaving very little upper or lower shadows. Conversely, a Bullish Belt-Hold pattern appears in downtrend and is a potential bottom reversal pattern. It consists of a single rising candlestick that also opens at or near its high and closes at or near its low. The length of these candlesticks indicates a potential change is sentiment, thus the pattern becomes more significant if depending on the size of candlestick in this pattern.

Both the bullish and the bearish belt-hold lines are more reliable when they appear near market extremes as indicated by trend lines, support and resistance, pivot points and moving averages. They are also more significant when they form part of other candlestick patterns, such as the dark-cloud cover pattern or the engulfing pattern.

[ehabelmasre]

The Three Black Crows Pattern




The Three Black Crows pattern is the opposite of the Three Advancing White Soldiers pattern. The Three Black Crows pattern is a bearish reversal pattern that consists of three bearish candlesticks that are ominous and dark in color, hence the name. This is a moderate trend reversal pattern that should only come into consideration when it appears in a rally or an established uptrend. The Three Black Crows usually indicates a weakness in an established uptrend and the potential emergence of a down trend.

Each of the three candlesticks in the Three Black Crows pattern should be relatively long bearish candlesticks with each candlestick closing at or near the low price for the period. Each successive candlestick should mark a steady decline in price and should not have long lower shadows or wicks. Preferably, each of the three candlesticks should open within the real body of the preceding candlestick in the pattern but this is not essential. When this pattern appears in an uptrend, it indicates the potential weakening of the trend and a possible trend reversal. However, if the three candlesticks are over extended and make significant price declines, you may need to be wary of oversold conditions.


Chart Example



The Three Black Crows can be seen in the shaded area on the following 15-minute Euro/USD Forex chart. The Three Blck Crows were made from a double tops level at around 1.30249 that was made at 2:15 AM and at 11:00 AM on May 14, 2013.