This is an education post about simple but yet powerful candlestick patterns, and the logic behind it.
The main reason I have made this educational post, is it because most of the time, beginner traders will find difficult to identify patterns that they learn from educational sheets or drawings, when it comes to apply their learnings real life price action.
You need to be aware that in real life, the candlestick patterns will not emerge so perfect as in the educational drawings. Many times, they will be imperfect, and then you need to train your eye, and develop experience in recognizing these patterns when they emerge in different types of environments.
I will break down the candles, and show you the action inside them, with the help of orderbook and footprints, so that you can get a better understanding of what is really happening when one of these patterns are emerging. This is important to gain trust in your trading strategy, if you are going to apply it to your trading.
If you have read the post about candlesticks under the microscope, it will be easier to understand this, if not, you will find the link to it at the end of the post.
Green charts are bullish patterns, and red charts are bearish patterns. Basically, bearish patterns are a merrowed reflection of bullish patterns, but I am still going to explain them because it is very important ‘training’ for the eye and brain.
In every of the following example, you will see the Footprint candle, which will indicate the filled market orders, together with the orderbook, which represents pending orders.
The patterns can be identity both in reversal movements, as well as in the continuation of a move. You want to avoid this in periods with low volatility or price consolidation.
In this screenshot you can see what it means when the same pattern can be found as a reversal or as trend continuation.
NOTE: Because of many variables like time frame used, trading session or volatility, I am not recommending Take Profit size, because this is up to each individual or money management rules to decide.
BULLISH PATTERNS
1. BULLISH ENGULFING – The red bearish candle, represents aggressive sellers consuming liquidity and pushing the price down. The strength of this move is being invalidate in the moment the aggressive buyers are entering the market with the next candle, overtaking sell market and pending orders, AND VERY IMPORTANT, they are pushing the price ABOVE the highest candlestick level. That is the moment the sellers ‘where defeated’.
ENTRY – After the Bullish Engulfing candle will close
STOP LOSS – Under the low of green candle. Many times, the price will create a spike to the open or low of the bullish candle, the reason of that being stop loss hunt. So, if you want to place a smaller SL, there is fine as long as you test it and you feel comfortable with it, and very important you take responsibility for having it hit more often than normal, but for a bigger risks to reward.
2. MORNING STAR – There is a red candle signifying seller pushing the price down, followed by a neutral candlestick and then by a bullish one, closing above the red candle. The neutral candlestick has a very small body or no body at all, with spikes in one or both directions. This means that after the price was pushed down by the sellers, there is some type of resistance coming from the buyers side. This can be happen because of big pending orders that are blocking the aggressive sellers to push the price down.
The following green candle, is like a confirmation that the sellers where defeated, and the price might develop to a reversal.
ENTRY – After the close of the first following green candle. If the next candle stick forming is a red one, buy trade is invalidated.
STOP LOSS – under the low of the green candle
3. HAMMER – This type of candle, is forming aggressively in the opposite direction of the trend. Usually, the price is continued to move aggressively after this type of candle, because of the logic behind it.
The aggressive sellers are pushing the price down, but than very aggressively, the price is being pushed up, closing the candle with a large wick in the down side, and with the body of the candle green, without wick in the upside.
The fact that there is no candle wick in the upside, is showing that the price was pushed up aggressively before the close, by the buyers, and that the price might continue in the upside.
Please note similar candlesticks with larger
ENTRY – After the hammer candle was closed
STOP LOSS – Under the wick of hammer candlestick
4. TWEEZER BOTTOM – This is one of my favorites, because the seller are failing 2 times, in 2 different candles. First is a bearish candle that is creating a spike from a certain level, and then, the green one is also forming with a spike in the down side.
ENTRY – At the close of the green candle
STOP LOSS – Under the low of the green candle
BEARISH PATTERNS
1. BEARISH ENGULFING - This is the mirrored pattern of Bullish Engulfing, with the same story, but only that this time, the buyers are losing control, creating a reversal move in the down direction.
ENTRY – After the Bearish Engulfing candle close
STOP LOSS – Above the red Engulfing Candle
2. EVENING STAR – Same pattern but mirrored. In this example, a TP of 2R would not have been hit, but I have chosen this example to prove that these patterns will not work 100% of the time.
3.
ENTRY – After the Bearish candle, following the doji candle
STOP LOSS – above the red Bearish candle, following the doji candle
4. SHOOTING STAR – The difference between EVENING START, is that this candle, has a body developed with a spike in the up side of the candle. This means that the buyers are losing and the sellers had enough power to push the price down at from that level.
ENTRY – After a bullish candle is closed, following the SHOOTING STAR candle.
STOP LOSS – Many times the price will spike again above the wick of the SHOOTING START candle, just so the sellers get more liquidity for higher volume positions.
5. TWEEZER TOP – AS with the bullish pattern the principle is the same. What is very important to remember, is that the wicks are rejecting from the same level, meaning that there where enough selling power at that price.
ENTRY – After the bearish candle stick is closed
STOP LOSS – Above the highest wick, from the green or the red candle.
There are still some patterns that I have missed in this post, but what is important, is to understand that behind every candlestick formation there is a logical behavior. The price will not keep moving up or down forever, and there will always be signs of weakness from one of the sides.
So, if I need to give a general simple definition of this candlestick pattern, I will say that they are sign of weakness from one of the sides, in a trend movement, where the weaker part will cease place to stronger part.
Don’t Stumble Trading. Trade Safe!
The main reason I have made this educational post, is it because most of the time, beginner traders will find difficult to identify patterns that they learn from educational sheets or drawings, when it comes to apply their learnings real life price action.
You need to be aware that in real life, the candlestick patterns will not emerge so perfect as in the educational drawings. Many times, they will be imperfect, and then you need to train your eye, and develop experience in recognizing these patterns when they emerge in different types of environments.
I will break down the candles, and show you the action inside them, with the help of orderbook and footprints, so that you can get a better understanding of what is really happening when one of these patterns are emerging. This is important to gain trust in your trading strategy, if you are going to apply it to your trading.
If you have read the post about candlesticks under the microscope, it will be easier to understand this, if not, you will find the link to it at the end of the post.
Green charts are bullish patterns, and red charts are bearish patterns. Basically, bearish patterns are a merrowed reflection of bullish patterns, but I am still going to explain them because it is very important ‘training’ for the eye and brain.
In every of the following example, you will see the Footprint candle, which will indicate the filled market orders, together with the orderbook, which represents pending orders.
The patterns can be identity both in reversal movements, as well as in the continuation of a move. You want to avoid this in periods with low volatility or price consolidation.
In this screenshot you can see what it means when the same pattern can be found as a reversal or as trend continuation.
NOTE: Because of many variables like time frame used, trading session or volatility, I am not recommending Take Profit size, because this is up to each individual or money management rules to decide.
BULLISH PATTERNS
1. BULLISH ENGULFING – The red bearish candle, represents aggressive sellers consuming liquidity and pushing the price down. The strength of this move is being invalidate in the moment the aggressive buyers are entering the market with the next candle, overtaking sell market and pending orders, AND VERY IMPORTANT, they are pushing the price ABOVE the highest candlestick level. That is the moment the sellers ‘where defeated’.
ENTRY – After the Bullish Engulfing candle will close
STOP LOSS – Under the low of green candle. Many times, the price will create a spike to the open or low of the bullish candle, the reason of that being stop loss hunt. So, if you want to place a smaller SL, there is fine as long as you test it and you feel comfortable with it, and very important you take responsibility for having it hit more often than normal, but for a bigger risks to reward.
2. MORNING STAR – There is a red candle signifying seller pushing the price down, followed by a neutral candlestick and then by a bullish one, closing above the red candle. The neutral candlestick has a very small body or no body at all, with spikes in one or both directions. This means that after the price was pushed down by the sellers, there is some type of resistance coming from the buyers side. This can be happen because of big pending orders that are blocking the aggressive sellers to push the price down.
The following green candle, is like a confirmation that the sellers where defeated, and the price might develop to a reversal.
ENTRY – After the close of the first following green candle. If the next candle stick forming is a red one, buy trade is invalidated.
STOP LOSS – under the low of the green candle
3. HAMMER – This type of candle, is forming aggressively in the opposite direction of the trend. Usually, the price is continued to move aggressively after this type of candle, because of the logic behind it.
The aggressive sellers are pushing the price down, but than very aggressively, the price is being pushed up, closing the candle with a large wick in the down side, and with the body of the candle green, without wick in the upside.
The fact that there is no candle wick in the upside, is showing that the price was pushed up aggressively before the close, by the buyers, and that the price might continue in the upside.
Please note similar candlesticks with larger
ENTRY – After the hammer candle was closed
STOP LOSS – Under the wick of hammer candlestick
4. TWEEZER BOTTOM – This is one of my favorites, because the seller are failing 2 times, in 2 different candles. First is a bearish candle that is creating a spike from a certain level, and then, the green one is also forming with a spike in the down side.
ENTRY – At the close of the green candle
STOP LOSS – Under the low of the green candle
BEARISH PATTERNS
1. BEARISH ENGULFING - This is the mirrored pattern of Bullish Engulfing, with the same story, but only that this time, the buyers are losing control, creating a reversal move in the down direction.
ENTRY – After the Bearish Engulfing candle close
STOP LOSS – Above the red Engulfing Candle
2. EVENING STAR – Same pattern but mirrored. In this example, a TP of 2R would not have been hit, but I have chosen this example to prove that these patterns will not work 100% of the time.
3.
ENTRY – After the Bearish candle, following the doji candle
STOP LOSS – above the red Bearish candle, following the doji candle
4. SHOOTING STAR – The difference between EVENING START, is that this candle, has a body developed with a spike in the up side of the candle. This means that the buyers are losing and the sellers had enough power to push the price down at from that level.
ENTRY – After a bullish candle is closed, following the SHOOTING STAR candle.
STOP LOSS – Many times the price will spike again above the wick of the SHOOTING START candle, just so the sellers get more liquidity for higher volume positions.
5. TWEEZER TOP – AS with the bullish pattern the principle is the same. What is very important to remember, is that the wicks are rejecting from the same level, meaning that there where enough selling power at that price.
ENTRY – After the bearish candle stick is closed
STOP LOSS – Above the highest wick, from the green or the red candle.
There are still some patterns that I have missed in this post, but what is important, is to understand that behind every candlestick formation there is a logical behavior. The price will not keep moving up or down forever, and there will always be signs of weakness from one of the sides.
So, if I need to give a general simple definition of this candlestick pattern, I will say that they are sign of weakness from one of the sides, in a trend movement, where the weaker part will cease place to stronger part.
Don’t Stumble Trading. Trade Safe!
