Candlestick Patterns

• Remember, candlesticks indicate how bullish or bearish the market was during a time period

• The next sections will showcase how candlestick patterns can give us a better idea of the direction

Each candle can tell us whether the market was bullish or bearish for that time period

• Remember, that a single candle is an indicator of the current price action, it is not a guarantee that the price will continue higher or reverse lower.

• Always use other methods of confirmation: Trend lines, candle patterns, or continuation candles.

Bullish

• • Engulfing

  • Hammer

  • Morning Star Doji

Bearish

• Dark Cloud Cover

• Shooting Star

• Look for three bullish candles

• Each candle opens within the previous candle and closes above

• Entry - third candle rising above the second candle high on volume

• Entry - after third candle (82% chance of it continuing to rise)

• Look for volume confirmation (increasing volume)

• AKA Rally Base Rally

• Bullish candle followed by short bearish candle that does not go close lower than halfway down the first candle (typically lower volume than first candle)

• Entry - break above the previous high of the first two candles

• Look for volume to confirm the third candle (increasing volume)

• Bearish downtrend that ends with a bullish candle

• Bullish candle that OPENS lower than the CLOSE of the bearish candle

• Bullish candle CLOSES above the OPEN of the bearish candle

• Entry - Price Rises Above the Second Candle High

• This could be one or more candles before it rises above

• The pattern is negated if a candle closes below the engulfing candle

• Similar to a pullback

• Consists of five candles

• Bullish green candle, followed by three red candles that decrease in price and stay within the body of the first bullish candle, Fifth candle is bullish

• Entry - fifth candle close above the first bullish candle high

• 74% probability to continue trend

• Defined by a neckline (support level) and three rises above support

• Entry - upon break of the neckline with volume

• Exit - the height of the head (bottom of head to neckline) is typically used to determine the potential target

• Target = height of head + neckline

• Other targets may be bounce points or resistance areas. Look to the previous days or weeks.

• Reverse of the Double Top

• Double Bottoms occur due to large buying pressure by hedge funds that are attempting to enter their positions

• Used to identify breakouts of downtrending stocks

• The pullbacks or short moves up are buyers stepping in

• Often you will see large volume spikes prior to a complete reversal

• This represents people:

  • • buying to start their position

    • shorts buying back their position to take profits or cut losses

• Reverse of Three White Soldiers

• Entry - third candle dropping below the second candle low on volume

• Entry - after third candle (78% chance of it continuing to fall)

• Reverse of Bullish Three Bar Play - AKA Rally Base Rally

• Bearish candle followed by short bullish candle that does not go close higher than halfway up the first candle (typically lower volume than first candle)

• Entry - break below the previous low of the first two candles

• Look for volume to confirm the third candle (increasing volume)

• Reverse of Rising Three Method

• Consists of five candles

• Bearish red candle, followed by three green candles that increase in price and stay within the body of the first bearish candle, Fifth candle is bearish

• Entry - fifth candle close below the first bearish candle high

• 71% probability to continue trend

• Defined by a neckline (support level) and three rises above support

• Entry - upon break of the neckline with volume

• Exit - the height of the head (neckline to top of head) is typically used to determine the potential target.

• Target = neckline - height of head

• Other targets may be previous bounce points or support areas. Look to the previous days or weeks.

• See Sarah Strat Sniper 50% Rule - Price Reversal

• Reverse of the Double Bottom

• Double Tops occur due to large selling pressure by hedge funds that are attempting to take profits and exit their position

• Used to identify breakouts of uptrending stocks

• The resistance represents hedge funds that are attempting to liquidate their position (sell to take profits)

• Since hedge funds have large positions to sell off, it needs a considerable amount of people to buy from them; this can often appear as a price or pattern breakout only to see it drop back down again due to large selling

• This represents:

  • • retail and other firms buying to start their position

    • hedge funds exiting their position

• Just because a hedge fund is exiting their position, does not mean that it could not continue to rise; it is just unlikely unless other hedge funds are purchasing

• See Sarah Strat Sniper 50% Rule - Price Reversal

• Bearish candle engulfs the previous bullish candle

• Entry - Price falls below the low of the previous candle

• The pattern is negated if the candle breaks above the engulfing candle

• Personally, it the candle reverses and closes within the engulfing candle I would exit sooner.

• See Sarah Strat Sniper 50% Rule - Price Reversal