Candlestick patterns 101

What is a candlestick?
High High
Higher Tails/Shadows/Wicks

Close Open

Body

Open Close

Lower Tails/Shadows/Wicks
Low Low

Note : Some website/applications use white for denoting a positive day and black for denoting negative day.
The charts used in the presentation have a white candle for positive day and red candle for negative day.
Candlestick pattern – 4 step process for Trading
1) Direction of Price Before Formation: Analyze the price movement leading up to the candlestick
formation to determine the current trend (uptrend, downtrend, or sideways).

2) Detection of Candlestick Pattern: Identify key candlestick patterns (e.g., hammer, doji, engulfing)
that signal potential market reversals or continuations.

3) Confirmation of the Pattern: Wait for confirmation, such as a following candlestick that supports
the initial pattern’s signal, ensuring the pattern is valid.

4) Entry & Stop Loss: Enter the trade after confirmation, setting a stop loss below (or above) the
pattern with a margin of safety to protect against false signals.
 Candlestick process
1) The candlestick pattern has to be on a swing low or on a swing high.
(if not then ignore the candlestick pattern)
 Candlestick process
2) Each candlestick pattern is confirmed depending on the next days close known as the confirming
candle.

Incase of a candlestick pattern on a swing Incase of a candlestick pattern on a swing

low, the confirming candles close should high, the confirming candle’s close should be
be above the candlestick patterns close. below the candlestick patterns close.

C
C \
\
\
\ C
C

If yes then valid, if no then candlestick pattern has formed but failed to confirm and we should not take a trade
based on that candlestick pattern.
 Candlestick pattern - Doji
1. What is it?
A Doji is a candlestick with no or a very small body, meaning the
open and close prices are nearly identical. It signals indecision
between buyers and sellers.
2. How is it formed? Confirming
Candle Close
A Doji is formed when the market opens and closes at nearly the
\ GREATER
same price during a specific period, resulting in a candle with no THAN (>)
significant body, just wicks on both sides (upper and lower Candlestick
shadows). Pattern Close

3. What does it imply?

The Doji represents indecision or neutrality in the market. It
suggests that neither buyers nor sellers are in control, which often
signals a potential reversal or pause in the trend, especially when
it appears after a strong uptrend or downtrend.
4. How to take a trade?

● After an Uptrend: A Doji appearing after an uptrend might

indicate that the bullish momentum is weakening, signaling a
possible reversal. You may consider taking a short position
after confirmation from the next candlestick.
\
● After a Downtrend: If a Doji forms after a downtrend, it Confirming
may signal a bullish reversal. A long position could be Candle Close
LESSER THAN (>)
considered after a confirming bullish candle.
Candlestick
Pattern Close
5. Where do I keep a stop loss?

Set a stop loss slightly above the high of the Doji if going short or
slightly below the low of the Doji if going long. This provides a
margin of safety in case of a false signal.
 Candlestick pattern - Doji
1. Doji (Standard)
● Description: A Doji has a very small or no body, with wicks on both
sides, indicating that the opening and closing prices are nearly the same.
● Implication: Signals indecision in the market and can indicate a
potential reversal when found after strong trends.

2. Long-Legged Doji
● Description: A Doji with long upper and lower wicks, showing
significant price movement during the period but with no clear winner
between buyers and sellers. Doji Long Legged
Doji
● Implication: Strong indecision, with the market highly volatile but
unable to commit to either direction.
3. Dragonfly Doji
● Description: A Doji with a long lower wick and almost no upper
wick, meaning the price fell significantly but closed near the opening
price.
Dragonfly
● Implication: Often appears at the bottom of downtrends, suggesting Doji
a potential bullish reversal as selling pressure weakens.

4. Gravestone Doji
● Description: A Doji with a long upper wick and little to no lower
wick, indicating the price rose significantly during the session but
closed near the opening price.
● Implication: Common at the top of uptrends, signaling potential

bearish reversals as buying pressure fades. Gravestone

Doji
Example of Doji on swing low
Example of Doji on swing high
Example of Long Legged Doji on swing low
Example of Long Legged Doji on swing high
Example of Dragonfly Doji
Example of Gravestone Doji
Candlestick pattern – Spinning bottom / top
1. What is it?

A Spinning Top/ Bottom is a candlestick pattern characterized by a small body

located in the center of the candle, with long upper and lower shadows (tails) that are
significantly longer than the body. The small body shows that there was little difference
between the opening and closing prices, indicating a balance between buyers and
sellers.

2. How is it formed?

A Spinning Top/ Bottom is formed when the price moves significantly both up and
down during the session but closes near the opening price, resulting in long wicks (tails)
\
and a small central body. The tails represent volatility and indecision in the market.

3. What does it imply?

The Spinning Top/ Bottom indicates indecision or a pause in the current trend, as Confirming Candle
neither buyers nor sellers have taken control. After a strong trend, the appearance of a Close
GREATER THAN (>)
Spinning Top/ Bottom may signal that the current trend is weakening, which could lead
Candlestick Pattern
to a reversal or consolidation. Close
4. How to take a trade?
● After an Uptrend: A Spinning Top appears after a sustained
uptrend, it could signal that the bullish momentum is fading.
Consider entering a short position if the next candlestick \
confirms a bearish move (e.g., a bearish candlestick following
the Spinning Top).
● After a Downtrend: A Spinning Bottom appears after a
downtrend, it could suggest that the bearish momentum is
weakening. A long position might be considered after
confirmation from a bullish candlestick.

5. Where do I keep a stop loss?

● For a Short Position: Place the stop loss above the high of the
Spinning Top’s upper wick. Confirming Candle Close
● For a Long Position: Place the stop loss below the low of the LESSER THAN (>)
Spinning Top/ Bottom ’s lower wick. Candlestick Pattern Close
Example of Spinning bottom
Example of Spinning Top
 Candlestick pattern – Hammer
What is a Hammer?
A hammer is a type of candlestick pattern used in technical analysis to signal potential
reversals in the price of an asset. It is a single candle pattern characterized by a small
body at the top of the price range and a long lower shadow. The appearance of a
hammer suggests that a downtrend might be reversing.
How is it Formed?
A hammer candlestick forms during a downtrend or down move. Its features are:
● Small Body: The real body of the candlestick (the area between the opening and
closing price) is small and located near the top of the trading range.
● Long Lower Shadow: The lower shadow (the line extending below the body) is at
least twice the length of the body.
● Little or No Upper Shadow: The upper shadow (the line extending above the
body) is either very short or nonexistent.
What Does it Imply?
The hammer pattern implies that the sellers drove the price down during the trading
session but that buyers pushed it back up near the opening price by the close. This can Hammer
indicate a potential reversal of the current downtrend.
How to Take a Trade?
When you see a hammer pattern, here’s a general approach to taking a trade:
1. Confirm the Pattern: Ensure that the hammer appears after a downtrend. The more significant the downtrend
prior to the hammer, the more reliable the pattern might be.
2. Confirmation Candle: Look for a confirming candle that appears after the hammer. This confirmation candle
should ideally be bullish (closing higher than it opened) and should validate the reversal signal of the hammer.
3. Entry Point: You might consider entering a trade when the price breaks above the high of the hammer candle.

Where to Keep a Stop Loss?

To manage risk, place your stop loss:
● Below the Hammer's Low: A common approach is to set the stop loss just below the low of the hammer
candle. This way, if the price falls below this level, the hammer's reversal signal may be invalidated, and you
can limit your losses.
● Adjust According to Volatility: Depending on the asset's volatility, you might adjust your stop loss to
account for market fluctuations.
Example of Hammer
 Candlestick pattern – Hanging man
1. What is it?

The Hanging Man is a bearish reversal candlestick pattern that typically forms at the top of an uptrend. It
has a small real body (can be either green or red) near the upper end of the price range and a long lower
wick (tail). This pattern resembles a "hanging man," suggesting that selling pressure is increasing.

2. How is it formed?

A Hanging Man is formed when:

● The market opens, then trades lower significantly during the session (forming a long lower shadow).
● However, it recovers to close near or slightly below the opening price, leaving a small body and
long lower shadow.

This pattern signals that even though buyers pushed prices up, sellers started gaining strength during the Hanging man
session, indicated by the long lower shadow.

3. What does it imply?

The Hanging Man implies potential bearish reversal in an uptrend. It suggests that selling pressure is
increasing, and while buyers managed to bring the price back up, the selling pressure could take over in
the next session. It indicates the possibility of a market top and the beginning of a downtrend.
4. How to take a trade?
● Wait for confirmation: The Hanging Man itself isn’t a strong signal for entry. After the Hanging Man
forms, wait for confirmation from the next candlestick, which should be a bearish candle (e.g., a long
red candlestick or a gap down).
● Enter a short position if a bearish confirmation candle appears after the Hanging Man, indicating the
trend may be reversing.
5. Where do I keep a stop loss?
● For a short trade, place the stop loss above the high of the Hanging Man’s upper shadow (the high of
the session).
● This helps ensure that if the market breaks above the recent high, the bearish reversal may not play out,
and the trend could still be bullish.
By keeping the stop loss above the highs, you protect against a false signal while allowing the trade to play
out with a reasonable margin of safety.
Example of Hanging man
Candlestick pattern – Inverted Hammer
1. What is it?

An Inverted Hammer is a bullish reversal candlestick pattern that typically forms after a
downtrend. It has a small real body near the lower end of the price range and a long upper
shadow (wick), with little to no lower shadow. This pattern suggests that while bears were in
control, bulls started pushing the price higher, signaling a potential trend reversal.

2. How is it formed?

An Inverted Hammer is formed when:

● The market opens and moves higher during the session (forming a long upper shadow),
but sellers push the price back down near the opening level.
● Despite the pullback, the presence of a long upper shadow suggests that buyers are
starting to gain strength.

3. What does it imply?

The Inverted Hammer indicates potential bullish reversal at the bottom of a downtrend. It
suggests that although sellers were able to push the price down, buyers are showing signs of
strength by driving prices higher during the session. This pattern signals that selling pressure
may be weakening, and a reversal to the upside could follow.
Inverted Hammer
4. How to take a trade?

● Wait for confirmation: The Inverted Hammer alone isn’t a strong enough signal. Wait for a confirming
bullish candlestick in the next session (e.g., a strong green candle or a gap up) to validate the reversal.
● Enter a long position after confirmation from a bullish candle following the Inverted Hammer, signaling
the market may be ready to reverse upward.

5. Where do I keep a stop loss?

● For a long trade, place the stop loss below the low of the Inverted Hammer’s lower shadow (the lowest
point of the session).
● This ensures that if the market breaks below the recent low, the bullish reversal may not play out, and the
downtrend could continue.

Key Characteristics:

● Small body near the lower end of the candle.

● Long upper wick (shadow) that is at least twice the length of the body.
● Little or no lower shadow.
● Occurs at the bottom of a downtrend.
Example of Inverted hammer
 Candlestick pattern - Shooting Star
1. What is it?

A Shooting Star is a bearish reversal candlestick pattern that typically appears at the top of an
uptrend. It has a small real body near the lower end of the price range and a long upper shadow
(wick), with little to no lower shadow. The pattern resembles a star falling from the sky,
indicating that the bulls may be losing control.

2. How is it formed?

A Shooting Star is formed when:

● The market opens and moves significantly higher during the session, creating a long upper
shadow.
● However, sellers push the price back down, resulting in the candle closing near or below
the opening price, leaving a small body at the bottom of the range.

3. What does it imply?

The Shooting Star suggests potential bearish reversal in an uptrend. It indicates that buyers
were initially in control but lost momentum as sellers entered the market and pushed prices
back down. This signals a potential weakness in the uptrend and the possibility of a trend Shooting star
reversal to the downside.
4. How to take a trade?

● Wait for confirmation: The Shooting Star alone isn’t a reliable signal. Wait for confirmation in the form of a bearish
candlestick in the next session (e.g., a strong red candle or a gap down) to confirm the reversal.
● Enter a short position after the confirmation, signaling that the market may be ready to reverse downward.

5. Where do I keep a stop loss?

● For a short trade, place the stop loss above the high of the Shooting Star’s upper shadow (the highest point of the
session).
● This ensures that if the market breaks above the recent high, the bearish reversal may not materialize, and the uptrend
could continue.

Key Characteristics:

● Small body near the lower end of the candle.

● Long upper shadow that is at least twice the length of the body.
● Little or no lower shadow.
● Appears at the top of an uptrend.
Example of Shooting star