Candlestick Patterns – Part 2

Presenter: Sajid Khan Ghori

LEARNING OUTCOMES
High probable continuation & Reversal Candlestick Patterns

Contextual Reading & Tug of war of Buyers & Sellers

Hanging Man, Harami, Kicker & Star Patterns

Candlestick Chart
Japanese Candlestick chart is a style of price chart
which depict the plotting of the price movement of a
security or financial instrument.
An individual candle will usually plot the price
movement in one of two ways being up or down. A
candle that plots price movement in a positive or
upward direction is called a Bullish Candle. On other
hand, the candle that plots price movement in a
negative or downward direction is referred to as a
Bearish Candle.
You may get confused between dark and light candle
bodies, try to remember to look at each as if we were
talking about the weather. A dark body has a stormy
or bearish overtone and a clear body has a bright or
bullish outlook.
 Candlestick Patterns
Candlestick chart may seems a simple price chart at first glance but
a careful & investigative look tells the story of tug of war between
Buyers & Sellers.
Candlestick chart shows many different types of candles which vary
in the size of their bodies & wicks/shadows with each other.
Although every single candle portrays 4 types of price information
(as discussed earlier), not every candle has significance in terms of
anticipating the future direction of price movement.
There are some candlestick patterns which gives high probable
clues/hints of the likely future direction of price movement, are
called “Candlestick Patterns”. They have no value until they appear
on significant support & resistance levels.
 Hanging Man
This pattern is made up of three candles with the second (center)
candle being a hammer. On the third day, prices decline below the
shadow of the previous day’s hammer completing the formation.
We can observe selling coming the day after hammer forms.
Remember that a Hammer Candle is bearish at the top of an
uptrend. The buyers are able to regain control and push prices back
up towards the opening price or beyond forming the
lower shadow and small body of the hammer.
Even though the buyers were still around on the second day the initial selling is seen
as a warning the trend may be slowing. The third day’s dark candle is seen as
conformation of this warning. There are a few things we can look for that will make
this pattern more significant:
• A long shadow on the hammer candle indicating how much selling pressure was
present.
• Long bodied candles on the first and third day.
• The pattern forms at a point of technical resistance such as a major moving
average, upper trend line, or horizontal resistance.
 Harami Pattern
The Bullish Harami reversal signal occurs after a sizeable downtrend. A large black
candle forms on the first day, the price gaps up the next morning as buyers step in.
They are able to move prices higher all day, but not high enough to overtake the
opening price of the previous day’s candle.
There are a couple of things we can watch for to make the Harami pattern stronger:
• The longer both days’ candles are the better.
• The more the second day’s candle closes into the body of the first, the more
strength the signal shows.
• The pattern forms at a major technical support (Bullish).
The Bearish Harami reversal signal is seen after a significant rise in price. With a
white candle forming on the first day, the price gaps down on the second day to
open below the close of the first. The price falls throughout the day, closing lower,
but still above previous day’s opening price.
There are a couple of things we can watch for to make the Harami pattern stronger:
• The longer both days’ candles are the better.
• The more the second day’s candle closes into the body of the first, the more
strength the signal shows.
• The pattern forms at a major technical resistance (Bearish).
 Bullish Kicker
The Bullish Kicker is a two day reversal pattern that can be extremely strong but
sometimes hard to trade. The Bullish Kicker consists of a bearish dark candle on
the first day of the formation that forms after period of falling prices. The second
day should be a very bullish candle that gaps up to open from the close of the
previous day’s candle and closes above the high of the first day’s candle.

What makes the Bullish Kicker sometimes difficult to trade is the size of the gap
between the first and second day’s candle. Many times a Bullish Kicker will have a
very large gap, sometimes above the open of the second day’s candle. Many
times gaps this large will retrace themselves and the price will come back to fill the
gap to test it for support. This makes taking a long position a little tricky
sometimes.

There are a few criteria we can look for to strengthen the Bullish Kicker signal:
• The length of the second day’s candle.
• High trading volume on the second day.
• The distance from the close of the first day to the open of the second day.
• The pattern forms at a point of technical support such as a major moving
average, trend line, or horizontal support
 Bearish Kicker
The Bearish Kicker is the bearish counterpart to the Bullish Kicker with a
kicking or gapping candle. With the Bearish Kicker we are looking for the
pattern to form at the top of a trend and show bearish price action rather than
bullish price action at the bottom of a trend.
The Bearish Kicker is a two day reversal pattern that can also be hard to trade
for an end of day trader depending of the size of the gap. After a period of rising
prices we look for the pattern to form after a bullish white candle which will be
the first day of the pattern. The second day gaps down to open below the close
of the first day’s candle and sells off during the day to close below the open of
the first day’s bullish candle.

The following criteria will enhance the Bearish Kicker signal:

• The length of the second day’s candle. The longer the better.
• High trading volume on the second day.
• The distance from the close of the first day to the open of the second day.
• The pattern forms at a point of technical resistance such as a major moving
average, trend line, or horizontal resistance.
 Shooting Star
The Shooting Star pattern is a three day pattern consisting of a white (or clear)
bodied candle on the first day, followed by a small bodied black or white candle on
the second day that gaps up above the first day’s close. The final day of the Shooting
Star will complete the pattern with a longer than average black (or filled) candle that
gaps down below the body of the second candle, closing well into the body of the first
candle of the formation.

After a substantial uptrend, buyers carry prices higher as the first day of the formation
reveals itself. At the beginning of the second day there are enough buyers left to
cause a gap up in price but demand decreased as sellers move in to take their profits
and cause the formation of a candle with little price movement (small body). The third
days dark bodied candle forms as the sellers overtake buyers causing an oversupply,
prices gap down and quickly decline throughout the day, eliminating most or the
entire move of the previous two days.

There are a few indications you can look for to reinforce the signal:

• Very long candles on the first and third day of the formation.
• The third day penetrates the first days candle by greater than 50% or more.
• The pattern forms at a point of technical resistance such as an upper trend line,
major moving average, or horizontal price resistance.
 Morning Star
Morning Star is a three day reversal pattern that starts off with a dark candle on the
first day, followed by a black or white candle that gaps down in price but trades into
the range of the first day’s candle (shadow). The final day of the formation reveals
a white candle gapping up in price and closed well into the range of the candle of
the first day.

After a substantial downtrend, the first days candle reveals strong selling. On the
second day sellers open the day lower but are losing steam as buyers step in and
absorb the supply of stock causing a small trading range for the day. The third day
reveals buyers taking control as demand for the stock increases dramatically,
causing the last candle to trade well into the body of the first day’s candle and
wiping out losses for the period.

A few things we can look for to help strengthen the signal:

• The length of the downtrend preceding the formation.
• The length of the first and last candle. The longer the better.
• The distance the third candle trades into or above the candle of the first day.
• The pattern forms at a point of technical support such as a major moving
average, trend line, or horizontal support.
 Evening Star
Evening Star is a three day pattern that consists of a longer than average white (or clear)
bodied candle on the first day followed by a smaller black or clear candle that gaps up to open
above the close of the first day. The third candle is a longer than average black (or filled)
bodied candle that gaps down to open below the body of the second candle and trades well
into the body of the first candle. While the bodies of all three candles may be separated from
one another, the trading range of all three days will trade into one another which are
represented by the shadows.

After a substantial uptrend in price buyers carry prices higher on a very bullish day completing
the first day’s candle. The following day buyers are still strong enough to open above the
close but sellers comes in and supply & demand even out causing the small bodied candle on
the second day. The third and final day of the pattern reveals the demand at current prices
has dried up and sellers step in causing prices to sell off. Prices plummet throughout the day
well into the body of the first candle, eating up much of the gains of the last three days.

There are a few things we can look for to strengthen the Evening Star reversal signal:
• The length of the first and last candle of the formation.
• The distance in which the third candle penetrates the body of the first day’s candle.
• The length of the uptrend preceding the Evening Star formation.
• The pattern develops at a point of technical resistance such as a major moving average
upper trend line, or horizontal resistance.