Investors’ fear, greed and hope greatly influence stock prices.

Candlestick analysis shows the

interaction between buyers and sellers. It offers a quick picture into the psychology of short term
trading; it studies the effect, not the cause. Therefore, combining candlestick with other technical
tools helps select entry and exit points.

Hammer

A Hammer is identified by a small real body, i.e. a small range between the opening and closing
prices, and a long lower shadow, where the low is significantly lower than the open, high, and
close. The body can be empty or filled-in. If the Candlestick occurs after a significant downtrend,
it is a bullish Candlestick, whereas if it occurs after a significant up- trend, it is called a ‘Hanging
Man’.

Hammer Formation:

Piercing Line

This is a bullish pattern. The first Candlestick is a long black candle and the second candlestick
is a long white candle. The second candle opens lower than the first candles’ low, but it closes
more than halfway above the first candles’ real body.

Piercing line Formation:

Bullish Engulfing Lines
This pattern is strongly bullish if it occurs after a significant downtrend, i.e. it acts as a reversal
pattern. It occurs when a small bearish (filled-in) Candlestick is engulfed by a large (empty)
Candlestick.

This is a bullish pattern. The first Candlestick is a long black candle and the second candlestick
is a long white candle. The second candle opens lower than the first candles’ low, but it closes
more than halfway above the first candles’ real body.

Bullish Engulfing Formation

Morning Star

This is a bullish pattern, signifying a potential bottom. The “star” indicates a possible reversal and
the bullish (empty) Candlestick confirms this. The star can be empty or filled-in.

Morning Star Formation:

Evening Star

This is a bearish pattern, signifying a potential top. The “star” indicates a possible reversal and
the bearish (filled-in) Candlestick confirms this. The star can be empty or filled-in.

Hanging Man

These Candlesticks are bearish if they occur after a significant uptrend. If this pattern occurs
after a significant downtrend, it is called a Hammer. They are identified by small real bodies, i.e.
a small range between the open and closing prices, and a long lower shadow, i.e. the low was
significantly lower than the open, high, and close. The bodies can be empty or filled-in.

Hanging man Formation:

Dark Cloud Cover

This is a bearish pattern. The pattern is more significant, if the second candles’ body is below the
center of the previous candles’ body (as illustrated).
Bearish Engulfing Lines

This pattern is strongly bearish if it occurs after a significant up-trend, i.e. it acts as a reversal
pattern. It occurs when a small bullish (empty) candlestick is engulfed by a large bearish (filled-
in) candlestick.

Bearish Engulfing Formation:

Doji

This Candlestick implies indecision. It occurs when the security opened and closed at the same
price. These Candlesticks can appear in several different patterns.

Dragonfly Doji

This Candlestick also signifies a turning point. It occurs when the open and the close are the
same, and the low is significantly lower than the open, high, and closing prices.

Gravestone Doji

This Candlestick also signifies a turning point. It occurs when the open, close and low are the
same and the high is significantly higher than the open, low and closing prices.

Long-legged Doji
This Candlestick often signifies a turning point. It occurs when the open and close are the same,
and the range between the high and low is relatively large.

Long legged Doji Formation :

Doji Star

A star indicates a reversal and a Doji indicates indecision. Thus, this pattern usually indicates a
reversal, following an indecisive period. You should wait for a confirmation, for example, an
evening star illustration, before trading a Doji star.

Doji Star Formation:

Shooting Star

This pattern suggests a minor reversal when it appears after a rally. The star’s body must appear
near the low price and the candle should have a long upper shadow.
 Harami

This pattern is usually seen as a reversal of the current trend. It occurs when a Candlestick with
a small body falls within the area of a larger body.

Bullish Harami Formation:

Key Takeaways
 Candlestick patterns form as reversal and continuation types.
 Adding volume to the Candlestick charting often brings out actionable technical characteristics
that are not always visible when volume and price are plotted separately.
 Candlestick charts provide a unique visual effect that helps display certain market characteristics
which are not easily identifiable on a bar or line chart.

Continuation Patterns
Continuation Patterns derive their name from the fact that they generally continue in the direction
of the trend. Symmetrical Triangles, Ascending & Descending Triangles, Rectangles and Flags &
Pennants are the most common Continuation Patterns.
Reversal Patterns
Reversal Patterns have a tendency of reversing the trend. These consolidation patterns can
signal a reversal in both uptrend as well as downtrend.
Head and Shoulder
The Head and Shoulder pattern is generally regarded as a Reversal Pattern.Volume is of great
importance in the Head and Shoulder pattern. Volume generally follows the higher price on the
left shoulder. However, the head is formed on diminished volume, indicating the buyers.aren't as
aggressive as they once were. On the last rallying attempt, the right shoulder-volume is even
lighter than on the head, signaling that the buyers may have exhausted themselves.
 Head and Shoulder Formation:

Inverted Head and Shoulder

The Head and Shoulder pattern can sometimes be inverted.

Remember that:
 The inverted left shoulder should be accompanied by an increase in volume
 The inverted head should be made on lighter volume.
 The rally from the head, however, should show greater volume than the rally from the left
shoulder
 Ultimately, the inverted right shoulder should register the lightest volume of all.
 When the stock eventually rallies through the neckline, a big increase in volume should be seen.
 Inverted Head and Shoulder Formation:

Symmetrical Triangles
Symmetrical Triangles can be characterized as areas of indecision. A market pauses and future
direction is questioned. Typically, the forces of supply and demand at that moment are
considered nearly equal.

Remember that:
 Attempts to push higher are quickly met by selling, while dips are seen as bargains.
 Each new lower top and higher bottom becomes more shallow than the last, taking on the shape
of a sideways triangle. (It's interesting to note that there is a tendency for volume to diminish
during this period.)
 Eventually, this indecision is met with resolve and usually explodes out of this formation (often on
heavy volume.)
 Symmetrical Triangle Formation:

Ascending Triangles
The Ascending Triangle is a variation of the symmetrical triangle. Ascending Triangles are
generally considered bullish and are most reliable when found in an up-trend. The top part of the
Ascending Triangle appears flat, while the bottom part of the Ascending Triangle has an upward
slant.

Remember that:
 In Ascending Triangles, the stock becomes overbought and prices are turned back.
 Buying then re-enters the market and prices soon reach their old highs, where they are once
again turned back.
 Buying then resurfaces, although at a higher level than before.
 Prices eventually break through the old highs and are propelled even higher as new buying
comes in.

Ascending Triangles Formation:

 Descending Triangles
The Descending Triangle, also a variation of the Symmetrical Triangle, is generally considered to
be bearish and is usually found in downtrends.

Unlike the Ascending Triangle, this time, the bottom part of the Descending Triangle appears flat.
The top part of the triangle has a downward slant.

Remember that:
 Prices drop to a point where they are oversold.
 Tentative buying comes in at the lows, and prices perk up.
 The higher price, however, attracts more sellers and prices re-test the old lows.
 Buyers then once again tentatively re-enter the market.
 The better prices though, once again, attract even more selling.
 Sellers are now in control and push through the old lows of this pattern.
 At the same time, the previous buyers rush to dump their positions.

Descending Triangles Formation:

Wedges
The Wedge formation is also similar to a Symmetrical Triangle in appearance, in that it has
converging trend lines that come together at an apex. However, Wedges are distinguished by a
noticeable slant, either to the upside or to the downside. As with triangles, volume should
diminish during its formation and increase on its resolve.
 Remember that:
 A falling Wedge is generally considered bullish and is usually found in up-trends. However, it can
also be found in downtrends. The implication is still generally bullish. This pattern is marked by a
series of lower tops and lower bottoms.
 A rising Wedge is generally considered bearish and is usually found in downtrends. They can be
found in up trends too, but would still generally be regarded as bearish. Rising Wedges put in a
series of higher tops and higher bottoms.

Rising Wedge Breakdown:

Falling wedge Breakout:

 Flags and Pennants
Flags and Pennants can be categorized as Continuation Patterns. They usually represent only
brief pauses in a dynamic stock. They are typically seen right after a big, quick move. The stock
then usually takes off again in the same direction. Research has shown that these patterns are
some of the most reliable Continuation Patterns.

Remember that:
 Unlike Wedges, their trend lines run parallel.
 "Bear" flags also have a tendency to slope against the trend. Their trend lines run parallel as
well.
 Pennants look very much like Symmetrical Triangles. However, Pennants are typically smaller in
size (volatility) and duration.
 Volume generally contracts during the pause with an increase on the breakout.

Flag Pattern Breakout:

Rectangles
A Rectangle chart pattern indicates sideways action. When the market enters in a congestion
phase, it is likely to break out in the direction of the preceding trend.If two horizontal lines
surround a retracement, it is a Rectangle chart pattern. Both the bullish and bearish Rectangle
patterns look the same. However, they appear in different trend context.
 Remember that:
 The trend before the Rectangle chart pattern determines if the pattern is bullish or bearish.
 A Rectangle pattern continues the prior trend.
 Buy on break-out above the resistance line, or on pullback to the resistance line (now acting as
support), after the break-out.
 Sell on break-down below the support line, or on pullback to the support line (now acting as
resistance), after the break-down.
 Volume should increase when price breaks out of the resistance / support line

Rectangle Breakout:

Key takeaways
 Until a price pattern has been formed and completed, the assumption should be that the
prevailing trend is still operative.
 Price patterns can be formed over any time frame. The longer the time required toform a pattern,
the more substantial the ensuing price movement is likely to be.
 Measuring formulas can be derived for most type of patterns, but these are generally minimum
objectives. Prices usually extend much further.
 Price objectives represent the minimum ultimate target and are not normally achieved in one
move.