Common Candlestick Patterns

Candlestick patterns are a very popular tool in trading, and because of their appealing names and easily identifiable shapes, they are one of the most powerful tools a swing trader can use. If so with swing trading, so much more with option trading!

Here are some of the most common patterns, and how they are generally interpreted:

1. The Doji Pattern - Doji, Dragonfly Doji and Gravestone Doji

The Doji is characterised as having no or almost no body, meaning that the open and close are very close. A Doji on its own does not mean much, but it is important in the context of preceding bars, and you must also gives consideration to the length of the shadows. A Doji is usually Transitional.

Doji pattern

  • A plain Doji at the top of a uptrend or after a few long white bars show that the buyers are "tired" and have run out of steam. In fact, a Doji in this position is sometimes called the "Evening Star" or the "Death Cross" - it shows that a major reversal is about to take place. A plain Doji in a sideways trend shows that volatility is low. A few days like this usually leads to a major move, either up or down.
  • A Dragonfly Doji, with a long downwards tail, means that the open, high and close are the same or very close. Sellers tried to push the price down, but buyers pushed it back up again. In a downtrend, this could mean that buyers are emerging to reverse the trend. In an uptrend, it means that buyers could not push the price to a new high, and the sellers may be gaining strength - a trend reversal could be about to take place.
  • A Gravestone Doji has long upper shadow, which means that the open, low and close are the same, but that buyers were trying to push the price higher, to be overwhelmed by sellers at the end of the day. This could signal the weakening of an uptrend or a reversal of a downtrend.

2. Hammer, Hanging Man and Shooting Star

These three are similar to the Doji, but with a bit more body. They usually identify emotional extremes in trading trends.

hammer

For the same reasons as you find with the Doji patterns, these three show that either buyers or sellers tried to gain the upper hand, and then were overwhelmed, and a trend reversal follows.

3. Harami

Harami means "pregnant" in Japanese, and this pattern is characterised by small bodied candlestick coming AFTER a large bodied one. Imagine a pregnant woman walking from left to right! If the colour of the two bars are different, and they come at the top of an uptrend or the bottom of a downtrend, then this is a strong indicator of a trend reversal.

harami

4. Engulfing

Engulfing patterns are the exact opposite of the harami, and also strongly signify a trend reversal. The body of the candlestick is much bigger than that of the day before, indicating increased volatility, and more tussling between the buyers and sellers. The previous trend is being "engulfed" by a new direction.

Engulfing

5. Piercing Pattern and Dark Cloud Pattern

These two patterns are similar but opposite. A Piercing pattern shows a large bodied red or black candle in a downtrend is followed by a lower but larger white bodied candle which closes at least half way into the first candle. A powerful reversal pattern! The Dark Cloud means gloom for an uptrend - a large bodied white candle is followed by a higher but red or black candle that closes at least half way into the first candle. Great set up for a short trade!

Piercing

Final Note:

Candlestick patterns in isolation do not mean a lot. They must always be interpreted in the context of a prevailing trend. If you apply them to swing trading principles, then you must look for these combinations happening within the confines of the 10ma and the 30 ema, which is a pivot point or the "Trader's Action Zone". If you can master these indicators in this context, you are now very ready to start applying swing trading principles to buying and selling of options - this is where your REAL profit will come from.

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  • On this page you will learn the most common candlestick patterns used in swing trading, and how they are interpreted. Remember to always interpret them in the context of the prevailing trend. They are most useful to a swing trader when they occur between the 10ma and the 30 ema - this combination are the most powerful indicators of a swing trade.


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