Lesson 22: Candlestick Patterns – Doji, Engulfing, Hammer & More
This lesson covers candlestick patterns, which help traders understand market sentiment and potential price reversals or continuations. Lesson Overview: 1. What Are Candlestick Patterns? 2. Single Candlestick Patterns Doji Hammer & Inverted Hammer Shooting Star 3. Multi-Candlestick Patterns Engulfing (Bullish & Bearish) Morning Star & Evening Star Harami (Bullish & Bearish) 4. How to Trade Candlestick Patterns 5. Key Takeaways
1. What Are Candlestick Patterns?
✔ Each candlestick represents price movement over a set time period. ✔ Consists of: Body: Difference between opening & closing price. Wick (Shadow): Highs & lows of the period. ✔ Colors: Green (Bullish): Close > Open (Price went up). Red (Bearish): Close < Open (Price went down). ? Candlestick patterns reflect market psychology and are strongest when combined with volume & technical indicators.
2. Single Candlestick Patterns
? Doji (Indecision Signal) ✔ Open & Close are nearly equal → Market uncertainty. ✔ Types: Standard Doji: Small body, long wicks (neutral). Dragonfly Doji: Long lower wick (bullish reversal). Gravestone Doji: Long upper wick (bearish reversal). ? Appears at key support/resistance levels before potential reversals. ? Hammer & Inverted Hammer (Bullish Reversal) ✔ Hammer (Bottom of a Downtrend): Small body, long lower wick. Shows buyers stepping in after initial selling. ✔ Inverted Hammer (Bottom of a Downtrend): Small body, long upper wick. Indicates potential trend reversal if followed by bullish confirmation. ? Buy signal when next candle closes above the hammer’s high. ? Shooting Star (Bearish Reversal) ✔ Appears at the top of an uptrend. ✔ Small body, long upper wick → Buyers lost control. ✔ Signals price rejection & potential downtrend. ? Sell confirmation when next candle closes below shooting star’s low.
3. Multi-Candlestick Patterns
? Engulfing Patterns (Trend Reversal Signals) ✔ Bullish Engulfing (Reversal to Uptrend): Small red candle followed by a large green candle. Green candle fully engulfs previous red candle. ✔ Bearish Engulfing (Reversal to Downtrend): Small green candle followed by a large red candle. Red candle fully engulfs previous green candle. ? Engulfing patterns work best at key support & resistance levels. ? Morning Star & Evening Star (Reversal Patterns) ✔ Morning Star (Bullish Reversal – Bottom of Downtrend): 1st Candle: Large red (bearish). 2nd Candle: Small body (indecision). 3rd Candle: Large green (bullish confirmation). ✔ Evening Star (Bearish Reversal – Top of Uptrend): 1st Candle: Large green (bullish). 2nd Candle: Small body (indecision). 3rd Candle: Large red (bearish confirmation). ? Volume should increase on the third candle for strong confirmation. ? Harami (Reversal or Continuation Signal) ✔ Bullish Harami (Potential Uptrend): Large red candle followed by a small green candle. Green candle is "inside" the red candle’s range. ✔ Bearish Harami (Potential Downtrend): Large green candle followed by a small red candle. Red candle is "inside" the green candle’s range. ? Harami patterns show loss of momentum and work best with trendlines & indicators.4. How to Trade Candlestick Patterns
- ✔ Step 1: Identify the pattern forming.
- ✔ Step 2: Confirm with technical indicators (RSI, MACD, Volume).
- ✔ Step 3: Enter trade after confirmation candle closes.
- ✔ Step 4: Set stop-loss at recent highs/lows.
- ✔ Step 5: Take profits at key resistance/support levels.
Example:
Hammer: Buy when price moves above the hammer’s high.
Bearish Engulfing: Sell when the next candle breaks below the engulfing candle.
Key Takeaways
- ✔ Candlestick patterns reflect market sentiment & potential trend shifts.
- ✔ Single candlestick patterns signal indecision or trend reversals.
- ✔ Multi-candlestick patterns confirm stronger reversal signals.
- ✔ Use volume & indicators for confirmation.
- ✔ Trade with stop-losses & profit targets.
Next Steps
The next lesson will cover "Risk Management – Position Sizing, Stop-Loss Strategies."