The information on this page is derived from my book, Encyclopedia of Candlestick Charts , pictured on the right.Once you click on a link, you will be taken to a page describing the candlestick. The glossary defines the terms used on the individual candlestick pages, but the black arrow on the figure shows which way price usually moves after the candlestick pattern ends. The top 10 performing reversal candlesticks appear below. -- Thomas Bulkowski  |
Thursday 29 March 2018
Top 10 Reversal Candlesticks
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Top 10 Continuation Candlesticks
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| The information on this page is derived from my book, Encyclopedia of Candlestick Charts, pictured on the right. Once you click on a link, you will be taken to a page describing the candlestick. The glossary defines the terms used on the individual candlestick pages, but the black arrow on the figure shows which way price usually moves after the candlestick pattern ends. Shown are the top ten performing candlestick patterns, based on performance of those that act as continuations of the prevailing price trend in a bull market. -- Thomas Bulkowski  |
10 Performing Candlesticks
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| The information on this page is derived from my book, Encyclopedia of Candlestick Charts, pictured on the right. Once you click on a link, you will be taken to a page describing the candlestick. The glossary defines the terms used on the individual candlestick pages, but the black arrow on the figure shows which way price usually moves after the candlestick pattern ends. The top 10 performing candlesticks appear below, based on their overall performance rank in both bull and bear markets. -- Thomas Bulkowski  |
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Monday 26 March 2018
Sunday 25 March 2018
PINOCCHIO BAR TRADE SETUP (PIN BAR)
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The Pinocchio bar (pin bar) is a very popular price pattern among active traders. In Martin Pring’s “Technical Analysis Explained”, he called the pattern Pinocchio because it lies.
It lies about the market direction. And its long nose exposes the lie.
So we expose the pin bar below.
The concept behind pin bars explains its efficacy. Traders place their entry orders and stop orders at support and resistance levels. Pin bars, by making a short-lived break of the levels, give false hope to traders in the wrong direction. As the pin bar closes back within the support or resistance, prices make a run for the other direction.RULES FOR LONG
- Bar opens above support
- Bar trades below support for most of the range of the bar
- Bar closes above support
RULES FOR SHORT
- Bar opens below resistance
- Bar trades above resistance for most of the range of the bar
- Bar closes below support
WINNING TRADE
This daily chart of AT&T shows a pin bar that began a swift down trend.- There was an existing up trend followed by a cup and handle pattern that signaled the bull trend to continue.
- However, the cup and handle formation failed quickly with a pin bar that poked above the “cup rim” before closing below the resistance.
- After the pin bar triggered a short entry, prices tried to move up but could not gain momentum despite several tries. In fact, it was better to wait and enter after the failed attempts to move up.
LOSING TRADE
This is a 5-minute chart of E-mini futures on NASDAQ 100. We included part of the previous and next trading sessions to highlight the context of the trade.- After a prolong congestion, prices broke down strongly and stopped at yesterday’s low with a two-bar reversal pattern.
- The pin bar was the second test of the low of yesterday’s session. Given that it was the second test of yesterday’s low, it was a good trade. However, we got stopped out quickly.
- After a final thrust down, prices drifted up and gapped up the next day to continue its way up. Indeed, there was buying pressure below the support tested by the pin bar. However, the pin bar was not the ideal entry point in this case.
REVIEW – PINOCCHIO BAR TRADE SETUP (PIN BAR)
A pin bar is a unique price pattern because it is not defined by one, two, or even three bars. It is defined by the entire market structure.
We can only label a pin bar after looking at support or resistance levels that it penetrated.
Given the right context, the pin bar offers a reliable point of entry. Focus on pin bars that penetrate major support or resistance. Then, find confirmation from other indicators or chart patterns, and you have a high probability trade.
When confirmation is lacking, it is a good idea to delay your entry. Let more price action unfold after the pin bar and enter if it confirms the pin bar.
Need help find the pin bar on your charts? Get an indicator for five price action patterns including pin bar here.
You should refer to Martin Pring’s solid work on technical analysis to learn more about the pin bar and other bar patterns.
10 PRICE ACTION BAR PATTERNS YOU MUST KNOW
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Bar patterns are nifty short-term patterns that are useful for timing trades and finding logical stop-loss points. No price action trader can do without learning about bar patterns.
So these are 10 bar patterns that you must know.
Reversal Bar Patterns
1. Reversal Bar
Volatility Bar Patterns
8. Inside Bar
9. Outside Bar
10. NR7
1. REVERSAL BAR PATTERN
What does it look like?
A bullish reversal bar pattern goes below the low of the previous bar before closing higher.
A bearish reversal bar pattern goes above the high of the last bar before closing lower.
What does it mean?
For the bullish pattern, the market found support below the low of the previous bar. Not only that, the support was strong enough to push the bar to close higher than the previous bar. This is the first sign of a possible bullish reversal.
For the bearish pattern, the market met resistance above the high of the previous bar. Furthermore, the resistance was powerful enough to cause the current bar to close lower.
How do we trade it?
- Buy above the bullish reversal bar in an uptrend
- Sell below the bearish reversal bar in a downtrend
2. KEY REVERSAL BAR
What does it look like?
A key reversal bar is a particular instance of a reversal bar that shows clearer signs of a reversal.
A bullish key reversal bar opens below the low of the previous bar and closes above its high.
A bearish key reversal bar opens above the high of the previous bar and closes below its low.
By definition, key reversal bars open with a price gap. As gaps within intraday time frames are rare, you will find most key reversal bars in the daily and above time-frames.
What does it mean?
A down gap is a powerful down thrust. When the market rejects such a strong bearish move with certainty, it might have reversed its sentiment to bullish.
On the other hand, when a gap upwards bumps into clear resistance, the market might have turned bearish.
Essentially, a key reversal bar is a violent display of strength that hints at a change of market sentiment.
How do we trade it?
- Buy above a bullish key reversal bar (If uncertain, wait for the price to close above it before buying.)
- Sell below a bearish key reversal bar (If unsure, wait for the price to close below it before selling.)
3. EXHAUSTION BAR
What does it look like?
A bullish exhaustion bar opens with a gap down. Then, it works its way up to close near its top.
A bearish exhaustion bar opens with a gap up before moving down to close as a bearish bar.
In both cases, the gap remains unfilled. Also, high volume should occur with the exhaustion bar.
What does it mean?
Its name explains it all. It represents exhaustion and a failed last-ditch attempt.
After the bears are exhausted, the bulls will take over, and the market will rise.
After the bulls are exhausted, the bears will take the market down.
How do we trade it?
- Buy above a bullish exhaustion bar
- Sell below a bearish exhaustion bar
4. PINOCCHIO BAR (PIN BAR)
What does it look like?
It resembles the nose of Pinocchio. It has a long and distinct tail.
For bullish pin bars, the lower tail takes up most of the bar. For bearish pin bars, it is the upper tail that dominates.
What does it mean?
Paraphrasing Martin Pring, the pin bar lies like Pinocchio.
With its long tail, a pin bar breaks a support or resistance momentarily to trick traders into entering the wrong direction. These traders are trapped, and there is often money to be made when you find trapped traders.
How do we trade it?
- Buy above a bullish pin bar that is rejected from support level
- Sell below a bearish pin bar that is rejected from a resistance level
5. TWO-BAR REVERSAL
What does it look like?
The two-bar reversal pattern is made up of two strong bars closing in opposite directions.
The bullish variant consists of a strong bearish bar followed by a bullish bar. Reverse the order to get its bearish counterpart.
What does it mean?
Every reversal pattern works on the same premise. A clear rejection of a downward thrust is a bullish reversal, and a clear rejection of an upthrust is a bearish reversal.
In this case, the first bar represents the first thrust, and the second bar represents its rejection.
How do we trade it?
- For bullish reversals, buy above the highest point of the two-bar pattern.
- For bearish reversals, sell below the lowest point of the two-bar pattern.
6. THREE-BAR REVERSAL
What does it look like?
In sequence, the three bars of the bullish pattern are:
- A bearish bar
- A bar has a lower high and lower low
- A bullish bar with a higher low and closes above the high of the second bar
Accordingly, the bearish pattern is made up of:
- A bullish bar
- A bar has a higher high and higher low
- A bearish bar with a lower high and closes below the low of the second bar
What does it mean?
A three-bar reversal pattern shows a turning point. Compared to the other reversal patterns, the three-bar reversal pattern is the most conservative one as it extends over three bars, using the third bar to confirm that the market has changed its direction.
How do we trade it?
- Buy above the last bar of the bullish pattern
- Sell below the last bar of the bearish pattern
7. THREE-BAR PULLBACK
What does it look like?
This bar pattern is easy to identify.
Three consecutive bearish bars form a bullish pullback pattern, and three consecutive bullish bars form a bearish pullback pattern.
What does it mean?
When the market is trending, it is hard to sustain a counter-trend pullback. Hence, after a pullback of three bars, the trend is ready to resume.
How do we trade it?
- Within a bull trend, wait for three consecutive bearish bars. Then, buy above the next bullish bar.
- Within a bear trend, wait for three consecutive bullish bars. Then, sell below the next bearish bar.
8. INSIDE BAR
What does it look like?
An inside bar must stay completely within the range of the bar immediately before it. In other words, the second bar must have a lower high and a higher low.
What does it mean?
An inside bar is a contraction in price range/volatility. Within the same unit time, the market covers less ground and stays completely within the range of the previous bar.
It is a pause in price action and does not show clear strength in either direction.
How do we trade it?
- Place bracket orders around it to trade its breakout in either direction. (A buy stop order above its high, and a sell stop order below its low. Once one order is triggered, cancel the other.)
- Place only one order (buy or sell) according to the market trend.
- Wait for a breakout of the inside bar and trade its failure.
9. OUTSIDE BAR
What does it look like?
An outside bar pattern is the polar opposite of an inside bar.
Its range must exceed that of the previous bar with a higher high and a lower low.
What does it mean?
It is a short-term expansion in price range/volatility. It shows strength in both directions.
In most cases, it is uncertain if the bulls or the bears have won. The only certainty is the increased volatility.
How do we trade it?
- Wait for a break-out of the outside bar and fade it. (Especially for outside bars that look like dojis, or those that go against the trend.)
- Trade its break-out, especially when the outside bar closes near its top or bottom. (e.g., Popgun Pattern)
10. NR7
What does it look like?
This bar pattern requires seven bars. If the last bar has the smallest bar range within the sequence, it is an NR7 pattern.
To clarify, bar range refers to the difference between the high and the low of a bar.
What does it mean?
Like the inside bar, it indicates decreasing volatility.
As the lower volatility comes within the context of seven bars, instead of a single bar like in the case of an inside bar, the NR7 pattern is a stronger sign of decreasing volatility.
However, while the inside bar shows no strength in either direction, the NR7 pattern might drift upwards or downwards. In such cases, the NR7 represents a price thrust with decreasing volatility.
As the market alternates between range contraction and range expansion, the NR7 alerts us to standby for explosive moves.
How do we trade it?
- Buy break-out of the high of the last bar if the trend is up
- Sell break-out of the low of the last bar if the trend is down
10 PRICE ACTION CANDLESTICK PATTERNS YOU MUST KNOW
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Are you using candlestick charts as your default chart type for price action analysis?
Most likely, the answer is yes. In that case, why not make the most out of it by mastering candlestick patterns?
According to Thomas Bulkowski’s Encyclopedia of Candlestick Charts, there are 103 candlestick patterns (including both bullish and bearish versions). While the encyclopedia is great for reference, there is no need to memorise the 929-page compendium.
Simply learn these 10 candlestick patterns for an illuminating foundation.
Basic Sentiment Candlesticks
1. Doji
2. Marubozu
Reversal Candlestick Patterns
3. Harami
4. Engulfing
10. Hikkake
1. DOJI
What does it look like?
It looks like a cross, with the same opening and closing prices.
What does it mean?
Simple. In a Doji candlestick, price is essentially unchanged. Hence, it represents market indecision. It’s like an area of congestion compressed into one candlestick.
How do we trade it?
- Trade it like a reversal signal (if there is a trend to reverse)
- Treat it as a signal to stand aside (if there is no trend to reverse)
2. MARUBOZU
What does it look like?
A Marubozu is the polar opposite of a Doji. Its opening price and closing price are at the extreme ends of the candlestick.
Visually, it is a block.
What does it mean?
A Marubozu that closes higher signifies powerful bullish strength while one that closes lower shows extreme bearishness.
How do we trade it?
The Marubozu is more useful as a learning tool than as a pattern for trading. Together with the Doji candlestick, they highlight the extremes of the candlestick spectrum.
By placing a candlestick on this spectrum, we are able to judge the directional strength of any bar.
If you must trade the Marubozu pattern, consider the following.
- Continuation pattern in a strong break-out aligned with the market bias
- Part of another candlestick pattern (discussed below)
3. HARAMI CANDLESTICK
What does it look like?
Just remember that Harami means pregnant in old Japanese. The first candlestick is the mother, and the second candlestick is the baby.
Focus on their bodies. The body of the baby bar must be entirely within the body of the mother bar.
Typically, in a bullish Harami, the first bar closes lower than it opens while the second bar closes higher. Similarly, in a bearish Harami, the first bar closes higher than it opens while the second bar closes lower.
What does it mean?
It means that the market has come to a muted reversal.
The candle body stands for the real price change of the candle regardless of its intra-candle excursions. Hence, it represents the real and conclusive movement of the candlestick. The smaller candle bodies points to decreased volatility. Thus, it is not surprising that many Harami candlestick patterns are also inside bars.
Compared with the Engulfing candlestick pattern below, it is a weaker reversal pattern.
How do we trade it?
- In a bull trend, use the bullish Harami to pinpoint the end of bearish retracement.
- In a bear trend, use the bearish Harami to pinpoint the end of bullish retracement.
4. ENGULFING CANDLESTICK
What does it look like?
Simply flip a Harami pattern horizontally and you will get an Engulfing pattern.
The body of the second candle completely engulfs the body of the first.
What does it mean?
Again, the focus on the candle bodies looks for a real reversal. In this case, the second candle body fully engulfs the first and represents a strong reversal signal.
How do we trade it?
- In a bull trend, buy above the bullish Engulfing pattern for bullish continuation.
- In a bear trend, sell below the bearish Engulfing pattern for bearish continuation.
5. PIERCING LINE / DARK CLOUD COVER
What does it look like?
The Piercing Line and the Dark Cloud Cover refer to the bullish and bearish variants of the same two-bar pattern.
The first candlestick of the Piercing Line pattern is bearish. The second candlestick:
- Opens below the low of the first candlestick; and
- Closes above the mid-point of the first candlestick.
As for the Dark Cloud Cover pattern, the first candlestick is bullish. The second candlestick:
- Opens above the high of the first candlestick; and
- Closes below the mid-point of the first candlestick.
Due to the first criterion of both patterns, the second bar must open with a gap away from the close of the first bar. Hence, these candlestick patterns are unusual in intraday time-frames where gaps are uncommon.
What does it mean?
It means some traders are sorely disappointed.
In the Piercing Line pattern, the second bar opened with a gap down, giving an initial hope of a strong bearish follow-through. However, not only did the bearishness fail to materialise, it proceeded to erase more than half of the bearish gains from the first bar. This bullish shock offers a great long trade.
Likewise in the Dark Cloud Cover pattern, the first gap up prompted hope from the bulls before the lower close crushed it.
How do we trade it?
- Find major bullish reversals with the Piercing Line pattern (preferably after a break of a bear trend line)
- Find major bearish reversals with Dark Cloud Cover pattern (preferably after a break of a bull trend line)
6. HAMMER / HANGING MAN CANDLESTICKS
What does it look like?
Let’s get this straight. Both the Hammer and the Hanging Man patterns look exactly the same.
Both have a:
- Candle body near the top of the candlestick; and
- A long lower shadow (around twice of the candle body).
(Color of the candle body does not matter.)
The difference is this. The Hammer pattern is found after a market decline and is a bullish signal. However, the Hanging Man appears (as an ill-omen) at the end of a bull run and is a bearish signal.
What does it mean?
The Hammer pattern traps traders who sold in the lower region of the candlestick, forcing them to cover their shorts. As a result, they produce buying pressure for this bullish pattern. Its bar pattern equivalent is the bullish Pin Bar.
The Hanging Man pattern is a seemingly bullish candlestick at the top of an upwards trend. Infected by its optimism, traders buy into the market confidently. Hence, when the market falls later, it jerks these buyers out of their long positions. This also explains why it is better to wait for bearish confirmation before going short based on the Hanging Man pattern.
How do we trade it?
- In a downtrend, buy above the Hammer pattern for a reversal play. (You can also trade the Hammer pattern like a bullish Pin Bar.)
- In a uptrend, sell below the Hanging Man pattern for a reversal play after bearish confirmation.
7. INVERTED HAMMER / SHOOTING STAR CANDLESTICKS
What does it look like?
Simply invert the Hammer pattern.
The Inverted Hammer is visually identical to the Shooting Star pattern.
The difference is in where you find them. An Inverted Hammer is found at the end of a downtrend while a Shooting Star is found at the end of a uptrend.
What does it mean?
The Inverted Hammer is a bullish pattern. In a down trend, the Inverted Hammer pattern emboldens the sellers. Hence, when the Inverted Hammer fails to push the market down, the bullish reaction is violent.
The bearish Shooting Star pattern implies a different logic. The Shooting Star traps buyers who bought in its higher range, forcing them to sell off their long positions and hence creating selling pressure. Its bar pattern equivalent is the bearish Pin Bar.
How do we trade it?
- In a downtrend, buy above the Inverted Hammer pattern for a reversal play after bullish confirmation.
- In a uptrend, sell below the Shooting Star pattern for a reversal play. (You can also trade it like a bearish Pin Bar.)
8. MORNING STAR / EVENING STAR
What does it look like?
Both star patterns are three-bar patterns.
In candle-speak, a star refers to a candlestick with a small body that does not overlap with the preceding candle body. Since the candle bodies do not overlap, forming a star will always involve a gap. Thus, it is uncommon to find Morning Stars and Evening Stars in intraday charts.
A Morning Star comprises (in sequence):
- A long bearish candlestick
- A star below it (either bullish or bearish)
- A bullish candlestick that closes within the body of the first candlestick
An Evening Star comprises (in sequence):
- A long bullish candlestick
- A star above it (either bullish or bearish)
- A bearish candlestick that closes within the body of the first candlestick
This pattern is similar to the three-bar reversal.
What does it mean?
The first candlestick in the Morning Star pattern shows the bears in control. The star hints at a transition to a bullish market. Finally, the strength of the last candlestick confirms the bullishness.
The Evening Star expresses the same logic. The first candlestick shows the bulls in control. Uncertainty sets in with the star candle. The last candlestick confirms the bearishness.
How do we trade it?
We apply both patterns to catch reversals as well as continuations.
- Buy above the last bar of the Morning Star formation
- Sell below the last bar of the Evening Star formation
9. THREE WHITE SOLDIERS / THREE BLACK CROWS
What does it look like?
Each of the three candlesticks in the Three White Soldiers should open within the previous candle body and close near its high.
Each of the three candlesticks in the Three Black Crows should open within the previous candle body and close near its low.
What does it mean?
In the Three White Soldiers pattern, each bar opens within the body of the previous candlestick and suggests a potential fall. However, each bar ends up with a strong and high close. After three instances, the bullishness is undeniable.
In the Three Black Crows pattern, each bar opens within the body of the previous candlestick, suggesting bullishness. However, as each bar closes lower, the bearishness is clear.
How do we trade it?
These patterns are effective for trading reversals.
- Buy above the Three White Soldiers after a substantial market decline
- Sell below the Three Black Crows after a substantial market rise
10. HIKKAKE
(Despite having a Japanese name, the Hikkake is not one of the classic candlestick patterns. However, it is an interesting pattern that illustrates the concept of trapped traders.)
What does it look like?
To find a Hikkake pattern, first look for an inside bar.
For a bullish Hikkake, the candlestick after the inside bar must have a lower low and a lower high to signify a bearish break-out of the inside bar. When this bearish break-out fails, we get a long Hikkake setup.
For a bearish Hikkake, the next candlestick must have a higher high and higher low. When this bullish break-out of the inside bar fails, the market forms a short Hikkake setup.
If you need help looking for the Hikkake pattern, check out our Price Action Pattern Indicator.
What does it mean?
The Hikkake pattern pinpoints the failure of inside bar traders.
Trading the break-out of inside bars is a popular strategy. When the break-out fails, we expect the price to blaze in the other direction.
How do we trade it?
We use Hikkake for continuation trades.
- Buy if a downside break-out of an inside bar fails within three bars
- Sell if an upside break-out of an inside bar fails within three bars
WHAT’S NEXT?
LEARN MORE CANDLESTICK PATTERNS
Of course, you should not limit yourself to the 10 candlestick patterns above.
However, you should familiarise yourself with one pattern before moving to the next. Trying to look out for dozens of patterns without knowing what they are trying to tell you lands you in a confusing mess.
Start with Steve Nison’s Japanese Candlestick Charting Techniques, which is the closest you can get to the source of candlestick patterns without picking up a Far Eastern language with three scripts.
COMPARE WITH BAR PATTERNS
Despite differences in nomenclature, bar patterns and candlestick patterns are not mutually exclusive. In fact, integrating both will greatly improve your price action analysis.
In particular, you would find that candlestick patterns brought along with it a deep focus on analysing the candle body. The comparison of the candle body (the range between the open and close), which is largely ignored by bar patterns, adds great value to price action analysis.
The pairings below will get you started on studying the similarities and differences between bar patterns and candlestick patterns.
- Harami – Inside Bar
- Engulfing – Outside Bar
- Hammer/Shooting Star – Pin Bar
- Piercing Line/Dark Cloud Cover – Two-Bar Reversal
- Morning Star/Evening Star – Three-Bar Reversal
- Three White Soldiers/Three Black Crows – Three-Bar Pullback
STUDY CANDLESTICK TRADING STRATEGIES
Note that we based the trading methods above on our own experience. They might not correspond strictly to Steve Nison’s book.
While you can refer to books and other online resources on candlestick patterns for a start, the best conclusion is always based your own observation and testing. You need to keep good trading records for this purpose.
Get started with candlestick trading with the strategies below.
