Candlestick patterns

Trading with Confidence Using Candlestick Patterns


Previously, we had discussed how a group of different candlestick formations provides the necessary information to comprehend the market sentiment and evaluate the probability of a trend reversal, which could help traders in joining the start of the new trend. 

In this educational article, we’ll review how candlestick formations can be used to establish a trading strategy and which patterns could bring more confidence in the trading setups.

The Candlestick Patterns’ Usefulness

Candlestick patterns arise as a result of the price action at a determined range of time. Independently of the timeframe under visualization, e.g., weekly, daily, hourly, or even minute timeframe, the price never is a lagging indicator.  Furthermore, candlestick patterns tend to appear in every market and timeframe.

Trading Signals with Candlesticks Patterns

There exist a set of candlestick patterns that frequently appears in the financial markets across time, although the technical trader must consider the market context before consider if the candlestick represents a continuation or a reversion of the trend.

Hammer and Hanging Man

The hammer characterizes itself by presenting a large shadow and a small body located near the high of the day. When this pattern appears at the end of a bearish trend, it tends to be a bullish reversal signal.

When a hammer pattern shows up after a substantial descent, the technical trader may place a buy position on the next trading bar above the high of that hammer, placing its stop-loss below the low of the last day.

On the opposite side, the hanging man pattern arises when an uptrend ends. The sell setup will take place in the next session candle using the low of the hanging man candle as entry level, with a stop-loss above its high.

Engulfing Candlestick Pattern

The engulfing pattern is a formation constituted by two candles. The bullish engulfing pattern will occur at the end of a downtrend. During the trading session, the action takes place in a wide range. The price opens near the low of the day and closes near the high of the day, erasing the losses of previous trading session or sessions.

A bullish position will take place at the high of the previous day, with a stop-loss located below the low of the last trading session. A bearish position will occur at the low of the previous trading session, with a stop-loss order placed above the highest level of the engulfing candle.

Harami Pattern

The harami pattern tends to indicate the change of the trend only when it appears at the end of a bull or bear leg. The Harami is the weakest form of a reversal pattern. 

A buy position will trigger if the price breaks and closes above the high of the day of the narrow range candle during the next trading session, the stop loss is to be placed below the low of the session in progress.

A sell position will occur if the price breaks and closes below the narrow range candle, and its stop-loss may be located above the highest level of the harami candle.

Morning Star and Evening Star Pattern

Both the morning star as the evening star pattern are formations that hold three candlesticks for its configuration.

The Morning star pattern is a bullish trend formation, which will activate a buy position above the high of the last trading session, with its stop-loss below the low of the previous day or candle.

The evening star pattern is a bearish formation, which will trigger a sell position below the third candle of the pattern, its stop-loss placed above the high of the last trading session.


In this educational article, we presented a group of candlestick patterns, which could increase the confidence in an entry setup. However, although the formation provides an entry-level and stop-loss, these formations don’t identify a profit target level. This context could not ensure the technical trader a risk to reward ratio at least one to one, reducing the profitability of any candlestick pattern.

To reduce this variability on the expected results, we remark the Fischer and Fischer conclusions; they unveil the advantage of the use of candlestick formations compared to bar charts, stating that candlesticks are easier to understand and most useful for short-term traders.

Finally, they conclude that the most reliable candlestick formations are the engulfing pattern, hammer, and hanging man. In this context, the technical trader should consider that before ramping up a trading strategy based on candlestick formations, it’s recommended to evaluate its performance, developing a statistical backtest before jumping in the real-market.

Suggested Readings

  • Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).
Candlestick patterns

Practical Application of Candlesticks: GBPNZD Long

This is the second article in a series of articles highlighting the importance and effectiveness of Japanese candlesticks in your trade plan.

Chart 1 – Original Trade Idea

If you haven’t read my first article in this series, you can read it here. That first article describes my approach to trading and how I identify trade setups. The trade I took back in December 2018 to go long on GBPNZD was one of the best performing trades I’ve had in the past two years. It remains a great trade! I wrote the following as justification for my trade idea.

Dec 12, 2018

Holy 2,000+ pip trade batman

The GBPNZD pair has a massive upswing potential, with little risk. And I’m just talking about a move to the center of the linear regression channel.

  1. The weekly chart shows two hammer candles – with the current week showing strong buying from the lows. Massive buying actually – firm rejection lower so far.
  2. The Chikou Span/Lagging Span is right near the bottom of the cloud – the probabilities of the Chikou Span just crossing below the bottom of the cloud on a weekly chart is very little, especially given that we’ve had ten weeks down without any meaningful retracement.
  3. YUGE bullish divergence that goes from July of 2017 to the present weekly low. It’s ridiculous.

This could be one of the biggest trades I’ve ever made – and the realistic target is 2,000 pips above, and the risk is only 275 – I’ll take those odds. And it’s very probable we trade higher than the center of the regression channel.


Using Candlesticks

If you are interested in learning about Japanese candlesticks, you should really pick up the Bloomberg Visual Guide to Candlestick Charting by  Michael C. Thomsett. There are over 200 different candlestick patterns in his book. And that is not even all of them! There are some patterns that exist that are very rare and very powerful. One of those rare and powerful patterns is on the GBPNZD weekly chart below:

Dragon Fly Doji
Dragon Fly Doji

The candlestick highlighted above is known as a dragonfly doji. As I wrote in my original trade idea, my entire purpose for going long was based on the existence of two consecutive hammers. When I saw these candlesticks occur on the weekly chart, I knew I was onto a big trade opportunity. Why? Because candlesticks are incredibly useful on weekly charts. Candlesticks were never meant to be used on anything less than a weekly chart – that might explain why they are more powerful on weekly charts. Just look at that dragonfly doji. It’s important to remember something about Japanese candlesticks: they tell a story. What does the dragonfly doji tell us? Panic and fear. Panic and fear for anyone short on the GBPNZD.

Look how long the wick is! That means a ton of sellers were able to push prices lower but gave up all of those gains – bulls took over. Anyone who was short during that weekly candlestick either covered immediately or experienced significant pain and had to cover eventually. Ultimately, the trade idea and initial profit target ran from the entry at 1.8457 to the bottom of the regression channel, where it wicked against at 1.9494 – a 1,037 pip move.

My actual trade results from that period:

GPNZD Results
GPNZD Results


Candlestick patterns Gann

Practical Application of Candlesticks: Gold Short

Practical Use of Candlesticks: Gold Short

This article is the first in a series of articles over the practical use of Japanese candlesticks. Japanese candlesticks are an excellent and powerful analytical tool. Candlesticks are three-dimensional because, to interpret and use candlesticks properly, we need price, time, and volume.

Each of these guides will utilize a trade idea I’ve shared on TradingView in the past. The nice thing about trade ideas that you share on TradingView is that you can hit ‘play’ and watch how price action played out after your idea. It’s one thing to say, “I called Gold dropping to this level, and it did” – it’s another to show evidence of that idea. I will also share some of my trade results from that same time period.

Identifying a Trade

I am a Gann-based trader through and through. I believe that time is the most important factor in the market, and that time is the reason why trends change. Gann Analysis is the study of cycles and finding the rhythm of a market. It is almost singular in its approach to financial analysis in that Gann Analysis is a Leading form of analysis. In other words, Gann Analysis seeks to predict what will happen in the future. We do that through the use of natural cycles like Lunar Phases, the cycles of Planets, Gann’s cycles, and numerous other measurements. I can’t get into all the details of what Gann analysis is but suffice to say; it is how I identify when I should take a trade.

In the trade idea for this setup, I identified the following reasons for wanting to short XAUUSD on Feb 19, 2019:

Feb 19, 2019

Time is the reason for trend changes.

Feb 18 was a time pivot in the current Law of Vibration cycle, a powerful 6/8th time-harmonic which acts as a source of resistance in time to the trend in force.

Feb 19 is a Full Moon, and the Moon is Apogee – trends reverse violently if these two astronomical cycles occur near a swing low/high.

Gold has been an uptrend for 186-days – which is well within the 180-day Gann Cycle of the Inner Year.

Violent short term reversal ahead.

Additionally, not shown is the Longitudinal position of Jupiter, which rests at 1330. When it comes to Gann’s Planetary Lines, I’ve learned to give equal weight to those levels as I would to Gann’s time cycle. Price has moved above that line – so the time cycles could just be conditions for further and swifter moves higher.

I updated the trade idea with an additional short:

Added to shorts at 1345.30 – 1235 CST

Ultimately, I took profits on Mar 6, 2019.


Using Candlesticks

Gold (XAUUSD) Daily Chart
Gold (XAUUSD) Daily Chart

The image above is the daily chart for Gold (XAUUSD). I’ve highlighted in a light blue box the trading period of this trade idea. Observe the first candlestick on the chart (red triangle above it). I consider that top candlestick a shooting star. Now, there are some real sticklers out there who are very dogmatic about what is an actual candlestick pattern and what isn’t. Japanese analysis is very dynamic and allows for a significant amount of interpretation. I only need to know a couple of things about the shooting start pattern:

  1. Did it show up at the top of a move?
  2. Is the shadow at least twice as long as the body?

Both 1 and 2 are true. The small wick below the body is irrelevant. When I combine this candlestick pattern – which is one of the most bearish candlestick patterns – to my Gann analysis, I get a very high probability setup for a short. But then I added to the short again, one day later on the 20th.

Gold (XAUUSD) 30-minute chart.
Gold (XAUUSD) 30-minute chart.

Switching to the 30-minute chart, I’ve labeled the additional short entry. Why did I enter that short? First, there is a rising wedge against the prior swing high. Second is the nature of the candlestick itself. The candlestick with the price label on it is two different patterns – but both are bearish. That candlestick is both a shooting star and a bearish engulfing candlestick. When we add the bearish engulfing candlestick to the shooting star and a break of the rising wedge, we get handed one of the highest probability short setups that you could see.

The results of this trading period are below:

Trade Results
Trade Results


Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns V – The Morning Star and the Evening Star

The Morning Star and the Evening Star

The morning Star and the Evening Star formations are patterns made of three candlesticks. The original candlestick patterns were made on the Japanese rice futures trading and were created for daily timeframes. Thus, they could depict gaps from the previous close to the next open. The Star was a small real body – white or black – that was gaping away from a previous large body. The only place where that could occur in the Forex markets is during weekends. Thus, what is required to form a star in Forex is a small body, the smaller, the better, at the end of a large body, preferably with large shadows.

The Morning Star

The Morning Star is a three-candle formation at the bottom of a descending trend. In astronomy, Mercury is the morning star that foretells the sunrise and the arrival of the day. That was the name the Japanese gave to the formation, as they consider it to be the precursor of a new uptrend.

As said, it is formed by three candlesticks. The first one is a large and black candlestick. The session day the price starts with a gap down (or just at the close in Forex) continues moving down for a while, then it recovers and closes near the open, creating a tiny body. The third day is a white candlestick that closes near the open of the first black candlestick. The important factor in the signal is the confirmation of buyers after the star candle is formed. The close of the third day should, at least, cross the halfway up to the black candle body, as in the case of a piercing pattern. 

Chart 1 – Morning Star on the DAX-30 Index (click on it to enlarge)

Criteria for a Morning Star 
  1. The downtrend was evident
  2. The body of the first candle continues with the trend (black)
  3. The second candle is a short body figure showing indecision
  4. The third day the candle closes at least above 50 percent the body of the black candle.
  5. The larger the black and white candles, the better.
  6. A gap is desirable but doesn’t count on it on 24H markets
  7. A high volume in the first and third candles would be good signs of a selloff and consequent reversal.
Market Psychology

As in most bullish reversals, the first day, the hopeless bulls capitulate with a significant drop and substantial volume. The next day the power of the sellers stops in a short-bodied candle. The third day began bullish, touching the stops of the late short-sellers, and also caused by the close of positions of profit-takers. That fuels the price to the upside, making more short sellers close their positions -buying- and pushing up further the price. At the end of the day, buyers take control of the market action closing with a significant white candle on strong volume.

The Evening Star

The Evening star is the reciprocal of the Morning star, and even more so, when trading pairs in the Forex market, or any pair, for that matter. In this case, the Japanese linked this formation with the Venus planet, as the precursor or the night. It is created when a long white candle is followed by a small body and a large black candle.

As the case of the Morning Star, a gap up on the second small-bodied candle followed by a gap down on the third black candle is further confirmation of a reversal, but that seldom happens in the Forex Market.  Also, the third candlestick is asked to close below 50 percent of the body of the first white candle.


Chart 2 – Evening Star on the EURUSD Pair (click on it to enlarge)

Criteria for an Evening Star
  1.  The upward trend has been showing for some time
  2. The body of the first candle is white and large.
  3. The second candlestick shows indecision in the market
  4. On the third day, it is evident that the sellers have stepped in and closes below 50 percent of the initial white candle.
  5. The longer the white and black candles, the better
  6. A gap before and after the second candle is desirable, although not attainable in Forex.
  7. A good volume in the first and third candles is also desirable.
Market Psychology

The uptrend has attracted the buyers, and the last white candle has seen an increasing volume. In the next session, the market gapped of continue moving up for a while, catching the last stops by short-sellers, but suddenly retraces and creates a small body, with the close next to the open. The next day there is a gap down makes the stops of the long positions to be hit, adding more selling pressure to the profit takers and short-sellers. The day ends with a close that wipes most of the gains of the first white candle, that shows that the control is in the hand of sellers.



Reference: Profitable Candlestick Patterns, Stephen Bigalow



Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns IV – The Hammer and The Hanging Man


The Hammer

The Hammer is a one-candle pattern. The Hammer is identified as a small body with a large lower shadow at the bottom of a downtrend. The result of having a small body is that the open and the close are near each other. The large lower shadow means during the session sellers could move down the price but, then, buyers stepped in and pushed the price back to the levels of the open, or, even, a bit further up. That means sellers lost the battle, and the buying activity started dominating the price action. A positive candle is needed to confirm the price action. This usually converts this candle into a Morning Star formation.

Chart 1 – Hammer in the USDCHF Pair

Criteria for Hammers

  1. The lower shadow must be at least twice the length of the body
  2. The real body is at the upper side of the range. The color does not matter much, although a white body would increase the likelihood of the reversal.
  3. There should be no upper shadow or a very tiny one.
  4. The longer the lower shadow, the better
  5. A large volume on the Hammer is a good signal, as a blob woff day might have happened.

Market Psychology

After a relatively large downtrend, the sentiment of the traders is rather bearish. The price starts moving down at the open and makes a new low. Then, buy orders to move the price up. Profit-taking activity also contributes to the upward move. Then intraday stop-loss orders come in fueling the action further up. A positive follow-up candle would confirm the control of the action by the buyers.

The Hanging Man

The Hanging Man is also a figure similar to a Hammer, with its small body and large lower shadow, but it shows up after a bullish trend. The Japanese named this figure that way because it looks like a head with the body and feet hanging.

Chart 2 – Three Hanging Man in the DOW-30 Index

Criteria for the Hanging Man

  1. The lower shadow must be at least twice the length of the body
  2. The real body is at the upper side of the range. The color does not matter much, although a white body would increase the likelihood of the reversal.
  3. There should be no upper shadow or a very tiny one.
  4. The longer the lower shadow, the better
  5. A large volume on the Hammer is a good signal, as a blowoff day might have happened.

Market Psychology

After a strong trend, the sentiment is quite positive and cheerful. On the day of the Hammer, the price moves higher just a bit, then it drops. After reaching the low of the session, the buyers step in again and push the price back up, close to the open level, at which level the session ends. This would indicate the price action is still in control of the buyers, but the considerable drop experienced in the first part of the session would mean the sellers are eager to sell at these levels, and a resistance zone was created. A lower open or a black candlestick the next day would move the control to the sell-side.

Profitable Candlestick Patterns, Stephen Bigalow

Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns III: Understanding the Harami

So far, the reversal formations we saw – the Piercing Pattern, the Dark Cloud Cover, and the Engulfing patterns, were strong reversal signals, showing that the bulls or bears had the control. The Harami is usually a less powerful signal.

The Harami is created when a short candle’s body is entirely contained inside the body of the preceding candle. The color of the second body of this pattern is unimportant, although the color of the first one follows the trend (black in downtrends and white in uptrends). The name “Harami” comes from the old Japanese word meaning “pregnant.” Japanese traders call the first candle, “the mother,” and the second one, “the baby.
The appearance of a Harami is indicative that the current trend has ended. According to Steve Nison, the Japanese say the presence of a Harami shows the market is losing its breath. They contend that, after a large healthy candle, the small inside candle shows uncertainty.
We have to say that if we look at the charts, harami-like formations appear often, but most of it was just pauses or pullbacks of the primary trend. Thus, although not good enough to call for a reversal of the trend, they could be potential signals to exit a trade or take partial profits.
Also, we have to remember that, since trading the Forex markets, and, also, intraday, there are no gaps available. This fact makes a harami quite similar to a Piercing pattern or a Dark cloud Cover if the body of the second candle surpasses half of the previous body.

Chart 1 – Several Haramis in the Cable.

As we see in chart 1, haramis and engulfing patterns are alike, with the exception of the second one.  What we can see is that be it harami or engulfing, the pattern is worth to pay attention to since most of the time signals the end of the previous leg.

Criteria for a Bullish Harami

  1. The body if the first candle is black (red) and the body of the second candle is white (green)
  2. There is evidence of a downtrend.
  3. The second candle opens higher or at the close of the first candle.
  4. Just the body needs to be inside the body of the first candle. That is unlike the inside day.
  5. A confirmation is needed for a reversal signal.
  6. The longer the black and white candles, the more powerful the signal
  7. The higher the white candle closes, the better.

Market Psychology of a Bullish Harami

After a selloff day, the next day, sellers don’t have the strength to push the prices further down. Concerned short-sellers start to take profits of just close the trade fuelling the purchases. The price finishes higher, and traders mark the double bottom as support. A strong day following the harami formation would convince the market participants that the trend has reversed.

Criteria for a Bearish Harami

  1. The body if the first candle is white (green) and the body of the second candle is black (red)
  2. There is evidence of an uptrend.
  3. The second candle opens lower or at the close of the first white candle.
  4. Just the body needs to be inside the body of the first candle. That is unlike the inside day.
  5. A confirmation is needed for a reversal signal.
  6. The longer the white and black candles, the more powerful the signal
  7. The lower the black candle closes, the better.

Chart 2- Several Haramis in the GBPAUD pair. Not all are successfully signaling a reversion of a trend

Market Psychology of a Bearish Harami

After a strong bullish trend, a long white candle emerges. In the next session, the longs cannot force more upsides. The asset began to drop, as concerned bulls are closing their positions to pocket their profits, and the day finished lower. Also, short-term traders mark the top of the white candle as a resistance level. A third day showing weakness is what is needed to convince everybody that the uptrend is over and a new leg down is starting.


Profitable candlestick Patterns, Stephen Bigalow

The Candlestick Course: Steve Nison


Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns: Refresh your Knowledge

After our last articles on candlestick reversal patterns, test your knowledge.

If you need to give a second read, these are the links:



Let’s begin


[wp_quiz id=”59882″]




The Candlestick Course: Steve Nison


Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns II: Let’s know The Engulfing Patterns


The engulfing pattern is a major reversal figure, and it is composed of two inverted candlesticks, as in the case of the Piercing pattern and the Dark Cloud Cover figure. Typically, this figure appears at the end of an upward or downward trend. It is common that the price pierces a significant resistance or support level, then making a gap up or down in the following session, to, suddenly, change its direction and end the day entirely covering the first candle.

The Bullish Engulfing

The bullish engulfing candle shows at the bottom of the trend. After several sessions with the price controlled by sellers, another black candle forms. The next session opens below the previous session close and closes above the last open, thus, completely covering the body of the black candle made on the previous session.


  1. The body of the second candlestick covers completely that of the black candle.
  2. There is evidence of a downward trend, even a short-term one.
  3. The body of the second candle is white and of the opposite color of the first candlestick. The exception is when the first candlestick is a doji or a tiny body. In this case, the color of the first candle is unimportant.
  4. The signal is enhanced if a large body engulfs a small body.
  5. a Large volume on the engulfing day also improves the signal.
  6. A body engulfing more than one previous candle shows the strength of the new direction.
  7. Engulfing also the shadows of the previous candle is also good news.
  8. In case of a gap, the larger the gap, the higher the likelihood of a significant reversal.

Market Sentiment:

After a downtrend, the next day, the price starts lower than the previous close but, after a short while, the buyers step in and move the price up. The late sellers start to worry, as they see their stops caught, adding more buying to the upward movement. As the price moves up, it finds a combination of profit-taking, stop-loss orders, and new buy orders. At the end of the day, this combination creates a strong rally that moves the price above the previous close.

 Fig 1- Bearish and Bullish engulfing patterns in the Bitcoin 4H  chart

The Bearish Engulfing

The Bearish engulfing pattern is the specular figure of a Bullish engulfing figure. And more so in the Forex market where assets are traded in pairs, making every move symmetrical.

The bearish engulfing forms after an upward trend. It is composed of two different-colored bodies, as in the above case. This time, though, the order is switched, and a bullish body is followed by a black candle. Also, the black body engulfs completely the body of the previous white candlestick. Sometimes that comes after the price piercing a key resistance, to then come back, creating a fake breakout.


  1. The uptrend is evident, even short-term.
  2. The body of the second day engulfs the body of the previous day.
  3. The body of the second candle is black, and the previous candle is a white candlestick, except for tiny bodies or dojis. In that case, the color of the first candlestick is unimportant.
  4. A large body engulfing a small body is an enhancement, as it confirms a change in the direction.
  5. A large volume on the engulfing day is also good for the efficacy of the signal.
  6. A body engulfing more than one previous candle shows the strength of the new direction.
  7. Engulfing also the shadows of the previous candle is also good news.
  8. In case of a gap, the larger the gap, the higher the likelihood of a substantial reversal.

Market sentiment:

After an uptrend, the price opens higher but, after a while, it reverses and moves below the previous open and below. Some stops trigger and add more fuel to the downside. The downward action accelerates on a combination of profit-taking, more stops hit, and new short orders. At the end of the day, the price closes below the open of the previous session, with the sellers in control. 



The Candlestick Course: Steve Nison

Profitable candlestick Patterns, Stephen Bigalow

Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns I: Overview and The Piercing Pattern

Candlestick Reversal patterns: An Overview

Candlestick reversal figures are composed mainly of bu two or three candlesticks, which in combination harness the psychological power to shift the market sentiment. 

Depending on the importance of the severity of reversal, their names vary. Japanese are very visual regarding the names they gave to them. Therefore, we can almost visualize them just by its name.

In this article, we will learn the following content:

  • Overview of the reversal candlestick patterns
  • how to identify a Bullish Piercing pattern and its specular Dark Cloud Cover pattern
  •  How important engulfing patterns are and how to recognize them
  • Experience how counterattack figures lead to swift trend reversals.

The predicting power of two candle figures is sometimes astonishing. For a sample to be statistically significant, scientists need more than 20 samples for normally distributed phenomena, sometimes more. A reversal figure only shows eight data points. 2x (OHLC), and besides that traders most of the time, the reversal figure warns about a trend reversal or at least the end of the current trend.

The typical reversal pattern is a two candle figure that begins with a topping or bottoming candle followed by an opposite candle that erases partially or totally, the price action of the first one.

Piercing pattern and Dark Cloud Cover

The Piercing Pattern and the Dark Cloud Cover are specular patterns. The Piercing Pattern warns of a reversal of the bearish trend, whereas the Dark Cloud Cover heralds the end of a bullish trend.

 Candlesticks are not always good predictors, and the Piercing Pattern is a weak signal, especially if the trend has not moved too deep yet. Of course, the most oversold is the price, the better a Piercing Pattern predicts a reversal. The Dark Cloud Cover, though, is seen to show much more predicting power.


The Japanese used them mostly in daily and weekly timeframes. The use of these two patterns in intraday trading must be confirmed with other signals, as, for instance, the Piercing Pattern occurring after hitting a significant support or a Dark Cloud cover as a result of a strong resistance rejection. The use of short-term oscillators such as 10-period stochastics or Williams percent R in combination with these two signals will improve the likelihood of success while trading them.

Recognizing a Piercing Pattern


The bullish Piercing Pattern is composed of a large bearish body forming after a broad downtrend. The next candle begins below the low of the first black candle, and closes above the midway up, or even near the open if the preceding bearish candle. 

  1. The first candle shows a black body
  2. The second candle shows a white body
  3. The Downtrend is clear and for a long time
  4. The second day opens below the range of the previous day
  5. the second white candle closes beyond the 50% of the range of the last day.
  6. The longer the candles, the better their predicting power.
  7. If there is a gap down, the greater, the better
  8. The higher the white candle closes, the stronger the signal
  9. A large volume during these two candles is significant.

The Dark Cloud Cover

Apply the specular conditions to the Dark Cloud cover. We also should remember that trading forex pairs make both patterns fully symmetrical.

  1. The first candle shows a white body
  2. The second candle shows a black body
  3. The upward trend is clear and for a long time
  4. The second day opens above the range of the previous day
  5. the second black candle closes below the 50% of the range of the last day.
  6. The longer the candles, the better their predicting power.
  7. If there is a gap up, the greater, the better
  8. The lower the black candle closes, the stronger the signal
  9. A large volume during these two candles is significant.


Final words

lease note that the Forex and crypto markets rarely have gaps. Therefore, the condition that the second open being below the range of the first candle is almost impossible to satisfy. In this case, we rely solely on the relative size of both candlesticks and the closing above 50 percent of the range of the black candle. Of course, it is almost impossible to get gaps in intraday charts except for spikes due to sudden unexpected events.



The Candlestick Course: Steve Nison

Profitable candlestick Patterns, Stephen Bigalow

Candlestick patterns Forex Daily Topic

Candlestick Trading Patterns V – The Long Black-bodied Candlestick

In the previous article, We talked about candles with long and white bodies and discovered how such a candle could provide us with very useful information about the hidden properties of the market situation and the psychology of its participants.

Actually, a black body in a currency pair is equivalent to a white body in the reciprocal pair. That is, the black body of the EUR/USD is the white body of the USD/EUR. In any case, in Forex, we can also operate with commodities, energy, or stock CFDs, therefore in this article, we will develop the properties and informative potential offered by the long-black candle bodies.

As we said in the article on long-white candles, the market can be described by two types of movement: impulsive movement and corrective movement. Large black-bodied candles (like the long-white candles) belong to the impulsive movement category, and as such, are indicators of a trend, in this case, a bearish one.

A black body in a topping area

As in the case of the white candle, a long black candle in a topping zone is a clear warning of the trend halt. For the warning to be stronger, the black candle must clearly be longer than the candles that preceded it. A black candle of this kind indicates that the bears have taken control.

Image 1 – The long black-bodied candle appearing after an uptrend.

In the previous image, we can see that the black body erased the gains acquired by the preceding five candlesticks showing a rush of close orders. Then, after the initial selloff, a short recovery but buyers were not able to move the price to new highs.

A long Black-bodied candle confirms resistance

If a top consolidation area appears, and, then, a black body shows up, it is an extra confirmation that the resistance area will hold, and the trend is reversing.

Image 2 – The long black-bodied candle appearing at a resistance level

On the picture above, the price topped and retraced, followed by a recovery touching but not exceeding the previous top close. Then the engulfing black body started up at the same level, but it created an exceedingly large body surpassing the previous retracement low and closing near it. That was the confirmation for bears to push the market down.

The Long Black-bodied candle breaks a support

The break of a support level by a long black candlestick is terrible news for bulls. This situation should be considered more bearish than other less evident breakouts.

Image 3 – The long black-bodied candle breaking support trendline and SMA 50-SMA

In the case of the preceding image, which corresponds to a 2H Euro Stoxx 50 chart, the large-bodied candle not only broke the ascending trend line but, also, the 50-Period SMA. This confirmation is what bears needed to move down the price.

Long Black-bodied Candle as Resistance

The top and open of a long black-bodied candle will act as resistance levels. That situation happens when the price retraces the complete impulse. According to Mr. Nison, it is more typical the retracement to stop near 50% of the candle’s body. In consequence, a typical strategy following the trend is to place a sell-short position at that level with a stop-loss level over the top of the candle.


Image 4 – The top of a black-bodied candle as a resistance


A large black body is a clear indication of a bear trend, especially if it appears at previous tops or resistance areas. We should always pay attention to a black body and analyze the implications of it in terms of market sentiment, and also its meaning as a new resistance area. Finally, from the point of view of a price-action trader, large black bodies are an opportunity to open a position with the trend, after waiting for a pullback. Not always the pullback will happen, but when it does, it is a low-risk place to create a short entry.


Candlestick patterns Forex Daily Topic

Candlestick Trading Patterns IV – Long White Bodies

There are two kinds of price movements in the markets: Impulsive movements and corrective movements. The ideal impulsive action is characterized by a continuous rise or decline from the opening level to the closing one, this being the highest or lowest point of the period. The ideal corrective movement is described by a lateral movement in a short-range and close opening and closing levels.

Most trading candles can be separated into those two moves. When impulsive movement prevails, the candle shows a large body, and only visible traces of the corrective action are perceived as upper and lower wicks. Corrective-motion candles have a short body and relatively long wicks at one or both ends.

A white and large-bodied candle body is indicative of a bullish impulse, whereas a black and large-bodied one shows a bearish or selling impulse. Therefore, when one of these appears at a critical level showing the opposite direction to the prevailing trend, we have to take notice of it.

Long White Candle at a low price level

A single candlestick Is mostly not enough for a proper forecast. However, a large candlestick at the end of a severe drawdown is a warning sign that the trend might have ended. If the candlestick shows its low, touching resistance levels, that is a second clue for a reversal, and also serves as a confirmation of the support level.  A white candlestick bouncing off a trendline gives credibility to that line.


In the above chart, we see the retracement of the price touch the trendline and then bounce with a white candle, that might have served as a good entry point to trade long. Further up, we see that the price still obeys the line in the second retracement, in this case, with a candle with a large lower wick.

Long White body breaking resistance

A Long white-bodied candle breaking resistance levels are usually a good confirmation of that fact. As we see in the chart below, the price crossed the resistance level decisively and never looked back. This is the kind of confirmation for a bullish continuation traders need.

Long White Body as Support

A long white body sometimes is retraced to test the bulls. But, on the occasions, the price retraces all the previous candle’s advance, its body bottom acts as a support level to hold the price and maintain the trend alive. It is more common that a Fibonacci level of the candle’s retracement would stop the pullback. According to Mr. Nison, the middle of the candle body is a usual support zone.

Once the underlying trend is established, a suitable method to enter the trend is to buy at 50% retracement, with a stop-loss below the white body. That way, the risk of entry is halved while profiting from mild retracements.


A single white-bodied candlestick can depict great information value to a savvy trader. This impulsive candle warns about potential trend changes, confirms breakouts when breaking resistance levels, and acts as support during retracement periods, thus, also showing potential levels to jump in and profit from the newly discovered trend.

Candlestick patterns Forex Basic Strategies Forex Trading Strategies

Pairing The Hanging Man Candlestick Pattern With MACD Indicator


The Hanging Man is a visual candlestick pattern which is used by traders and chartists in all type of markets. The term ‘Hanging Man’ refers to the shape of the candlestick. Visually the hanging man looks like a ‘T,’ and it appears in an uptrend. The formation of this candlestick is an indication that the uptrend is losing its strength. Meaning, sellers started showing interest, and the current trend of an asset is going to get reversed. Anyone can easily predict from the name of this pattern that it is viewed as a bearish sign.

The Hanging Man candle composes of a small body and a long lower shadow with little or no upper shadow. The vital point to remember is that the hanging man pattern is a warning of the upcoming price change, so do not take it as a signal to go short. Also, trading solely based on one pattern is risky. To confirm the sign given by the Hanging Man pattern, traders must pair it with support resistance or any other trading indicator.

This pattern is not confirmed unless the price falls shortly after the Hanging Man. If the next candle closes above the high of the Hanging Man, this pattern is not valid. After the pattern, if the very next candlestick falls, then it’s a clear indication of the reversal. Now, if you see a Hanging Man candlestick and the above-discussed rules apply, you can go ahead and take the trade. But since it is crucial to have an extra confirmation, let’s pair this pattern with a technical indicator.

Pairing the Hanging Man Pattern With MACD Indicator

In this strategy, we have paired the Hanging Man pattern with the MACD indicator so that we can filter out the low probability trades. MACD stands for Moving Average Convergence and Divergence, and it is one of the most popular indicators in the market. It is essentially an oscillator that is used for trading ranges, trend pullbacks, etc. Also, this indicator identifies the overbought and oversold market conditions. In this strategy, we are using the default setting of the MACD indicator to identify the trades.

Step 1 – Confirm the uptrend first on your trading timeframe

We can’t use the Hanging Man pattern to take the buy trades. Since it is a reversal pattern, it only signals the selling trades. So first of all, find out the uptrend in any currency pair. One more primary thing to remember when trading this pattern is this – After finding a clear uptrend, if you see the market printing the Hanging Man, then try not to trade that pair. Because, in a strong trend, it’s not easy for a single candle to change the direction of the entire trend. But if you find this pattern when the uptrend is a bit choppy, it has higher chances to perform. As we can see in the image below, the uptrend in USD/CHF was not strong enough.

Step 2 - Find out the Hanging Man pattern on your trading timeframe

Some traders use two or three timeframes to trade patterns. But that’s not the right way of pattern trading. If you are an intraday trader, use only lower timeframes to identify the pattern. So the next step here is to find out the Hanging Man in this chart. Also, apply the MACD indicator. For us to go short, the MACD indicator must be in the overbought area.

As you can see in the image below, the USD/CHF Forex pair prints a Hanging Man pattern. This is the first clue for us that the buyers aren’t able to push the market higher. Soon after the crossover happened on the MACD indicator, we can say that this forex pair is in the overbought condition. So now, two forces are aligned, and they are indicating us to go short. Within a few hours, the pair rolls over, and it prints brand new lower low.

Step 3 – Entry, Take Profit & Stop Loss

We go short as soon as we see the Hanging Man candlesticks and MACD indicator at the overbought area, we can go short. In this pair, buyers were quite weak, and this is an indication for us to place deeper targets. As we suggest in every strategy, often close your position at significant support/resistance area, or when the market starts to print the opposite pattern. In this pair, we closed our full trade at 0.9844. Overall it was 7R trade, and we made nearly 140+ pips.

Placing the stop loss depends on what kind of trader you are. Some advanced traders use their intuition to close their positions, while some use logical ways such as checking the power of the opposite party. In this trade, we know that the buyers are not strong enough, so there is no need to use the spacious stop loss.

Difference Between Hanging Man and Hammer Patterns

The Hanging Man and Hammer both look the same terms of size and shape. Both of these patterns have long, lower shadows and small bodies. But the Hanging Man forms in an uptrend, and it is a bearish reversal pattern. Whereas the Hammer forms in a downtrend, and it is a bullish reversal pattern. These two patterns appear in both short and long term trends. Do not use these patterns alone to trade the market. Always use them in conjunction with some other reliable indicators or any other trading tool.

Bottom Line

Most of the professional traders never see this pattern alone as a predictor of a potential trend reversal. Because there will be times when the price action continues to move upward even after the appearance of the Hanging Man. Hence technical indicator support is required to confirm the reversal of the trend. Make sure to stick to the rules of the pattern so that you can use it to your advantage. This pattern forms in all the timeframes, but we suggest you master it on a single timeframe first. Cheers!

Candlestick patterns Forex Daily Topic

Candlestick Trading Patterns III – The Doji, The Most Critical Candle

The Doji

The Doji is a special candle, not only because of its striking appearance but also because it is one of the most vital signals in trading. This figure is so important that we need to understand it very well, as it is one of the safest trading signals when properly applied.

Fig 1 – A Doji on a chart

The Doji is characterized by having the open and close at the same level while standing out for its elongated upper and lower shadows. The figure of the Doji has a precise meaning. Buyers and sellers are in a state of mental indecision. The Doji is a powerful sign of trend change. The probability of a turn increases if in addition to the Doji:

  1. The next candles confirm the Doji’s signal
  2. The market is overextended
  3. The chart does not have many Doji.

The perfect Doji has the same open and close values. Nevertheless, if both levels are separated a few pips, and the candle can still be seen as a single line, it can be considered as Doji.

The Doji is a powerful signal to detect market tops. Steve Nison says that a dog is a sign of indecision by buyers, and an upward trend cannot be sustained by undecided traders. Nison also points out that, from his experience, the Doji loses some reversal potential during downtrends. That observation may apply to the stock market but is useless in pairs trading, as they are symmetric. In this case, a bullish trend of a pair is a bearish pare on the inverse pair and vice-versa. So a Doji will always have a similar meaning: The trend is compromised.  When trading commodities, indices, or stock ETFs the trader should take this into account, though.

In view that a Doji is such a powerful signal, it is better to act upon it. Better to attend a false signal than ignore a real one. Therefore, dojis are signals to close positions, since a Doji alone does not mean a price reversal.

The Northern Doji

The northern Doji is called a Doji that shows up during a rally. According to Mr. Nisson, ” The Japanese say that with a Doji after a tall white candle, or a Doji in an overbought environment, that the market is “tired.” Therefore, as said, a Doji does not mean immediate market reversal. It shows the trend is vulnerable.


FIg 2 – Down Jones Industrial Average showing northern Doji.

As we can see in the chart above, a Doji after a large candle, as in the first case, is followed by a gap and a drop to the base of a previous candle that surged after a gap.  The next Doji we see was an inside bar that just acted as a retracement and continuation. In the third case, we can see two Dojis, the second being a kind of hanging man with no head. In this case, we notice that the third bearish candle is the right confirmation of the trend reversal. It is not uncommon to observe tops depicting several small bodies, one of which is a Doji.

The Long-legged Doji

Fig 3 – Long-legged Doji in a SPY Daily chart.

We already know that a small body and long upper and lower shadows is called a high wave candle. If the figure doesn’t have a body is called “long-legged Doji,” and also called “rickshaw man.” As it happens with high-wave candles, it reflects great confusion and indecision.

Gravestone Doji

The gravestone Doji is the Doji that begins and ends at the low of the day. According to Stephen Bigalow, the Japanese name is set to represent “those who died in the battle.” Gravestone Dojis are a rarity.

Fig 4 – Long-legged Doji in the UK-100 Daily chart.


Dragonfly Doji

The Dragonfly Doji occurs when the price moves down since the open, and then it comes back and closes at the open. When it happens after an uptrend is a variant of a hanging man.

Fig 5 – Long-legged Doji in the DAX-30 Daily chart.


Dojis are important figures that warn trend reversals, especially if it happens at support or resistance levels.

Dojis need confirmation for trend reversals. When that happens, they create morning star and evening star formations. They also are followed by other small bodies, creating a flat top or bottom.

A safe precaution when encountering these figures while a trade is active is to close or reduce the position or, alternatively, tight the stops.



Japanese Candlestick Charting Techniques, Second Edition, Steve Nison

Stephen Bigalow, Profitable Candlestick Signals


Candlestick patterns Forex Daily Topic

Test your knowledge about Candlesticks

After our discussion about short-bodied candlestick in our article

Candlestick Trading Patterns II – Everything you need to know about Single Candlestick Signals

Here you can test your newly acquired knowledge about the matter. If you haven’t read it, please do so before the quiz.



[wp_quiz id=”51631″]



Reference: The Candlestick Course – Steve Nison

Candlestick patterns Forex Daily Topic

Candlestick Trading Patterns II – Everything you need to know about Single Candlestick Signals

This article is to be dedicated to single candlestick key figures. The majority of patterns are created by more than one candle, but some particular candlestick shapes are key figures to gauge the market sentiment and spot reversals.

In every one of them we will deal with the following aspects:

  • Identification of the candlestick
  • Marker psychology interpretation
  • Criteria and use

Key Single Candlestick Figures:

  • Doji
  • Spinning top
  • High Wave Candlestick
  • Hammer
  • Hanging man
  • Shooting star

The Japanese traders call the real body “the essence of the price action.” A scientist might call it the Signal part of the message, while the shadows are the nose of the market. The relation between the body and the shadows delivers unique insights into the sentiment of the traders. Shadows show the fight between buyers and sellers to control the price. A large body and small shadows denote that one of the sides has won the battle during that interval. A short body with large shadows after an extended trend indicates the winning herd is losing steam.

Spinning tops and high wave candles

Fig 1 – Spinning tops and High Wave candles

A spinning top is a visual clue for a candle with a tiny body. The color of the body does not matter.  A spinning top without a body is called Doji, such as the second one in the figure above. The fourth one is very close to it too.

Market sentiment in spinning tops

A the smaller the body, the larger the fight between bulls and bears. It shows that no one had control of the price during this period, as the sellers pressure the price down and buyers up, a small body means no one could outweigh the other party. The demand is counteracted by fresh supply,  and vice-versa, so the market is unable to move.

High Wave Candles

Steve Nison also mentions a close relative to the spinning top, called High Wave Candle. High Wave candles also have very small bodies, but to qualify as High Wave, the formation must also have large shadows on both sides. Shadows need not be of the same size, but they must be large.

Market sentiment in a High Wave Candle

According to Mr. Nison, If indecision is the crucial sentiment on spinning tops, High Wave candles represent “downright confusion.” That is evident because, in the same period, the market goes from the euphory of an extended high to the fear of a large drop, and then to close very near to its opening value. That means total confusion.

Trends and spinning tops

A large white body is like a green light for bulls in an uptrend. A large red body is also a green light to sell. But finding a spinning top in an uptrend means that the buyers do not have the complete control of the price. Therefore, such tops are a warning sign that the trend might be ending. Spinning tops acquire more importance when the price is overextended or close to resistance levels.

Spinning tops during ranging markets do not have any power to warn a trend change, as these stages are too noisy, and filled with lots of small bodies, anyway. Therefore, spinning tops and high waves during horizontal channels have no trading value.

Hammers, Hanging Man, and Shooting stars

Three special cases of spinning tops are the Hammer, the Hanging Man, and the Shooting Star.


Fig 2 – Hammer

The hammer has a small real body and a large lower shadow. It is the equivalent of a reversal bar.  The price went from the open to the bottom, then it recovered and closed near or at the high of the session. The color of the body has less importance, although a close above the open has more upside implications. The signal is confirmed with a followthrough candle next to it.

  • The occurrence is after a lengthy downward movement, and the price is overextended.
  • The real body is at the upper top of the trading range
  • The shadow must be two times the length of the body. The longer, the better.
  • No upper or just a tiny shadow
  • Confirmation with a strong bullish candle, next
  • A large volume on the candle confirms a bottom.


Hanging Man

Fig 3 – Hanging Man

The hanging man has a similar shape of the hammer, but it shows up after an uptrend. The Japanese named that way because it is similar to the head and body of a man hanging by the neck.

  • The occurrence is after a significant upward move, and/or the price overextended.
  • The body is at the upper end of the trading range.
  • The lower shadow at least two times the height of the body. The color is not essential, but a bearish finish is preferred. the longer the shadow, the better
  • Tiny or no upper shadow.
  • Confirmation with a large bearish candle
  • High volume on the candlestick is indicative of a potential blowoff.
Shooting star

Fig 4 – Shooting Star

The shooting star is a top reversal candlestick and is the specular image to the hanging man.  In the case of a shooting star, it began great for buyers, but after the euphory of new highs, it came to the deception of the selling pressure with no demand to hold the price.  The close happens at the lower side of the trading range. A bear candle next confirms the trend change.

  • The upper shadow should be two times the height of the body. The larger, the better.
  • The real body is at the bottom of the trading range.
  • Color is less important, although a  red candle implies more bearishness.
  • Almost no lower shadow.
  • A large volume would give more credibility to the signal.
  • A  bear candle next is the confirmation of the change in the trend.


Reference: Steve Nison: The Candlestick Course

Profitable Candlestick Trading, Stephen Bigalow



Candlestick patterns Forex Daily Topic

Candlestick Trading Patterns I – The Story

The Financial markets are an exciting place for many people, attracted by dreams of infinite wealth. However, these markets are one of the most complicated environments on earth. The fact that millions of people exchange assets in financial markets makes them very difficult to predict, as each of the participants has its own vision, interests, and objectives.
That is why traders are always investigating the best tools to allow them to detect market sentiment in every situation.

Fundamental versus Technical

In the past, fundamental analysis was the only tool that allowed investors to detect whether a value was overvalued or undervalued. That gave them the keys to future trends, and to be able to overtake other investors with less information.
Then, at some point, the theory arises that the analysis of price history shows everything necessary for an informed investment. According to this theory, launched by Charles Dow, the price is already included in the fundamental analysis, since the chart is the trace left by investors about the consensus value of the good.

That said, there is a consensus that fundamental analysis is still necessary to detect the macro trend and to position the buying and selling actions in favor of the primary trend, while technical analysis is essential to generate the timing of trading activities.

Fig 1- Old NY Stock Exchange price table and Average chart. Source (

Chartism was encouraged in the early 1970s and 1980s by the emergence of personal computers, which allowed graphs to be automatically generated, instead of manually drawn, and also analyzed in time frames shorter than the daily.

The OHLC Chart

The technical analysis popularized the use of OHLC graphs that not only indicated the closing value of each interval but also gave the opening, maximum, and minimum data. This allowed chartists to observe the range of movements of the period and obtain an assessment of the volatility.

Fig 2- OHLC Chart in its classical B&W style.

The use of OHLC charts was a big advancement in the analysis of the price action. Soon analysts began to define profitable patterns such as reversal bar, key reversal bar, Doble and triple tops and bottoms, head and shoulders pattern round bottoms, Cup and handle, and many more.

Candlestick Charts

A centuries-old hidden way to analyze the markets came from Japan helped by Steve Nison’s studies of candlestick charting methods. According to him, centuries back, Japanese merchants were at the bottom of Japan’s social scale, well below soldiers, artisans, and farmers. But a prominent merchant began rising in status by the XVIIth century. His name was Munehisa Homma. At that time rice was a medium of exchange. Feudal Lords would store it in Osaka’s warehouses to, then, exchange the receipts when it was convenient for them, thus, becoming a de-facto futures market. Homa’s trading techniques, which included analysis through a primitive form of candlestick charts to gauge the psychology of the marker would earn him an immense fortune.

Fig 3- Candlestick Chart in its modern colorful style.

The major advantage of a candlestick chart over an OHLC chart is the ability to assess at a glance the overall trend and, also many hints about the current sentiment or psychological mood of the trader collective. Color is key to assess the current trend. Also, large bodies signify genuine momentum, short bodies and large wicks mean indecision and fight between buyers and sellers to control the price action.

Candlestick Patterns

Many of the western analysis methods can be applied also to candlestick charts, but these Japanese charts have brought a brand new batch of new patterns to assess market turns and continuations.  We will try to cover most of them, including obviously all major trading candlestick patterns such as Morning and evening stars, haramis, engulfing, three soldiers, and so on.

To refresh your basic knowledge of candlesticks, we recommend the following articles: