NUSInvest Workshop Series
Session Two
Candlesticks Patterns
NUS Students’ Investment Society
Workshops Syllabus – Sem 1
LT18, 6-7PM
Week
Lesson Topic
Week 4
Introduction to FA & TA
Week 5
Japanese Candlesticks & Charts (E-learning Week)
Week 6
Annual Reports
Week 7
NIL (Mid-terms Week)
Week 8
Support & Resistance
Week 9
Valuation Methodology
Week 10
Week 11
Week 12
Exams Preparation
PROFILE
• NUS Invest Research Analyst, Acting FA Director
• Year 2 BBA (Finance)
• First trading experience in 2010
• Does both FA & TA, mostly FA
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Background
Japanese Candlestick
• Stresses relationship between open and close prices
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Candle Anatomy
•
Body: Distance between open and closing
•
Tip of upper wick/shadow: Highest price of
Bearish
Candle
that period
•
Bottom of lower wick/shadow/hair: Lowest
price of that period
•
Range (length) of candle stick indicates
volatility
•
Upward candlestick usually
or green
or blue
•
Downward candlestick usually black or red
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Bullish
Candle
Gaps/ Windows
• Gap: Current open is not the same as
prior closing price
• No price and no volume transacted
hands between the gap (area on price
chart where there is no trades)
• Effect of news after stock market closed
for the day (e.g. earnings report)
• Psychology: Can act as resistance/
support (news that sparked the gap is
still in play)
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Gaps
Daily Chart – Wal-Mart (WMT)
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
1-Price Bar Patterns
1-Bar Pattern
•
Long Lower Shadow
-
Bullish signal
-
Lower shadow must be at least the size of the real body
-
Longer lower shadow: more reliable that it is a bullish
trend
•
Long Upper Shadow
-
Bearish signal
-
Upper shadow must be at least the size of the real body
-
Longer upper shadow: more reliable that it is a bearish
trend
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Marubozu
• White Marubozu
– Long white body, no wicks
– Bullish candle
– Open equals low, closing equals high
– Indicates buyers in control during entire period
• Black Marubozu
– Long black body, no wicks
– Bearish Candle
– Indicates sellers in control during entire period
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Hammer
•
•
•
•
Found in downtrend
Short body at the top of price range
Little to no upper shadow
Lower shadow must be at least
twice the length of real-body
• Signals: Reversal pattern when
found in a downtrend
• Short-term outlook indication
• Real body can be black or white
(white: stronger signal)
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Hammer
• Low reliability, requires confirmation
– Bullish gap for next session
– Subsequent session shows white real body above that of
the hammer’s real body
Buyers drive prices back up
to close near the highs
• Significance/ Strength:
– Length of Lower Shadow
– Colour
Long lower wick indicates initial selling prices
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Hanging Man
•
•
•
•
Found in uptrend
Short body at the top of price range
Little to no upper shadow
Lower shadow must be at least
twice the length of real-body
• Warning of a potential downward
trend
• Short-term outlook indication
• Also requires confirmation
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Hanging Man
1. Uptrend
2. Gap Up
3. Lower Shadow at
least twice as big as
Real Body
4. Real Body Bullish or
Bearish; better if
Bearish
5. Confirmation
Candle
Greater gap: Higher likelihood of reversal
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Shooting Star
• Found in uptrend
• Short body at the bottom of price
range
• Little to no lower shadow
• Upper shadow must be at least
twice the length of real-body
• Signals: Reversal pattern
• Short-term outlook indication
• Real body can be black or white
(black: stronger signal)
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Shooting Star
• Low reliability, requires confirmation
– Bearish gap for next session
– Subsequent session shows black real body below that of
the shooting star’s real body
• Significance/ Strength:
– Length of Upper Shadow
– Colour
Long upper wick indicates
initial buying prices
Open
Bears were able to reject
bulls completely (or push prices even
lower by closing below open)
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Shooting Star
1. Uptrend
2. Upper shadow at
least twice as big as
real body
3. Real body bullish
or bearish (bearish:
stronger indication)
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Inverted Hammer
• Found in downtrend
• Short body at the bottom of price
range
• Little to no lower shadow
• Upper shadow must be at least
twice the length of real-body
• Signals: Reversal pattern
• Short-term outlook indication
• Real body can be black or white
(white: stronger signal)
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Inverted Hammer
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Spinning Top & Doji
• Short body in the middle of two long
wicks
• Market closed relatively unchanged
• Indicates indecision (‘standoff’ after
significant price movement)
• Trend losing momentum; possible
turning point
• Doji/ Long-legged Doji: stronger
signal
• Open and close are the same
• Insignificant in sideway markets
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
Buyers in control
Sellers in control
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
More Doji Patterns
Dragonfly Doji
• Long lower, no
upper
BACKGROUND
1-BAR
PATTERN
Gravestone Doji
• Long upper, no
lower
2-BARS
PATTERN
3-BARS
PATTERN
Four Price Doji
• Same upper,
lower, open & close
• Very rare
• Low volume
situations
PRICE TRADING
STRATEGIES
2-Price Bar Patterns
Bullish Engulfing Candle
When found in a downtrend:
• Bullish candle opens lower than
previous candle’s close, closes
higher than previous candle’s open
• Potential sign that trend is reversing
• Indicates control has shifted from
sellers to buyers
Gap down
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Bullish Engulfing
1. Downtrend
2. Bearish Candle
3. Gap Down
4. Bullish Candle
5. Close above
previous Bearish
Candle
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Bearish Engulfing Candle
When found in a uptrend:
• Gap up: Bullish sign
• But: Bulls only push prices up
slightly before bears take over and
push prices much lower
Gap Up
• Potential sign that trend is reversing
• Indicates control has shifted from
buyers to sellers
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Bearish Engulfing
Greater size difference:
Increased significance
1. Uptrend
2. Bullish Candle
3. Gap Up
4. Bearish candle
5. Close below
previous Bullish
Candle
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Dark Cloud Cover
Gap Up
• Bullish candle closes below the
middle of previous candle
• Rejection of Gap: Bearish sign
• Retracement: Additional significance
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Piercing Line Pattern
• Bearish candle closes below the
middle of previous candle
• Rejection of Gap: Bullish Sign
• Retracement: Additional significance
Gap down
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Harami
• Bearish Harami
– Large bullish, followed by small bearish
– Gap down, unable to retrace
 Uncertainty entering the market
• Bullish Harami
– Large bearish, followed by small bullish
– Gap up
 Reversal Pattern
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Harami
In an Uptrend
1. Uptrend
2. Bullish Candle
3. Gap Down
4. Small Bullish
Candle
In a Downtrend
1. Downtrend
2. Bearish Candle
3. Gap Up
4. Small Bullish
Candle
Tweezer Top & Bottom
• Bearish Tweezer Top
– Day 1 Close about equal to Day 2
Open
– Occurs during an uptrend (closes
near the high)
– Sentiments reverses completely the
next day
• Bullish Tweezer Bottom
– Occurs during downtrend (closing the
day near the lows)
– Sometimes eliminates entire gains
from previous day
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Tweezer Bottom
1. Downtrend
2. Bearish Candle
3. Day 1 Lows about
equal to Day 2 Lows
4. Bullish Candle
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Tweezer Top
High of Day 1
Resistance Line
High of Day 2
(Bulls rejected)
High of Day 3
Gap Up to Prior Highs;
Bulls rejected again
3-Price Bar Patterns
Morning Star
• Consists of 3 candlesticks
• Bearish Gap: Bears are in control
during opening
• Day 2: Prices are not pushed much
lower (small / neutral candlestick)
– Bullish: stronger sign
• Day 3: Bullish gap up
• Prices pushed further upward,
sometimes eliminating all Day 1 losses
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Morning Star
1. Downtrend
2. Bearish Candle
3. Gap Down
4. Small Bullish/
Bearish Candle
5. Gap Up
6. Bullish Candle
Evening Star
• Consists of 3 candlesticks:
- Bullish, Small/ Neutral, Bearish
• Presence of bullish gap & bearish gap
• Day 2: Prices are not pushed much
higher
– Bearish: stronger sign
• Day 3: Large bearish candlestick
• Prices pushed further downward,
sometimes eliminating all of Day 1’s
gains
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Evening Star
1. Uptrend
2. Bullish Candle
3. Gap Up
4. Small Bullish/
Bearish Candle
5. Gap Down
6. Bullish Candle
Powerful bearish
reversal pattern!
Morning Star Pattern
Price Action Trading
Strategies
Pin Bar Setup
• Pin bar: middle of a 3-bar formation
• Open and Close of pin bar is within (or very close)
price range of bar 1 and 3
• Shadow of pin bar sticks out
Bullish Pin
Bar
– Longer, more significant
• Pin bars occurring at important support/
resistance level can be very accurate
Bearish Pin
Bar
• Can be taken as counter trend if well-defined and
protrude significantly from surrounding price bars
– Indicates strong rejection occurred
– Preferably on daily chart time frame
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Pin Bar Setup
• Pin bars occurring the context of a trending market
Obvious bullish pin bars with the overall
uptrend
Two large bullish pin bars bring
an end to the previous downtrend
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Inside Bar Setup
• Inside bar: Bar (or series of bars) completely
contained within preceding bar
• Not the same as harami
• Inside bars in strong trending
markets breakout plays in
that direction (‘pauses’)
Two inside bars contained
within range of mother bar
Mother bar
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Inside Bar Setup
Inside bar setups traded with the
near-term momentum often give rise to
large moves.
Daily AUDUSD chart
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Fakey Setup
• Inside/Harami bar + False break, then closes
back within range
Fakey setup
• Fakey entry: triggered as price moves back up
past the high of the inside bar (or the low in the
case of a bearish fakey)
• Amateurs tried to pick market top, pros stepped
in and flushed out amateurs in a flurry of buying
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Fakey Setup
Substantial push higher after false-break to
the downside
False-break / Fakey setup
BACKGROUND
1-BAR
PATTERN
2-BARS
PATTERN
3-BARS
PATTERN
PRICE TRADING
STRATEGIES
Summary
• Background
– Candlestick Anatomy
– Gaps
• 1-Bar Pattern
– Hammer/ Hanging Man
– Shooting Star/ Inverted
Hammer
– Spinning Top
– Doji
• 2-Bars Pattern
–
–
–
–
Bullish/ Bearish Engulfing
Dark cloud cover/ Piercing Line
Harami
Tweezer Top/ Bottom
• 3-Bars Pattern
– Morning/ Evening Star
• Price Trading Strategies
– Pin Bar Setup
– Inside Bar Setup
– Fakey Bar Setup
Resources
• Babypips.com
• Forexfactory.com
Ask Research!
Do email us at
research@nusinvest.com if you
have any questions!
Thank You! 