A Crash Course On Technical Analysis, Part Five: Advanced Candlestick Patterns


January 28  

This is part five of a series on technical analysis. Click here for the series overview in part one. Click here for part two on the history of technical analysis. Click here for part three on an overview of candlestick charts. Click here for part four on basic candlestick patterns.

When it comes to candlestick charts, there
is much to learn. The next step after learning to recognize basic patterns is
being able to identify larger, more complex patterns spanning multiple days or
time periods. Many of these patterns come in both bullish and bearish
varieties. Some are considered to be continuation patterns, while others are a
sign that a reversal could be just around the corner.

The Harami and Harami Cross

The four Harami patterns share some similarities, but they appear at different points in the trends and mean different things. They look like the reverse of the engulfing patterns we discussed earlier in this series, although the Harami candlestick patterns are part of larger trends.

The Bearish Harami is a small red or black
body that’s totally inside the previous time period’s body. The Bullish Harami
is a small green or white body that appears totally inside the previous time
period’s body. Neither of these two patterns is necessarily a signal for
action, but they are something to watch. The Bearish Harami could signal a
reversal, although it doesn’t always mean an uptrend is about to switch to a
downtrend. The Harami indicates that the market is indecisive, so it could go
either way. If the next candle after the one that formed the Harami continues
the same downtrend or uptrend that existed before the Harami, then the trend
could remain intact after just a brief pause.

The Bullish and Bearish Harami Crosses look like a candle followed by a Doji that’s fully inside the candle that came just before it. In the case of a Bearish Harami, the Doji appears within an uptrend, while in a Bullish Harami, the Doji appears within a downtrend. The implications of these patterns are the same as for the regular Harami patterns.

The Bullish and Bearish Flag

The Flag pattern is formed by a long price
increase or decrease which forms the pole, followed by a brief period of
range-bound trades ahead of a strong movement in the same direction as the pole.
This pattern is not unique to candlestick charts and can be identified in other
types of technical analysis as well.

A Bullish Flag starts with a nearly
vertical price spike that peaks and then enters a tighter trading range before
breaking out of that range higher. It’s a temporary period during which the
price remains range-bound before breaking higher.

A Bearish Flag is the inversion of a
Bullish Flag. It appears when there’s a long, steady downtrend, followed by a
period of range-bound movement. When the price finally breaks out of the range,
it does so by moving lower and continuing in the same downward direction it was
on before the temporary pause.

In the case of both Flag candlestick patterns, it can be difficult to find good entry and exit points, but with experience, you can learn to spot the resistance and support levels of the ranges.

The Bullish Rising Three and Bearish
Falling Three

Another name for the Bullish Rising Three
and Bearish Falling Three is the Three-Method formation in both bullish and
bearish versions.

The Bullish Rising Three starts with a long
white or green candle, and then the three candles immediately following it are
all down candles. Each of the three down candles moves the price a little lower
than the previous one, but all three are within the body of the long candle
which preceded the first one. This is a bullish signal because the long green
or white candle which follows the three down candles marks a new high point in
the price. The three down candles are also considered bullish because they
don’t mark a new low since all three of them are within the body of the first

The Bearish Falling Three is the inversion
of the Bullish Rising Three pattern. It starts with a long black or red candle,
followed by three small white or green candles which each raise the price just
a little bit higher. However, all three candles remain within the body of the
first long candle in the pattern. This indicates that no new high was breached,
so the bears prepare for a continuation of the downtrend.

The Three Black Crows and the Three White

The Three Black Crows candlestick pattern consists of three consecutive down candles, while the Three White Soldiers pattern is made up of three consecutive up candles. In the case of the Three Black Crows, the opening price of each candle is a little lower than the previous session’s opening price. The closing prices of the candles in the Three White Soldiers are each a little higher than the closing price of the previous candle.

The Three Black Crows signal a strong
reversal or a confirmation that a bullish trend has ended and given way to a
new bearish trend. The Three White Soldiers confirm the end of a bear market
and beginning of a new uptrend.

Evening and Morning Stars

These candlestick patterns in this group consist of three candles each. The Evening Star has a large up candle followed by a small up candle that’s above it. The third one is a down candle with a closing price that’s within the first up candle of the series. The Evening Doji Star is the same, except with a Doji for the second candle instead of a regular up candle. When the Evening Star appears at the top of a trend, it usually signals a reversal. The Evening Doji Star is more of a bearish signal than the other one because of the Doji in place of the second up candle. The Doji represents indecision on the part of the market, suggesting a reversal is taking place.

The Morning Star and Morning Doji Star candlestick patterns are the inverse versions of the Evening Star and Evening Doji Star. The Morning Star has a down candle, followed by an up candle that appears below the bottom price of the down candle from the previous time period. The last candle in the series is an up candle with a top price that’s well within the body of the first down candle. The Morning Doji Star is the same, except it has a Doji in place of the second candle in the series. When the Morning Star appears at the bottom of a trendline, it signals a bullish reversal. The Morning Doji Star is even more bullish than the regular Morning Star because of the Doji, which again suggests indecision with the trend.

The Hikkake pattern

This last candlestick pattern is not unique to candlestick charts like most of the others are. The Hikkake pattern can be seen in traditional bar charts or point-and-figure charts as well. It isn’t a traditional candlestick pattern. This pattern can trap unsuspecting traders who take it to mean the opposite of what it actually means.

Both variants of the Hikkake start with one
candle which has a higher low and a lower high than the previous candle. The
bearish version of this pattern follows that first candle with a candle that
has a higher low and higher high than the candle just before it. The bullish
version has a lower low and lower high on the second candle. However, this
pattern alone doesn’t represent a trading signal. Chart technicians wait to see
if the move is confirmed within the next three candles. A candle with a price
that’s lower than the low of the first candle confirms the bearish Hikkake,
while a candle with price that’s higher than the high of the first candle confirms
the bullish variant.

There are many more candlestick chart
patterns than these, but these are the most common ones you might hear about.
The rest of this series will examine other aspects of technical analysis.

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost