What are the commonly used Candlestick Patterns in Price Action Trading?

Welcome to Episode 4 of Price Action Trading Series from MarketSecrets.

In this episode we are go to learn “Candlestick Patterns“

To watch all the episodes, please use this link: https://www.youtube.com/playlist?list=PLRpfTFEfJ27Y9rFMjQZgXPRjxiA3dPhOP

In the last episode, we have discussed  about various candlestick types. When you combine these candlesticks in the chart, you will get candlestick patterns. There are 100s of candlestick patters available.

In this episode, we will be focussing only on the 6 candlestick patterns listed below.

1. Bullish Engulfing
2. Bearish Engulfing
3. Dark Cloud Cover
4. Piercing Pattern
5. Bullish Harami
6. Bearish Harami

These patterns are actually like pairs or mirror images. Bullish engulfing is exactly same as Bearish engulfing, except the color of the candles which is actually reversed. Likewise, Dark Cloud Cover and Piercing Pattern are mirror image of each other and the same goes for Bearish & Bullish Harami.

Let’s see about each of these in detail.

Bullish & Bearish Engulfing Pattern

Engulfing pattern consists of two candles, where the second candle completely engulfs the first candle. If the first candle is red and second candle is green, it is called bullish engulfing. In case if the first candle is green and second candle is red, it is called bearish engulfing.

Engulfing patterns like all candlestick patterns have many different looks and as a rule of thumb an engulfing pattern is defined as a candle that closes higher than the previous candle’s body high (bullish engulf) or lower than the previous candle’s body low (bearish engulf).

If it closes above the high rather than above the body or below the low rather than below the body, then the engulfing pattern will even be stronger. The candle that engulfs the prior candle shouldn’t be a 50% candle. I mean, it shouldn’t be failed ERC candle.

Concept behind engulfing is very simple, let’s take bullish engulfing as example:

1. First Candle is a Red candle, which indicates a bearish sign. Traders pushed the price down and formed a RED candle.
2. Second Candle is a Green candle. It opens lower than the first candle but the traders turn bullish and push the price up and in the process second candle engulf’s the first candle.

In this case, buyers have clearly won, as they pushed the price up over and above all the sellers. Sellers are already exhausted and buyers have an upper hand now.

Reverse is true for Bearish engulfing. Sellers have gained upper hand over buyers.

When you learn about candlestick patterns, you need to try to understand logic behind these candlestick patterns instead of blindly following chart patterns. We will come to this part in detail at much later part of the series.

Piercing Pattern:

The piercing pattern is also a two-candlestick pattern, made up of a long red candle, followed by a long green candle.

There is usually a significant gap down between the first candlestick’s closing price, and the green candlestick’s opening. It indicates a strong buying pressure, as the price is pushed up to or above the mid-price of the previous day.

Import thing to remember: 2^nd Candle should close above 50% (or) mid-point of first candle.

Dark Cloud Cover:

The dark cloud cover candlestick pattern consists of 2 candles which indicates a bearish reversal – a dark/red cloud over the previous day’s optimism/green candle. It comprises two candlesticks: a red candlestick which opens above the previous green body, and closes below its midpoint.

It signals that the bears have taken over the session, pushing the price sharply lower. If the wicks of the candles are short it suggests that the downtrend was extremely decisive.

Import thing to remember: 2^nd Candle should close below 50% (or) mid-point of first candle.

Bullish Harami:

A bullish Harami occurs when there is a large bearish red candle on Day 1 followed by a smaller bullish candle on Day 2. The most important aspect of the bullish Harami is that prices gapped up on Day 2 and price was held up and unable to move lower back to the bearish close of Day 1.

This is a sign that bears are losing steam/power.

Import thing to remember: 2^nd Candle size should be less than 50% of first candle size.

Bearish Harami:

A bearish Harami occurs when there is a large bullish green candle on Day 1 followed by a smaller bearish candle on Day 2. The most important aspect of the bearish Harami is that prices gapped down on Day 2 and were unable to move higher back to the close of Day

This is a sign that bulls are losing steam/power.
Import thing to remember: 2^nd Candle size should be less than 50% of first candle size.

So, now open the chart and try to mark these 6 different candlestick patterns you have learnt today. Upload it Google Drive and share the link in the description section of this video, so that we can evaluate.

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