✦ Study Material — Page 3

Candlestick Patterns

Master multi-candle patterns — Doji, Morning Star & Evening Star — to identify indecision and powerful three-candle reversals at key market turning points.

Advanced Patterns

9

Doji

Indecision / Reversal
Doji Candlestick Pattern

A Doji is formed when the opening price and the closing price are equal. It signals indecision between buyers and sellers and can precede a reversal depending on context.

There are mainly five types of Doji:

1. Neutral Doji

A small candlestick pattern that looks like a cross or plus sign. It occurs when the stock opens and closes at the middle of the day's high and low.

2. Long-Legged Doji

Has upper and lower shadows much longer than the natural Doji. The price dramatically moves up and down but closes at the same level it opened, showing strong indecision between buyers and sellers.

3. Gravestone Doji

Formed when the opening and closing price are equal and occur at the low of the day. This pattern forms when supply and demand forces are at equilibrium.

4. Dragonfly Doji

Formed when the opening and closing prices are equal and occur at the high of the day. This forms when supply and demand forces are at equilibrium.

5. Four Price Doji

Simply a horizontal line without any upper or lower shadow — it looks like a minus sign. The high, low, open and close prices of the candle are exactly the same.

10

Morning Star

Bullish Reversal
Morning Star Candlestick Pattern

The Morning Star Pattern is viewed as a Bullish reversal pattern, usually occurring at the bottom of a downtrend.

The pattern consists of three candlesticks:

1. A long Bearish candle.
2. A small Bullish or Bearish candle (or a Doji) that opens at or below the close of the previous candle.
3. A green Bullish candle that opens at or above the high point of the previous candle and closes at or above the center of the first candle.

Criteria of Taking Trades

  • The first part of a Morning Star reversal pattern is a large Bearish red candle. On the first day, bears are definitely in charge, usually making new lows.
  • The second day begins with a Bearish gap down. It is clear from the opening of Day 2 that bears are in control. However, bears do not push prices much lower. The candlestick on Day 2 is quite small and can be Bullish, Bearish, or neutral (i.e. Doji).
  • Day 3 begins with a Bullish gap up, and bulls are able to press prices even further upward, often eliminating the losses seen on Day 1.
  • It forms at the Support level i.e. on downtrend. After touching Support level the market will be reversed and will be in uptrend.
11

Evening Star

Bearish Reversal
Evening Star Candlestick Pattern

The Evening Star Pattern is viewed as a Bearish reversal pattern that usually occurs at the top of an uptrend.

The pattern consists of three candlesticks:

1. Large Bullish Candle (Day 1).
2. Small Bullish or Bearish Candle (Day 2).
3. Large Bearish Candle (Day 3).

Criteria of Taking Trades

  • The 1st part of an Evening Star reversal pattern is a large Bullish green candle. On the first day, bulls are definitely in charge, usually making new highs.
  • The 2nd day begins with a Bullish gap up. It is clear from the opening of Day 2 that bulls are in control. However, bulls do not push prices much higher. The candlestick on Day 2 is quite small and can be Bullish, Bearish, or neutral (i.e. Doji).
  • Day 3 begins with a gap down — a Bearish signal — and bears are able to press prices even further downward, often eliminating the gains seen on Day 1.
  • It forms at the Resistance level i.e. on uptrend. After touching the Resistance level the market will be reversed and will be in downtrend.
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