[Update 2020] I wrote this post back in 2006 when I was just starting day trading. I have decided to review and update this post. The materials presented in this post are still applicable and useful to beginner traders.
I am hitting the wall while working on backtesting programming. I decided to take a break and write a post about candlesticks stuffs that I have recently learned. There are just too many patterns of candlesticks. And I was confused. And I was pissed. And I gave up.
I know the value of candlesticks for day trading. With help from Dave, I am looking at a couple of useful patterns and trying to integrate into my backtesting program of the dummy system. I tried to search on the internet, books and I have sorted out these few valuable patterns.
14 Most Useful Candlesticks Patterns
Abandoned Baby
A long black day is followed by a Doji that gaps in the direction of the trend. Then a white day occurs gapping in the opposite direction with no overlapping shadows.
In a downtrend or within a pullback of an uptrend, the market gaps down but does not continue its downward movement. Instead, enough bulls step up to bring supply and demand back into equilibrium and the stock churns in place. This isn’t necessarily bullish, but it’s certainly less bearish. The pattern is confirmed by the next day’s gap up and rally.
Doji Star
A long black day is followed by a Doji that gaps in the direction of the trend. The shadows of the Doji should be short.
In a downtrend or within a pullback of an uptrend, the market gaps down but does not continue its downward movement. Instead enough bulls step up to bring supply and demand back into equilibrium and the stock churns in place. The halt of the downtrend signifies the possibility of a reversal, so confirmation is needed with a strong third day (preferably with volume behind it).
Kicking
A Black Marubuzo (open is the high of the day and the close is the low of the day) day is followed by a White Marubuzo (open is the low of the day and the close is the high of the day) day that gaps in the opposite direction.
The current trend is not very important with a bullish Kicking pattern. The fact that the stock can gap up and rally to close at its high is bullish regardless of the previous trend. Use volume on a white day to confirm the movement.
Mat Hold
A long white day in an uptrend is followed by a relatively small black day that gaps in the direction of the trend. The next two days continue the brief pullback and are small days that stay within the range of the first day. The fifth day is a long white day that closes above the close of the first day and continues the uptrend.
In an uptrend, a long white day is followed by a brief pullback (preferably on lightish volume). The fifth day simply continues the trend. The brief pullback is nothing more than a few days off for the bulls.
Matching Low
A long black day is followed by another black day with equivalent closes both days.
In a downtrend or during a pullback within an uptrend, a long black day occurs signaling the bears being in control. The stock gaps up the next day but then sells off to close at the same level as the previous day. The more times a stock can successfully test and hold a low, the higher the chance a reversal will occur once the seller become exhausted. Strength the following day with volume would confirm the pattern.
Morning Doji Star
A long black day is followed by a Doji that gaps in the direction of the trend. The third day is a white day which closes in the top half of the black day.
In a downtrend or during a pullback within an uptrend, the market gaps down but does not continue its downward movement. Instead enough bulls step up to bring supply and demand back into equilibrium and the stock churns in place. This is the bullish Doji Star formation. A subsequent follow through gap up that closes above the midpoint of the black day completes the Morning Doji Star and confirms the reversal.
Evening Doji Star
A long white day is followed by a Doji that gaps in the direction of the trend. The third day is a black day that closes in the bottom half of the white candle.
In an uptrend or within a bounce of a downtrend, the market gaps up but does not continue its upward movement. Instead enough bears step up to bring supply and demand back into equilibrium and the stock churns in place. This is the bearish Doji Star formation. A subsequent follow through gap down that closes below the midpoint of the white day completes the pattern and confirms the reversal.
Evening Star
A long white day is followed by a small body that gaps in the direction of the trend. The third day is a black day that closes in the bottom half of the white candle.
In an uptrend or within a bounce of a downtrend, the market gaps up but does not continue its upward movement. Instead enough bears step up to bring supply and demand back into equilibrium so a small body forms. A subsequent follow through gap down that closes below the midpoint of the white day completes the pattern and confirms the reversal.
Morning Star
A long black day is followed by a small day that gaps in the direction of the trend. The third day is a white day which closes in the top half of the black day.
In a downtrend or during a pullback within an uptrend, the market gaps down but enough buyers step in to halt the weakness. The lack of ability of the bears to press the issue indicates the downtrend may be weakening. The gap up and rally that closes the white day above the top half of the black day confirms the reversal if accomplished with a surge in volume.
Three Inside Up
A bullish Harami pattern is followed by a white day that has a higher close than the second day.
In a downtrend or during a pullback within an uptrend, a bullish Harami pattern forms. This pattern has low reliability, but when it is followed up with another white day, a reversal becomes much more probable ? especially when accompanied by volume.
Three Outside Down
A bearish Engulfing pattern is followed by a black day whose close is lower than the second day.
In an uptrend or within a bounce of a downtrend, a bearish Engulfing pattern forms. By itself this pattern has moderate reliability as a reversal indicator, but when the it is followed by another black day (preferably on strong volume), the overall pattern becomes much more reliable.
Three Inside Down
A bearish Harami pattern is followed by a black day whose close is lower than the second day.
In an uptrend or within a bounce of a downtrend, a bearish Harami forms. By itself this pattern has moderate reliability as a reversal pattern, but when followed by a weak day (preferably with a pick up in volume) the overall pattern becomes much more reliable.
Three Outside Up
A bullish Engulfing pattern is followed by a white day whose close is higher than the second day.
In a downtrend or during a pullback within an uptrend, a bullish Engulfing pattern forms. By itself the pattern has moderate reliability as a reversal indicator, but when the it is followed by another white day (preferably on strong volume), the overall pattern becomes much more reliable.
Dark Cloud Cover
A long white day is followed by a black day which gaps above the high of the white candle and then closes below the midpoint of the first day’s body.
In an uptrend or within a bounce of a downtrend, the stock gaps up and immediately encounters sellers who push the stock back down. This simply signifies the possibility of a reversal that is more reliable if the gap up occurs at resistance and the black day is accompanied by a surge in volume.
Most Useful Candlesticks Patterns – Closing Words
There you have it. My list of most useful candlesticks patterns for day trading.
However, bear in mind that these are not holy grails. The best way to use any market pattern is to play it with the context of the market.
Understand the context of the market, define your trade location, and look for your favorite chart or candlesticks patterns to play out.
If you are looking to learn more about trading, remember to check out the Back To Basics series of blog posts. I have compiled a list of articles that I feel are useful to beginners’ traders.
Also, feel free to check out the Resource page to see the tools I use in my trading.
That’s it.
Be a Better Trader, Today.
estocastica says
Excellent post! I’m bookmarking this for reference.
Excellent post! I’m bookmarking this for reference.
Thanks for the article. Very informative.
Thanks for the article. Very informative.
Estocastica,mc:
Thanks for the comments. I am glad to know that the posting is useful ๐
Estocastica,mc:
Thanks for the comments. I am glad to know that the posting is useful ๐
Hi Gav,
i read u r website on a daily basis. i am doing full time job in US from 9 to 5.
would like to know if its possible to trade any other market not us market.
i will like to spend some time after hours say 7 p.m c.t till 10 p.m c.t
can you suggest some website where i can find more info. are the markets as liquid as us futures and indices.
thanks
bill
Hi Bill,
Thanks for reading my blog. what I can share with you is my experience trading Asian market. I guess Asian hour is just nice for you to trade in the evening time. If you are interested, you can check out HangSeng Index futures, sgx-Nikkei225 or even SIMSCI futures. To my opinion, HangSeng and Nikkei are liquid enough to trade. SIMSCI is relatively small and sometimes lack of liquidity.
One problem I found is, it is a little difficult and troublesome to find real time datafeed for asian market. You gotta do some research.
SIMSCI
Nikkei 225
Some other index futures spec can be found here
Hope these help.
note to self : *Amazing…I have reader reading my blog on daily basis..wow ;p *
Hi Gav,
i read u r website on a daily basis. i am doing full time job in US from 9 to 5.
would like to know if its possible to trade any other market not us market.
i will like to spend some time after hours say 7 p.m c.t till 10 p.m c.t
can you suggest some website where i can find more info. are the markets as liquid as us futures and indices.
thanks
bill
Hi Bill,
Thanks for reading my blog. what I can share with you is my experience trading Asian market. I guess Asian hour is just nice for you to trade in the evening time. If you are interested, you can check out HangSeng Index futures, sgx-Nikkei225 or even SIMSCI futures. To my opinion, HangSeng and Nikkei are liquid enough to trade. SIMSCI is relatively small and sometimes lack of liquidity.
One problem I found is, it is a little difficult and troublesome to find real time datafeed for asian market. You gotta do some research.
SIMSCI
Nikkei 225
Some other index futures spec can be found here
Hope these help.
note to self : *Amazing…I have reader reading my blog on daily basis..wow ;p *
Great post Gav. Will help the non-stick people out.
Great post Gav. Will help the non-stick people out.
Hi Bill,
I’m currently trade in Hong kong Hang seng Index and so far, it was not successful.
I heard that in Hangseng index, we can actually predict the next days High and low, as soon as the next days market open and by analising: Previous trading days OPEN, HIGH, LOW, CLOSE and Current day’s “OPEN”. Do you know this method?
If you know, can you share it with me ?
Thanks
Hi Bill,
I’m currently trade in Hong kong Hang seng Index and so far, it was not successful.
I heard that in Hangseng index, we can actually predict the next days High and low, as soon as the next days market open and by analising: Previous trading days OPEN, HIGH, LOW, CLOSE and Current day’s “OPEN”. Do you know this method?
If you know, can you share it with me ?
Thanks