Overview
This lecture covers everything you need to know about candlestick patterns for trading in stocks, forex, crypto, or other financial markets, focusing on reading, classifying, and trading candlestick patterns effectively.
Candlestick Basics
- Candlesticks can be bullish (price up, green/white) or bearish (price down, red/black).
- Each candlestick shows four points: Open, High, Low, Close (OHLC).
- The candle's body represents the distance between open and close; wicks (shadows) show high and low.
- Candlesticks are displayed in various timeframes (e.g., 1min, 1hr, 1 day).
Reading Candlestick Strength & Momentum
- Large real bodies suggest strong momentum (bullish or bearish).
- Long wicks show reversal attempts or indecision.
- Small bodies with long wicks indicate indecision (neither buyers nor sellers dominate).
- Momentum candles are typically at least 2x the size of previous candles.
Candlestick Pattern Classifications
- Complexity: Simple patterns (1 candle), complex patterns (2+ candles).
- Direction: Bullish (up), bearish (down), or neutral (indecision).
- Type: Reversal (trend change), continuation (trend persists).
Key Reversal Patterns & Strategies
- Bullish Engulfing: Green candle engulfs previous red, signals reversal up after downtrend.
- Bearish Engulfing: Red candle engulfs previous green, signals reversal down after uptrend.
- Hammer: Small body, long lower wick—bullish reversal after downtrend.
- Shooting Star: Small body, long upper wick—bearish reversal after uptrend.
- Morning Star: Three-candle bullish reversal (strong red, small body gap, strong green).
- Evening Star: Three-candle bearish reversal (strong green, small body gap, strong red).
- Piercing Pattern: Green closes above 50% of previous strong red after downtrend.
- Dark Cloud Cover: Red closes below 50% of previous green after uptrend.
- Inverted Hammer: Small body, long upper wick—bullish reversal after downtrend.
- Hanging Man: Small body, long lower wick—bearish reversal after uptrend.
Key Continuation Patterns & Strategies
- Rising Three Methods: Strong green, 3 small reds in range, then another strong green closing above first.
- Falling Three Methods: Strong red, 3 small greens in range, then another strong red closing below first.
- Bull/Bearish Momentum Candle: Large body at least twice prior candles, signals trend continuation.
- Bull Flag: Strong green, small downward candles, then strong green closing above last pullback.
- Bear Flag: Strong red, small upward candles, then strong red closing below last pullback.
- Runaway Gap: Price gap with no overlap; signals strong trend continuation.
Doji and Spinning Top Candles
- Doji: Open and close nearly equal, signals indecision (multiple types: classic, dragonfly, gravestone).
- Spinning Top: Small body, long wicks; shows indecision or potential reversal depending on context.
Key Terms & Definitions
- OHLC — Open, High, Low, Close: key price points on a candle.
- Engulfing Pattern — One candle fully covers previous, signaling a possible reversal.
- Hammer/Shooting Star — Single candle reversals with long wicks.
- Momentum Candle — A candle at least 2x larger than previous, showing strong trend.
- Doji — Candle with nearly equal open and close, indicating indecision.
Action Items / Next Steps
- Practice identifying each candlestick pattern on real charts.
- Review support/resistance trading and RSI divergence for better trade decisions.
- Watch related trading courses and playlists to broaden understanding.