ADVANCED NOTES ON CANDLESTICK PATTERNS & TECHNICAL
INDICATORS
Professional Trading Handbook
Based on Japanese Candlestick Theory, Price Action, Market Psychology, Volume Analysis,
Momentum Indicators, Trend Theory, and Confluence Trading.
Primary classical reference: Japanese Candlestick Charting Techniques by Steve Nison
PART 1 — FOUNDATION OF CANDLESTICK ANALYSIS
1. WHAT A CANDLE REPRESENTS
A candlestick is not merely a shape.
It represents:
Market psychology
Order flow
Emotional battle between buyers and sellers
Strength/weakness of momentum
Acceptance/rejection of price
Liquidity behavior
Every candle answers:
Who controlled the session?
Did buyers sustain control?
Was selling absorbed?
Was there rejection from highs/lows?
2. BASIC STRUCTURE OF A CANDLE
A. OPEN
First traded price of session
B. HIGH
Highest traded price
C. LOW
Lowest traded price
D. CLOSE
Most important price
Represents final market sentiment
3. REAL BODY ANALYSIS
Large Bullish Body
Meaning:
Strong demand
Institutional buying
Momentum continuation likely
Large Bearish Body
Meaning:
Panic selling
Aggressive supply
Small Body
Meaning:
Indecision
Balance between bulls and bears
4. SHADOW ANALYSIS
Upper Shadow
Long Upper Shadow Means:
Price rejected from highs
Sellers active above
Profit booking
Supply zone
Stronger When:
Near resistance
After prolonged rally
High volume
Lower Shadow
Long Lower Shadow Means:
Demand emerged from lows
Sellers trapped
Buying absorption
Stronger When:
Near support
After panic decline
PART 2 — SINGLE CANDLE PATTERNS
1. DOJI
Definition
Open and close almost equal.
Market Psychology
Complete indecision
Momentum exhaustion
Transition zone
Types of Doji
A. Standard Doji
Balanced session
B. Long-Legged Doji
Very high volatility.
Meaning:
Extreme uncertainty
Battle between bulls/bears
C. Dragonfly Doji
Structure:
Long lower shadow
No upper shadow
Psychology:
Sellers dominated initially
Buyers completely reversed session
Bullish if:
Appears after sharp fall
At major support
D. Gravestone Doji
Structure:
Long upper shadow
No lower shadow
Psychology:
Buyers pushed higher
Sellers crushed rally
Bearish if:
At resistance
After strong uptrend
Doji Confirmation Rules
Bullish Confirmation
Next candle closes above Doji high
Bearish Confirmation
Next candle closes below Doji low
2. HAMMER
Eligibility Conditions
Must appear after decline
Small body near upper end
Lower shadow ≥ 2× body
Small/no upper shadow
Psychology
Session Flow:
1. Sellers push sharply lower
2. Buyers absorb selling
3. Price closes near high
This indicates:
Demand entering
Smart money accumulation
Potential exhaustion of bears
Strong Hammer Conditions
Appears at strong support
Appears after capitulation
High volume
RSI oversold
Near Fibonacci 61.8%
Gap down followed by recovery
Weak Hammer Conditions
Sideways market
Low volume
Against strong macro trend
Stop Loss
Below hammer low
Confirmation
Next candle:
Bullish
Closes above hammer high
3. HANGING MAN
Same structure as Hammer.
Difference:
Appears after uptrend
Psychology
Although bulls recover by close:
Sellers entered aggressively
Early warning of distribution
Strong Bearish Hanging Man
Near resistance
At all-time highs
With high volume
Followed by bearish gap down
4. SHOOTING STAR
Eligibility
Uptrend required
Small body near low
Long upper shadow
Psychology
1. Bulls push strongly upward
2. Sellers aggressively reject highs
3. Late buyers trapped
Strong Bearish Factors
Near resistance
RSI divergence
Volume spike
MACD weakening
5. INVERTED HAMMER
Psychology
Buyers testing strength
Bears losing dominance
Requires confirmation.
6. MARUBOZU
A Marubozu candle is a candlestick with:
Very large real body
No upper wick/shadow
No lower wick/shadow
Indicates complete dominance of buyers or sellers during that session.
Bullish Marubozu
Mandatory Conditions
Opening Price = Day’s Low
Closing Price = Day’s High
Candle body is long and bullish (green/white)
Upper shadow absent or extremely tiny
Lower shadow absent or extremely tiny
Strong buying momentum throughout session
Mathematically:
Open≈Low, Close≈High
Practical Trading Rule
Many traders allow:
Wick size ≤ 5% of total candle range
Interpretation
Buyers controlled price from open till close
Very strong bullish sentiment
Often appears during:
breakout
trend continuation
bullish reversal near bottoms
Meaning
Complete buyer control
No meaningful pullback
Bearish Marubozu
A candle is considered a Bearish Marubozu when:
Mandatory Conditions
Opening Price = Day’s High
Closing Price = Day’s Low
Candle body is long and bearish (red/black)
No upper shadow
No lower shadow
Strong selling pressure throughout session
Mathematically:
Open≈High, Close≈Low
Practical Trading Rule
Tiny wick allowed (generally <5% candle range)
Interpretation
Sellers dominated entire session
Strong bearish momentum
Usually seen in:
breakdowns
downtrend continuation
bearish reversal near tops
Meaning
Complete seller control
Importance
Institutional activity often visible.
Important Additional Eligibility Filters Used by Traders
Professional traders usually add these filters:
Condition Preferred Requirement
Candle body Larger than previous 5–10 candles
size
Volume High volume confirmation
Trend context Appears near breakout/reversal zones
Close strength Close near exact high/low
Timeframe More reliable on higher TF (1H, 4H, Daily)
Types of Marubozu
Type Condition
Full Marubozu No wicks at all
Open Marubozu Small wick only at close side
Close Marubozu Small wick only at open side
Ideal Marubozu Characteristics
A high-quality Marubozu should have:
Long body
Minimal/no shadows
High volume
Strong breakout momentum
Close beyond resistance/support
Reliability
Marubozu works best when combined with:
Volume
Support/resistance
Trend direction
RSI/MACD confirmation
7. SPINNING TOP
Psychology
Equilibrium
Trend fatigue
Reduced conviction
PART 3 — DOUBLE CANDLE PATTERNS
1. BULLISH ENGULFING
Eligibility
Downtrend exists
First candle bearish
Second bullish
Second body fully engulfs first
Psychology
1. Bears initially continue trend
2. Strong buyers absorb supply
3. Shorts trapped
4. Momentum reverses
Strongest Bullish Engulfing
Large second candle
High volume
Near support
RSI oversold
Long-term trend support
Institutional Interpretation
Often:
Short covering
Large accumulation candle
Stop Loss
Below engulfing low
2. BEARISH ENGULFING
Opposite logic.
Psychology
Buyers trapped near highs
Distribution starts
Smart money selling
3. PIERCING PATTERN
Conditions
Downtrend
Strong bearish candle
Gap down opening
Strong bullish recovery
Closes above midpoint
Psychology
Panic selling absorbed
Demand overpowering supply
4. DARK CLOUD COVER
Conditions
Uptrend
Gap up opening
Bearish close below midpoint
Psychology
Bulls trapped
Distribution beginning
PART 4 — TRIPLE CANDLE PATTERNS
1. MORNING STAR
Structure
1. Large bearish candle
2. Small indecision candle
3. Strong bullish candle
Psychology
Stage 1
Bear dominance
Stage 2
Selling momentum slows
Stage 3
Buyers regain control
Strongest Morning Star
Third candle closes deep into first candle
High volume
Appears after panic selloff
2. EVENING STAR
Opposite structure.
Meaning
Major top reversal possibility.
3. THREE WHITE SOLDIERS
Conditions
Three consecutive bullish candles
Small shadows
Higher closes
Psychology
Sustained institutional buying
Strong trend reversal
4. THREE BLACK CROWS
Meaning
Sustained institutional selling.
PART 5 — CONTINUATION PATTERNS
1. RISING THREE METHODS
Conditions
Strong bullish candle
Small pullback candles
Final breakout candle
Psychology
Temporary profit booking inside strong uptrend.
2. FALLING THREE METHODS
Bearish continuation equivalent.
PART 6 — GAPS (WINDOWS)
Bullish Gap
Meaning
Aggressive buying imbalance.
Breakaway Gap
Starts new trend.
Runaway Gap
Trend acceleration.
Exhaustion Gap
Near trend ending.
PART 7 — TREND THEORY
Uptrend
Conditions
Higher highs
Higher lows
Downtrend
Conditions
Lower highs
Lower lows
Trend Strength Hierarchy
Very Strong Uptrend
20 EMA > 50 EMA > 200 EMA
Very Strong Downtrend
20 EMA < 50 EMA < 200 EMA
PART 8 — MOVING AVERAGES
1. SMA
SMA=P1+P2+⋯+PnnSMA=\frac{P_1+P_2+\cdots+P_n}{n}SMA=nP1+P2+⋯+Pn
2. EMA
Importance
Faster response
Preferred for intraday trading
EMA Hierarchy
Scalping
9 EMA
20 EMA
Swing Trading
20 EMA
50 EMA
Positional Trading
50 SMA
200 SMA
Golden Cross
Conditions
50 MA crosses above 200 MA
Meaning
Long-term bullish shift
Death Cross
Opposite structure.
PART 9 — RSI
RSI=100−1001+RSRSI=100-\frac{100}{1+RS}RSI=100−1+RS100
RSI Zones
Above 70
Overbought
Below 30
Oversold
Advanced RSI Concepts
Bullish Divergence
Price lower low + RSI higher low
Meaning:
Selling momentum weakening
Bearish Divergence
Price higher high + RSI lower high
Meaning:
Buying momentum weakening
Hidden Divergence
Bullish Hidden Divergence
Price higher low
RSI lower low
Continuation bullish.
PART 10 — MACD
MACD=EMA12−EMA26MACD=EMA_{12}-EMA_{26}MACD=EMA12−EMA26
Components
MACD Line
Momentum difference
Signal Line
Smoothing average
Histogram
Momentum acceleration/deceleration
Bullish MACD Signal
MACD crosses above signal
Prefer below zero line
Bearish MACD Signal
MACD crosses below signal
Prefer above zero line
MACD Divergence
Very powerful reversal indication.
PART 11 — STOCHASTICS
%K=Close−LowHigh−Low×100\%K=\frac{Close-Low}{High-Low}\
times100%K=High−LowClose−Low×100
Zones
Above 80
Overbought
Below 20
Oversold
Best Usage
Sideways markets
Reversal trading
PART 12 — BOLLINGER BANDS
Components
Middle SMA
Upper Band
Lower Band
Bollinger Squeeze
Meaning
Volatility compression
Usually followed by:
Explosive breakout
Walking the Band
Strong trend continuation.
PART 13 — VOLUME ANALYSIS
Most Important Confirmation Tool
Bullish Signals
Price ↑ + Volume ↑
Healthy uptrend
Price ↓ + Volume ↓
Healthy pullback
Bearish Signals
Price ↑ + Volume ↓
Weak rally
Price ↓ + Volume ↑
Aggressive selling
Climax Volume
Often near:
Tops
Bottoms
PART 14 — VWAP
VWAP=∑(Price×Volume)∑VolumeVWAP=\frac{\sum(Price\times Volume)}{\sum
Volume}VWAP=∑Volume∑(Price×Volume)
Institutional Importance
VWAP acts as:
Fair value benchmark
Institutional execution reference
Bullish
Price above VWAP
Bearish
Price below VWAP
PART 15 — ADX
Trend Strength Indicator
Levels
Below 20
Weak trend
25–40
Strong trend
Above 40
Very strong trend
PART 16 — FIBONACCI RETRACEMENT
Important Levels
23.6%
38.2%
50%
61.8%
78.6%
Strongest Retracement Zone
61.8%
Best Usage
Combine with:
Support
Candlestick reversal
EMA
RSI divergence
PART 17 — SUPPORT & RESISTANCE
Strong Support Characteristics
Multiple touches
High volume reaction
Historical importance
Resistance Characteristics
Repeated rejection
Long upper shadows
Supply emergence
Role Reversal
Broken resistance becomes support.
Broken support becomes resistance.
PART 18 — CHART PATTERNS
Bullish
Cup & Handle
Continuation breakout pattern.
Ascending Triangle
Higher lows against resistance.
Double Bottom
W-shaped reversal.
Inverse Head & Shoulders
Major bullish reversal.
Bearish
Head & Shoulders
Major bearish reversal.
Double Top
M-shaped reversal.
Descending Triangle
Bearish continuation.
PART 19 — MARKET STRUCTURE
Break of Structure (BOS)
Trend continuation confirmation.
Change of Character (CHOCH)
Early reversal signal.
Liquidity Sweep
Price hunts stop losses before reversing.
PART 20 — MULTI-TIMEFRAME ANALYSIS
Best Method
Higher Timeframe
Determine trend.
Lower Timeframe
Find entries.
Example
Daily Trend
Bullish
15-Minute
Wait for pullback + bullish pattern
PART 21 — CONFLUENCE TRADING
Highest Probability Trades
Require multiple confirmations.
Strong Bullish Confluence
Support zone
Hammer
RSI oversold
MACD bullish crossover
Volume spike
EMA support
Strong Bearish Confluence
Resistance
Shooting star
RSI divergence
MACD bearish crossover
High volume rejection
PART 22 — RISK MANAGEMENT
Most Important Section
Risk Per Trade
Professional traders:
Risk 1–2% capital only
Risk Reward Ratio
Minimum:
1:2
Ideal:
1:3 or higher
Stop Loss Rules
Never emotional.
Position Sizing Formula
Position Size=Account RiskEntry−Stop LossPosition\ Size=\frac{Account\ Risk}{Entry-
Stop\ Loss}Position Size=Entry−Stop LossAccount Risk
PART 23 — PROFESSIONAL TRADING PRINCIPLES
Never Trade:
Random candles
Low liquidity
News spikes blindly
Against trend without confirmation
Always Wait For:
Candle close
Confirmation
Confluence
Risk/reward clarity
Most Reliable Candlestick Patterns
Highest Reliability
Engulfing
Morning Star
Evening Star
Three White Soldiers
Three Black Crows
Medium Reliability
Hammer
Shooting Star
Piercing Pattern
Lowest Reliability Alone
Doji
Spinning Top
PROFESSIONAL RULE
Candlestick patterns alone are NOT enough.
Best results come from:
Trend
Volume
Support/resistance
Momentum indicators
Multi-timeframe confirmation
Risk management
combined together.