STB – Session 1

Candlesticks, Support & Resistance, Trendlines & Gaps – Student Notes

1. OHLC / OHLCV Basics

● OHLC = Open, High, Low, Close of a candle for a specific time frame.

● OHLCV = OHLC + Volume.

● Why Volume matters

○ Confirms strength of a move.

○ High volume = strong participation & conviction.

○ Low volume = weak move, higher chance of failure.

2. Psychology of Candles
● Candles show market emotion – fear, greed, indecision.

● Every candle is a fight between buyers vs sellers.

○ Long green body → buyers in control.

○ Long red body → sellers in control.

○ Small body / long wicks → indecision or rejection.

3. Types of Candlestick Patterns
3.1 Single Candle Patterns

1. Marubozu

○ Full body, no (or tiny) wicks.

○ Bullish marubozu: Opens near low, closes near high → strong buying.

○ Bearish marubozu: Opens near high, closes near low → strong selling.

○ Often signals strong momentum / breakout.

2. Doji (standard, long-legged, dragonfly, gravestone – see diagram on page 13)

○ Open ≈ Close → indecision.

○ After a strong trend, can signal possible reversal or pause.

3. Hammer

○ Small body at top, long lower wick.

○ Appears after a downtrend → sellers pushed price down, buyers pulled it

back.

○ Signals potential bullish reversal.

4. Hanging Man

○ Same shape as hammer but after an uptrend.

○ Warns of potential bearish reversal (sellers starting to hit the market).

5. Inverted Hammer

○ Small body at bottom, long upper wick.

○ In a downtrend, shows buyers tried to push up but couldn’t fully hold →

early sign of possible bullish reversal.

6. Shooting Star
 ○ Same shape as inverted hammer but after an uptrend.

○ Long upper wick = strong rejection at higher prices → bearish reversal

signal.

3.2 Double Candle Patterns

1. Bullish Engulfing

○ Small red candle followed by a large green candle that completely engulfs the
previous body.

○ Appears after a decline → strong buyers taking control.

2. Bearish Engulfing

○ Small green candle followed by a large red candle engulfing previous body.

○ Appears after a rally → strong sellers taking control.

3. Bullish Harami

○ Large red candle, followed by small green candle inside the previous body.

○ Shows selling pressure slowing; possible reversal up.

4. Bearish Harami

○ Large green candle, followed by small red candle inside previous body.

○ Buying is slowing; possible reversal down.

3.3 Three Candle Patterns

1. Morning Star (Bullish)

○ Day 1: Long red candle.

 ○ Day 2: Small body (any colour) – indecision / pause.

○ Day 3: Strong green candle closing well into Day 1 body.

→ Signals bottoming out and bullish reversal.

2. Evening Star (Bearish)

○ Day 1: Long green candle.

○ Day 2: Small body – indecision.

○ Day 3: Strong red candle closing well into Day 1 body.

→ Signals top formation and bearish reversal.

4. Candlestick Trading – Marubozu “Momentum Ignition”

Setup
Idea: Trade breakout continuation when a strong marubozu breaks key levels.

● Context

○ Price consolidates in a sideways range with small candles.

○ Bullish setup: range just below resistance.

○ Bearish setup: range just above support.

● Trigger

○ Bullish: Strong green marubozu breaks above resistance.

○ Bearish: Strong red marubozu breaks below support.

● Entry

○ At the close of the marubozu; or

○ On a small pullback to 30–50% of the marubozu candle.

 ● Stop-Loss

○ Bullish: Below midpoint or low of marubozu.

○ Bearish: Above midpoint or high of marubozu.

● Targets

○ Project height of prior range from the breakout; or

○ Use fixed Risk:Reward like 1:2 or 1:3.

5. Support & Resistance (S&R)

● Support

○ Price level where buying interest is strong enough to stop decline.

○ Acts like a floor.

● Resistance

○ Price level where selling pressure is strong enough to stop rise.

○ Acts like a ceiling.

Change in Polarity

● Once resistance is broken, it often becomes new support.

● Once support is broken, it often becomes new resistance.

● This “role change” is called Change in Polarity and is a powerful confirmation level.
6. Trendlines & Channels
● Trendline

○ Uptrend: line connecting higher lows.

○ Downtrend: line connecting lower highs.

○ Acts as dynamic support (uptrend) or dynamic resistance (downtrend).

● Trading Channels

○ Two parallel lines: one on swing highs, one on swing lows.

○ Price oscillates between channel support and channel resistance.

○ Trade ideas:

■ Buy near channel support in uptrend, sell near channel resistance.

■ Breakout above or below channel can start strong new move.

7. Gaps – Basics
● A Gap = Area on chart where no trading happened (price jumps).

● Candle opens significantly above or below previous close.

Why Gaps Happen

● Major news releases / earnings.

● Overnight developments (global markets, events).

● Upper/Lower circuits in stocks.

 ● Illiquid or highly volatile markets.

Gap Theory

● Gaps show strength of momentum and sentiment – sharp re-pricing by market.

● Four main types:

1. Common Gap

2. Breakaway Gap

3. Runaway / Continuation Gap

4. Exhaustion Gap

8. Types of Gaps
8.1 Common Gaps

● Occur inside a range/sideways market.

● Usually small and in low volume environments.

● Typically filled quickly (price comes back to cover the gap).

● Not very important for long-term trend – more noise than signal.

8.2 Breakaway Gaps

● Form at the end of a consolidation / range.

● Price gaps out of a strong pattern or level:

○ Triangle, rectangle, head & shoulders, major support/resistance.

 ● Usually high volume.

● Often not filled quickly and can become strong support/resistance.

● Signal: start of a new trend or major continuation.

8.3 Runaway / Continuation Gaps

● Occur in the middle of a strong trend (up or down).

● Indicate increased enthusiasm in direction of trend.

● Often with higher volume.

● Confirm that the ongoing trend is healthy and strong – trend traders can use them to
add positions.

8.4 Exhaustion Gaps

● Appear near end of a prolonged trend.

● Initially strong volume, then volume drops, showing loss of momentum.

● Often followed by reversal or deeper correction.

● Serve as a warning sign that trend may be exhausted.

9. Volume for Confirming Breakouts / Breakdowns

● High / Increasing Volume

○ Breakout above resistance or breakdown below support is more reliable.

○ Shows strong participation & conviction.

 ● Low Volume

○ Moves are suspect – can be false breakouts.

○ Be cautious; wait for confirmation.

10. Gap Trading Strategies

10.1 “Breakaway Gap + Retest” on Daily Timeframe

● Context

○ Stock forms a multi-week base / range.

○ Then gaps out of the base in the direction of breakout (up or down).

○ After 3–5 days, price pulls back & partially fills the gap.

● Trigger for Long (Bullish)

○ Price retraces into upper half of the gap.

○ Forms a bullish reversal pattern like:

■ Hammer

■ Bullish Engulfing

■ Morning Star

○ Volume on pullback is lower than breakout-day volume.

● Entry

○ Buy on break of the reversal candle’s high.

● Stop-Loss

○ Keep SL below the low of the gap candle.

 ● Targets

○ Next strong resistance zone; and/or

○ Trail profits using a moving average (MA).

10.2 Exhaustion Gap – “Island Reversal” Strategy

● Context

○ Strong uptrend near key resistance.

○ First: Gap Up (could be continuation or exhaustion).

○ Then after a few candles: Gap Down, leaving a few candles isolated like an
island between two gaps.

● Trigger

○ Clear gap up → small consolidation → gap down with no overlapping

prices.

○ Presence of evening star / other bearish pattern inside the island makes setup
stronger.

● Entry

○ Enter short on the gap-down day, or

○ On break of the island’s low.

● Stop-Loss

○ Above the island high (price region between the two gaps).

● Targets

○ Mean reversion back to major support zone.

 ○ Book partial profits along the way as price approaches intermediate supports.

11. How to Use These Notes for Practice

● Step 1 – Pattern ID:

○ Scroll through charts and label each candle (marubozu, hammer, shooting star,
etc.).

● Step 2 – Context First:

○ Always check trend + S&R + volume before acting on any pattern.

● Step 3 – Combine Tools:

○ Candle pattern at support/resistance or trendline + favourable volume = high-

probability setup.

● Step 4 – Journal Trades:

○ For each setup (Marubozu / Breakaway Gap / Island Reversal), note:

■ Date, instrument, pattern,

■ Entry, SL, target,

■ Result & learning.