Art of Investment
Japanese Candlestick
Patterns
Dr. Sarveshwar Kumar Inani
(Ph.D. in Finance, IIM Lucknow)
Agenda:
• Recap (Single-Candlestick patterns)
• Any query from previous sessions
• Multiple-Candlestick patterns
Multiple-candlestick patterns
• Based on multiple period’s trading activity (More than one candle)
• Explain Gaps in prices (Gap up opening and Gap down opening, Full vs
Partial gaps)
• Every pattern shows the behavior of Bulls/bears or market participants.
• Popular patterns (Explain with live examples):
• The Engulfing pattern (Bullish or Bearish)
• The Piercing pattern
• The Dark cloud cover
• The Harami (pregnant) pattern (Bullish or Bearish)
• The Morning star
• The Evening star
The Bullish Engulfing
Pattern (Buy signal)
• It occurs at the end of a downtrend and indicates
potential trend reversal.
• Based on 2 candles. 1st candle small (red) and 2nd
candle big (green).
• Second candle (green) engulfs the first one (red) .
Trade set up:
• Entry: Buy the stock at the price available (near close
of day2)
• Stoploss: The lowest of low of day 1 and day 2.
• Target: Candles do not give targets
Image source: Google images
The Bearish Engulfing
Pattern (Sell signal)
• It occurs at the end of an uptrend and indicates
potential trend reversal.
• Based on 2 candles. 1st candle small (green) and 2nd
candle big (red).
• Second candle (red) engulfs the first one (green) .
Trade set up
• Sell the stock at the price available (near close of
day2)
• Stoploss: The highest of high of day 1 and day 2.
• Candles do not give targets
Image source: Google images
The Piercing Pattern
(Buy signal)
• Minor variation to Bullish engulfing pattern.
• It occurs at the end of a downtrend and indicates
potential trend reversal.
• Based on 2 candles. 1st candle big (red) and 2nd candle
small (green).
• Second candle (green) partially engulfs (50% or more)
the first one (red) .
Trade set up
• Buy the stock at the price available (near close of day2)
• Stoploss: The lowest of low of day 1 and day 2.
• Candles do not give targets
Image source: Google images
The Dark Cloud Cover
(Sell signal)
• Minor variation to Bearish engulfing pattern.
• It occurs at the end of an uptrend and indicates
potential trend reversal.
• Based on 2 candles. 1st candle big (green) and 2nd
candle small (red).
• Second candle (red) partially engulfs (50% or more) the
first one (green) .
Trade set up
• Sell the stock at the price available (near close of day2)
• Stoploss: The highest of high of day 1 and day 2.
• Candles do not give targets
Image source: Google images
The Bullish Harami
Pattern (Buy signal)
• It occurs at the end of a downtrend and indicates
potential trend reversal.
• Based on 2 candles. 1st candle big (red) and 2nd
candle small (green).
• Second candle (green) is inside the range of the first
one (red) .
Trade set up
• Buy the stock at the price available (near close of
day2)
• Stoploss: The lowest of low of day 1 and day 2.
• Candles do not give targets
Image source: Google images
The Bearish Harami
Pattern (Sell signal)
• It occurs at the end of an uptrend and indicates
potential trend reversal.
• Based on 2 candles. 1st candle big (green) and 2nd
candle small (red).
• Second candle (red) is inside the range of the first
one (green) .
Trade set up
• Sell the stock at the price available (near close of
day2)
• Stoploss: The highest of high of day 1 and day 2.
• Candles do not give targets
Image source: Google images
The Morning Star (Buy
signal)
• It occurs at the end of a downtrend and indicates
potential trend reversal.
• Based on 3 candles. 1st candle big (red); 2nd candle is
doji/spinning top with gap down; and third candle is big
(green) with gap up.
• Close of third candle (green) is above the open of first one
(red) .
• Keep in mind, candlestick patterns are soft science.
Trade set up
• Buy the stock at the price available (near close of day 3)
• Stoploss: The lowest of low of day 1, day 2, or day 3.
• Candles do not give targets
Image source: Google images
The Evening Star (Sell
signal)
• It occurs at the end of an uptrend and indicates potential
trend reversal.
• Based on 3 candles. 1st candle big (green); 2nd candle is
doji/spinning top with gap up; and third candle is big (red)
with gap down.
• Close of third candle (red) is below the open of first one
(red) .
• Keep in mind, candlestick patterns are soft science.
Trade set up
• Sell the stock at the price available (near close of day 3)
• Stoploss: The highest of high of day 1, day 2, or day 3.
• Candles do not give targets
Image source: Google images
Thanks