Candlestick Reversal Patterns

Five Part Series

The Art & Science of

Active Trend Trading
 Disclaimer
U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures
and Options trading has large potential rewards, but also large potential risk. You must be aware
of the risks and be willing to accept them in order to invest in the futures and options markets.
Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to
Buy/Sell futures or options. No representation is being made that any account will or is likely to
achieve profits or losses similar to those discussed in this training. The past performance of any
trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN

LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE
RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN
GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF
HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY
TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

All Materials presented are for training purposes only . Traders should paper trade any new method
prior to risk of personal capital.
 A Quick Review
Candlestick History

Charting method originating In Japan between the 18th century & late
1800’s
Potentially used by Japanese Rice Traders
Introduced to Western Traders by Steve Nison in the 1990’s
Knowledge base and trading importance expanded by Steve Bigalow
 A Quick Review

Candles and Technical Analysis go together

Powerful Tools – Only partially understood by most traders

Immediate feedback on investors sentiment

Greatly improve Reward/Risk on every trade in all time frames

Be a detective – Look for the Convergence of Clues

Presentation Material by: Active Trend Traders
 Golden Rule of Candlesticks
Candlesticks and patterns require three criteria for
proper interpretation:

1. A Completed Line (Must wait for the time period to finish!)

2. Shape of the line of pattern

3. The Preceding Trend

 What’s the Difference?
Bar Chart vs Candlesticks

Bullish Bearish

High
Open
Close

Close
Open
Low
 Primary & Best Candlestick Signals
There are many, many Candlestick Patterns but these
represent the Primary & Best
Indecisive
Doji/Spinning Tops

Bullish Bearish
Hammer Hanging Man
Engulfing Patterns Engulfing Patterns
Piercing Line Dark Cloud
Harami Harami
Inverted Hammer Shooting Star
Morning Star Evening Star

Kicker Kicker
 The Dynamic Doji
- Doji’s and Spinning Tops show indecision between buyers &
sellers

- Clue: When present at past support or moving averages

potential trend reversal or break out

- Price Action will tend to move in the direction of the open

after a Doji/Spinning Top
Doji/Spinning Top Bullish
26%+ Gain from Signal to
High in one month

Series of Doji’s
at Support

& Clue: Oversold Stochastics

 Live Examples

GO to the Charts!!
Next Week: Hammers & Hanging Men

- Hammer or Hanging Man?

Thanks See You Next Wednesday

 Golden Rule of Candlesticks
Candlesticks and patterns require three criteria for
proper interpretation:

1. A Completed Line (Must wait for the time period to finish!)

2. Shape of the line of pattern

3. The Preceding Trend

 Hammers & Hanging Men

- The Basics Shape

Small Body

Shadow must be 2X the Body

 Hammers & Hanging Men
Understanding what the line tell us?
- Buyers Wrestled control from sellers during the trading
period—but where it appears is equally important!

R - Shows levels & zones of support and resistance

What’s Important—Context & Convergence

1. Where the line forms—Uptrend or Downtrend?

2. Quality of the line
S 3. Magnitude/Range of the line—Bigger Better!
4. Other Clues
5. Defining Expectations & Failure of the Signal
 Hammers & Hanging Men
Quality of the Signal is determined by:

1. Where the Line appears—How long has the preceding trend

been in place? Appearing after longer trends can have
greater meaning

2. The Magnitude/Range of the Line

3. Convergence of other clues

 Hammer
Swing High
Only occurs after a downtrend.
Shadow must be 2X the Body

Expected move back to swing high,

trend lines or moving averages

Hammer Support
 Hammer Example

AAPL 11/16/12 What Happened

 Hanging Man
Only occurs after a
Uptrend. Shadow must Resistance
be 2X the Body

Expected move back to

swing low, trend lines or
moving averages

Swing Low
 Hanging Man Example

TNA 5-3-11 What Happened

 Poor Quality Hammer or Hammer Failure

Two Hammer examples:

1. Too Close to Resistance of

Moving Averages

2. Appearing shortly after a

new downtrend

AAPL 10/2012
 Poor Quality Hanging Men or Hanging Men Failure

Two Hanging Man examples:

1. The lower wick entry signal as

never triggered

2. Pattern just coming out of

consolidation—uptrend yes but
new uptrend

QIHU 4-2013
 Secrets of Trading Hammers & Hanging Men
Understand the Parts:
Resistance 1. Stays in effect until a close violates signal high or
Zone low

2. Both are self confirming signals

3. High is Top of a Resistance Zone

Support
Action
Zone 4. Low is Bottom of a Support Zone
Points
5. Hammer—expect testing of the wick

6. Hammer use low of body as a stop after a break

out or with Long legged Hammers

7. Hammer middle of wick can be early entry

8. Violating Low is max stop loss

9. Hanging Man violating high is max stop loss

10. Both May Appear with other candlestick reversal

patterns in series (Pay attention to this!)
 Secrets of Trading Hammers
Opens above yesterday’s candle
Opens in Wick Entry 3
Entry 2

Stop From Entry 2 or 3

Opens in Wick
Entry 1 Next Day Entries &
Stops Hammer
1. Self confirming signals
can be entered day of
Max Stop Any Entry signal
 Secrets of Trading Hanging Men
Max Stop Any Entry
Opens in Top Wick

Opens in Wick
Entry 1 Next Day Entries &
Stops Hammer
1. Self confirming signals
Opens in Lower Wick can be entered day of
signal

Opens in Lower Wick

Entry 2
Opens Below yesterday’s candle
Entry 3
 Live Examples

GO to the Charts!!
 Next Wednesday
Shooting Stars and Inverted
Hammers
 Golden Rule of Candlesticks
Candlesticks and patterns require three criteria for
proper interpretation:

1. A Completed Line (Must wait for the time period to finish!)

2. Shape of the line of pattern

3. The Preceding Trend

 Shooting Star
Only occurs after a Uptrend. Body
Resistance inside previous days candle

Wick must be 2X Body

Color of candle doesn’t matter

Expected move back to swing low,

trend lines or moving averages

Swing Low
 Shooting Star
Shooting Star

-25% Drop from Signal to Low

in 5 Days

Clue: Divergent Stochastics

 Evening Star
Only occurs after a Uptrend. Body
Resistance inside previous days candle

2nd Down day closes at least ½ way

down candle from 2 days prior

Expected move back to swing low,

trend lines or moving averages

Swing Low
Evening Star

Evening Star

Clue: Divergent Stochastics

 Inverted Hammer
Swing High Only occurs after a downtrend.
Shadow must be 2X the Body

Can be very powerful signal

Expected move back to swing high,

trend lines or moving averages

Hammer Support
Inverted Hammer
30%+ Gain from Signal to High in 6 Weeks

Inverted Hammer

Clue: Stochastics Oversold

 Morning Star
Swing High Only occurs after a downtrend.
Body inside previous days candle

2nd Down day closes at least ½ way

down candle from 2 days prior

Expected move back to swing high,

trend lines or moving averages

Hammer Support
Morning Star
11%+ Gain from Signal to High in 2 Weeks

Morning Star

Clue: Stochastics @ Support

 Next Wednesday
Engulfing Patterns, Piercing
Lines & Dark Clouds
 Golden Rule of Candlesticks
Candlesticks and patterns require three criteria for
proper interpretation:

1. A Completed Line (Must wait for the time period to finish!)

2. Shape of the line of pattern

3. The Preceding Trend

 A Quick Review

Candles and Technical Analysis go together

Powerful Tools – Only partially understood by most traders

Immediate feedback on investors sentiment

Greatly improve Reward/Risk on every trade in all time frames

Be a detective – Look for the Convergence of Clues

Presentation Material by: Active Trend Traders
 What do Candlesticks tell us immediately?
- Single Candlesticks tell us immediately, who won the battle that day

(Buyers or Sellers)
- This translates to being able to visually determine investor sentiment
- What does this do for you and your planning your trades?

- In combination with trend, other candles, moving averages, i.e.; other

clues they are predictive of potential trend reversals or pauses in existing
trend
 Bullish Engulfing
Swing High Only occurs after a downtrend. Completely
engulfs the previous days body.

Expected move back to swing high, trend lines

or moving averages

Support
Bullish Engulfing
12.8%+ Gain from Signal to
High in 6 weeks

Bullish Engulfing

Clue: Divergent Stochastics

 Bearish Engulfing
Only occurs after a Uptrend. Completely
Resistance engulfs the previous days body.

Expected move back to Swing Low, trend

lines or moving averages

Swing Low
 Bearish Engulfing

Bearish Engulfing

12.8%+ Gain from Signal to

High in 6 weeks

Clue: Divergent Stochastics

 Piercing Line

Swing High Only occurs after a downtrend. Must

open below and close more than ½
way up preceding candle.

Expected move back to swing high,

trend lines or moving averages

Support
Piercing Line
70%+ Gain from Signal to
High in 2 Months

Piercing Line

Clue: Oversold Stochastics

 Dark Cloud

Only occurs after a uptrend. Must

Resistance open above and close more than ½
way down preceding candle.

Expected move back to swing low,

trend lines or moving averages

Swing Low
Dark Cloud
Dark Cloud

-9% Drop from Signal to Low

in 2 days

Clue: Overbought Stochastics

 Bullish Harami
Swing High Only occurs after a downtrend.
Body inside previous days candle

One of the most powerful signals

Color of candle doesn’t matter

Expected move back to swing high,

trend lines or moving averages
Bullish Harami
13%+ Gain from Signal to High in 4 Weeks

Bullish Harami

Clue: Oversold Stochastics

 Bearish Harami
Only occurs after a Uptrend. Body
inside previous days candle

One of the most powerful signals

Color of candle doesn’t matter

Expected move back to swing low,

trend lines or moving averages

Swing Low
Bearish Harami
Bearish Harami

-20% Drop from Signal to Low

in 5 Weeks

Clue: Divergent Stochastics

 Live Examples

GO to the Charts!!
 Next Wednesday
Kicker Patterns—Bullish &
Bearish & Review
 Golden Rule of Candlesticks
Candlesticks and patterns require three criteria for
proper interpretation:

1. A Completed Line (Must wait for the time period to finish!)

2. Shape of the line of pattern

3. The Preceding Trend

 A Quick Review

Candles and Technical Analysis go together

Powerful Tools – Only partially understood by most traders

Immediate feedback on investors sentiment

Greatly improve Reward/Risk on every trade in all time frames

Be a detective – Look for the Convergence of Clues

Presentation Material by: Active Trend Traders
 What do Candlesticks tell us immediately?
- Single Candlesticks tell us immediately, who won the battle that day

(Buyers or Sellers)
- This translates to being able to visually determine investor sentiment
- What does this do for you and your planning your trades?

- In combination with trend, other candles, moving averages, i.e.; other

clues they are predictive of potential trend reversals or pauses in existing
trend
 Kicker Signal
• Rare but very powerful

• 2 Day Pattern

• Investor Sentiment:
o Bullish Kicker: Downtrend, a capitulation like move down, followed the next day by a
gap up move

o Bearish Kicker: Uptrend, Exhaustion move up, followed by a gap down move the next
day

• Strong Reversal Clue

 Kicker
Only occurs after a downtrend. Can
Swing High follow sell off gap down.

Very Powerful Signal

Next day opens up with a gap

Expected move back to swing high,

trend lines or moving averages

Gap up
Kicker—Bullish
13%+ Gain from Signal to High in 4 Weeks

Bullish Kicker

Clue: Stochastics Oversold

 Bearish Kicker
Only occurs after a uptrend. Can
follow exhaustion gap up.

Very Powerful Signal

Next day opens down with a gap

Expected move back to swing high,

trend lines or moving averages
Gap Down

Swing Low
 Kicker—Bearish

Bearish Kicker

-19%+ Gain from Signal to 100 day SMA in 26 days

Clue: Stochastics Divergence

 Live Examples

GO to the Charts!!