Candlestick patterns

This is part of the Education Series prepared by StockStream Financial Services. This session looks at some common Candlestick patterns used in trading.

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Candlestick Patterns
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Disclaimer
•Trading carries significant risk of losses and may not be suitable for all
investors. Traders should assess these risks either themselves or in
consultation with a financial advisor before investing.
•There is no guarantee that the trading techniques, methods and other
information in this presentation will result in profits. The content in this
presentation in only intended for educational and informational
purposes and not intended as trading recommendation.
•The content of this presentation is subject to change without notice.
•Stockstream Financial Advisory Services LLP or mystockstream.com
will not take any liability or accountability of losses arising from the use
of information in this presentation in any manner.

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Introduction
•Extensively used in technical
analysis.
•Candlestick patterns reflect the
market emotions.
•Indicates changes in sentiment
giving early signals of trend
reversal or continuation.
•Shows the opening price,
closing price, low and high
made for the time period.
•Ability to look at intra-period
market sentiment.

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Bearish Engulfing Pattern
•Formation of this pattern in an uptrend
indicates a top formation.
•Markets open above the previous
close and end below the previous
open.
•This pattern indicates that selling
pressure has overcome buying
interest.
•Trading Strategy:
oSell on formation of bearish
engulfing pattern.
oStop above the high of the bearish
candle.
oDetermine target using other
technical indicators.

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Bullish Engulfing Pattern
•Formation of this pattern in a
downtrend indicates a bottom
formation.
•Markets open below the previous close
and end above the previous open.
•This pattern indicates that buying
pressure has overcome selling interest.
•Trading Strategy:
oBuy on formation of bullish
engulfing pattern.
oStop below the low of the bullish
candle.
oDetermine target using other
technical indicators.

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Dark Cloud Cover
•Formation of this pattern in an uptrend
indicates a top formation.
•Markets open above the previous
close and ends close to the low of the
previous day.
•Greater penetration into previous days
candle indicates stronger signal.
•Trading Strategy:
oSell on formation of the dark cloud
cover pattern.
oStop above the high of the bearish
candle.
oDetermine target using other
technical indicators.

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Piercing Line
•Formation of this pattern in a
downtrend indicates a bottom
formation.
•Markets open below the previous
close and ends close to the high of the
previous day.
•Greater penetration into previous days
candle indicates stronger signal.
•Trading Strategy:
oBuy on formation of the piercing
line pattern.
oStop below the low of the bullish
candle.
oDetermine target using other
technical indicators.

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Hammer
•Shows a long lower shadow and a
small body. The body can be bullish
(blue) or bearish (red)
•The longer the shadow and smaller
the body the more bullish the pattern.
A bullish body gives a stronger signal
than a bearish body.
•The long shadow indicates buying
interest at lower levels.
•Trading Strategy:
oBuy on a bullish candle close after
the hammer.
oStop below the low of the hammer.
oDetermine target using other
technical indicators.

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Hanging Man
•Shows a long lower shadow and a small
body. The body can be bullish (blue) or
bearish (red)
•The longer the shadow and smaller the body
the more bearish the pattern. A bearish (red)
body gives a stronger signal than a bullish
(blue) body.
•The pattern indicates that the market is
having problems moving higher and selling
interest is coming at higher levels.
•Trading Strategy:
oSell on a bearish candle close after the
hanging man.
oStop above the high of the hanging man.
oDetermine target using other technical
indicators.

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Morning Star
•This is a bottom reversal pattern.
•This is a three candlestick pattern.
The first candle is bearish, the second
is bullish with a small body and a gap
open below the close of the bearish
candle. The third candle is a bullish
candle confirming change in
sentiment.
•Trading Strategy:
oBuy on a formation of the morning
star pattern.
oStop below the low of the middle
candle.
oDetermine target using other
technical indicators.

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Evening Star
•This is a top reversal pattern.
•This is a three candlestick pattern.
The first candle is bullish, the
second is bearish with a small
body and a gap open above the
close of the bullish candle. The
third candle is a bearish candle
confirming change in sentiment.
•Trading Strategy:
oSell on a formation of the
evening star pattern.
oStop above the high of the
middle candle.
oDetermine target using other
technical indicators.

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Shooting Star
•This is a top reversal pattern. It is not
as strong as an evening star.
•The pattern has a long top shadow
with a small body indicating selling
pressure at higher levels.
•Trading Strategy:
oSell on a confirmation of the
shooting star pattern with another
bearish candle.
oStop above the high of the
shooting star candle.
oDetermine target using other
technical indicators.

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Inverted Hammer
•This is a bottom reversal pattern.
•Looks like an shooting star pattern
but formed at the end of a
downtrend.
•The pattern has a long top shadow
with a small body indicating buying
interest at lower levels.
•Trading Strategy:
oBuy on a confirmation of the
inverted hammer pattern with
another bullish candle.
oStop below the low of the candle.
oDetermine target using other
technical indicators.

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