candlestick patterns –

Learning chart patterns might be the fastest way to making consistent money in the stock market. For centuries, the market has displayed the same characteristics, over and over again. After all, it’s all about the buying and selling, supply and demand. Human emotions plotted on a graph in ticks and candles and lines and bars.

To that end, the more you learn about these repeatable patterns, the more insight you’ll have. It’s a lot like learning a new language. At first glance, it all seems like gibberish. It’s the patterns that give it meaning. For example, “love” may sound different in another language, but it means just the same.

So it is in the market. Learn the patterns of accumulation (buying), distribution (selling), and stalemate (sideways action), and you’ll be well on your way to exploiting opportunities.

In this guide to chart patterns, we’ll outline for you the most important patterns in the market: From candlestick patterns to bear traps, triangle patterns to double bottoms, we’ll cover it all.

Candlestick Patterns

What is a Candlestick?

Very simply, a candlestick is a plot of price over time. This can be any time frame. For example, a one minute candle is a plot of every traded price of a stock or asset during that one minute interval. Likewise, a 5 minute candlestick is a plot of all the prices that stock traded in 5 minutes worth of time.

This is all very basic information until you realize that candlesticks are telling a story of buyers and sellers during that timeframe.

The formation of a candlestick pattern — The formation of a candlestick

How to Read Candlestick Patterns in Trading

The value of candlesticks, which have been around for centuries, is in the story they tell. As you can see from the image above, a single candlestick shows the open, high, low, and close of the price action during that time interval.

To the naked eye, this might seem inconsequential. However, to the trained candlestick chart reader, all of that information is very, very useful in decision making. Here’s why.

Imagine a stock opens at $1 on a 1-minute candle but gets hit with a lot of selling pressure during the first quarter of the time interval. During the first 15 seconds, it trades below the opening price. This forms the lower wick of the candle.

Then, for the next 30 seconds, demand enters and the price of the stock moves higher to $1.50. It is safe to assume that bulls were able to overcome sellers during that time.

However, with 15 seconds remaining in the formation of the candle, selling pressure returns. This pushes the price of the stock back to $1.25, and forms the upper wick of the candle. Perhaps bulls took profits and bears re-entered the scene.

What is left is an indecision candle, which we’ll talk about later. It is a chart pattern that occurs over and over again.

Many implications can be had about this type of candle. It tells you that neither bears nor bulls are in full control. Regardless of the type of candle or implication, the point is that every candle has a story to tell. It’s also important that these chart patterns repeat, over and over again. It reveals a struggle between both forces in the market and where the stock could be headed next.

After all, it is the “hard right edge” of the chart we are always looking to anticipate. Chart patterns help us with this.

Types of Candlestick Patterns

Generally speaking there are only three broad categories of candlestick patterns: bullish, bearish, or indecision patterns. Most of these patterns require the formation of more than one candlestick to create a pattern — and there are many such patterns.

In fact, entire books have been written about all the types of candlestick patterns you can see in the market. And while they are very informative and can add value to your trading decisions, the average trader may find the myriad of patterns daunting. For that reason, most educators try to condense the types of candlestick patterns into the most popular ones.

Here are a few examples of the most popular bullish and bearish candlestick pattern combinations that you might see. Perhaps you are already familiar with a few of them?

Types of candlestick chart patterns — Types of candlestick patterns

Let’s dig a little deeper now into what constitutes a bullish or bearish candlestick pattern.

Bullish Candlestick Chart Patterns

A bullish candlestick pattern is one that implies a bullish character — simple enough, right? This could be a reversal of a downtrend, or a continuation in an uptrend.

For a single candlestick, however, we assume it is a bullish candlestick when it “closes green”. What you’re looking for is a candle that closes higher than it opens, essentially. The example we gave above is similar.

Here’s what a bullish candlestick might look like:

Although this could be considered an indecision candle, the overall nature of the candle leans to the bullish side. It closed higher than it opened. There are plenty of other types of bullish candlesticks more bullish than this one.

For example, a marubozu candle occurs when price opens at the lows (no/small wick) and closes at the highs (no/small wick). We usually consider these very bullish candlesticks in that bulls were in control during the entire time interval.

Notice how strong the green, bullish reversal candle is on this chart. It was enough to overcome the entire red candle preceding it — and the wicks are super tiny. This tells us demand was strong during the formation of the candle.

Bullish reversal candlestick chart pattern — Bullish reversal candles

For more examples like this one on bullish candlestick patterns, check out our guide to the 6 best bullish candlestick patterns.

Bearish Candlestick Chart Patterns

Contrary to bullish candlesticks, bearish candlestick patterns are just what you would assume. They reveal that bears were in control during the time interval that the candle pattern was formed. Likewise, they may represent a reversal pattern after a strong uptrend, or a continuation pattern during a downtrend.

For bearish candlesticks, we assume the price opens higher than it closes. In other words, bears took control at some point after the open of the candle and pushed price lower as the candle formed.

Here’s an example of what this might look like:

Beyond just candlesticks, there are many bearish candlestick combination patterns. These create a series of candles which produce a bearish “event,” per se. They could be parabolic reversals, tweezer tops, abandoned babies, evening stars, or other unique patterns.

Evening star bearish candlestick pattern

Just like this example above, we discuss 8 of the most reliable bearish candlestick patterns in this tutorial.

Shooting Star Candlestick Chart Patterns

Continuing with some of the more popular candlestick chart patterns, let’s look at the shooting star candlestick pattern.

For good reason, most traders assume this is a bearish candlestick pattern. When taken in the context of an uptrend, the presence of a shooting star often signals a reversal. Many contrarian traders love to see these at the top of a parabolic run.

Shooting star candlestick chart patterns

As price increases, what you want to see is a large volume candle that starts low, goes up, and then comes back down to where it started. It leaves a nice long topping tail. This tells us that gravity, just like with a real shooting star, is pulling the price of the stock back to earth.

Traders look for these so that they can then take a short position and risk off the high of the candle, assuming it won’t go any higher.

Here’s an example of what that trade might look like:

Shooting star candlestick pattern trading example — Shooting start candlestick pattern trading example

Just as you’d expect, the shooting star occurs at the end of an uptrend, giving you an opportunity to short the stock, expecting a reversal. After the shooting star candle is formed, you initiate a short position on the break lower, risking to the high of the shooting star candle.

We discuss how to trade this setup more in depth in this tutorial.

Hammer Candlestick Patterns

Hammer candlestick patterns are somewhat similar to shooting stars in that they often signal reversals. In fact, they can be bullish or bearish depending on the context.

Hammer candlestick chart patterns — Hammer candlestick patterns

As you can see, a hammer candlestick pattern often signals a reversal of a downtrend, much like a shooting star does on the opposite end of a trend. Both hammers and shooting star candles look the same, don’t they?

In the Hammer candlestick pattern example, we have sellers capitulating into stronger hands who buy up their shares. This leaves a long bottoming wick, and signals a reversal. To take this trade, you simply buy the breakout above the hammer candle after it is formed, risking to the low of the wick.

Inverted hammer patterns can also signal reversal in a downtrend. It simply means that sellers were not able to continue pushing the stock price lower. Once they realize this, they give up and begin covering their positions, pushing the price higher.

For more on how to trade hammer candlestick patterns, check out this guide.

Doji Candlestick Patterns

Doji candlesticks are often referred to as indecision candles. They can show up red or green on a chart, but aren’t exactly considered bullish or bearish. They typically indicate a stalemate between both forces.

Like the example above, what you typically find in a doji candlestick is a very narrow body with wicks on either end. Similar to what we discussed above, this informs the chart reader that both bears and bulls created a tug-of-war while this candle was forming, and neither really won, despite the candle closing green or red.

However, if you spot the doji candlestick pattern in certain contexts, it might signal a reversal. We discuss this in our tutorial on dojis. Here are a few examples of where you might see doji candlesticks, and how they differ from the large marubozo style of candlestick patterns:

Comparably, doji candles are narrow-bodied with long wicks. Ideally, you’ll want to wait until the next candle forms after a doji to make a decision as to who has the upper hand – bull or bears. This will keep you safe in your trading decisions.

Here is an example of a gravestone doji reversal pattern:

Gravestone doji reversal chart pattern — Gravestone doji reversal

Candlestick Patterns Cheat Sheet

In order to keep from getting overwhelmed, we created a cheat sheet for you of the most popular candlestick patterns. Ideally, you’ll keep this handy while you’re trading in order to train your chart eye.

Over time, you should expect to recognize these patterns instead of having to refer back to the candlestick pattern cheat sheet. As you see a stock becoming more and more extended, it will become second nature to you to start spotting these patterns.

Feel free to save this for your own trading purposes:

Candlestick Pattern Quick Reference Guide — Candlestick pattern cheat sheet

We’ve broken the most popular patterns into bullish and bearish candlestick patterns in this cheat sheet. We recommend taking the following approach to learning these:

Pick a side (bullish or bearish)
Focus on 2-3 candlestick patterns for 2-3 months
Identify all the examples you can find of those patterns
Document what makes the pattern work or fail
Create a list of criteria you can use to stay disciplined as you trade the setups

Triangle Patterns

What is a Triangle Pattern?

Triangle patterns are a collective of candles that form a general chart pattern over time in the formation of a triangle. They can be ascending triangles, descending triangles, or symmetrical triangles.

For all intents and purposes, the simple way to spot one of these is to draw a trend line across the top and bottom of the most recent price action of the stock in play. If you find that stock coiling into an apex, it is likely forming a triangle pattern.

These can be called by different names. Some like to call them pennants, others like to call them wedges. Aside from maybe a few nuances here or there, they are all basically the same — chart patterns that resembles a triangle.

Triangle chart patterns — Triangle patterns

How to Read a Triangle Chart Pattern

Triangle patterns begin with broader price range and volatility. Over a period of time, they contract into an apex on lower volatility and narrowing price range. This is accompanied with a series of higher tops and higher bottoms, or lower tops and lower bottoms or a symmetrical sideways pennant of lower highs and higher lows. Some variances to this can occur, like a flat base or flat top.

Regardless of the formation specifics, the goal as a trader is to determine the path of least resistance once the stock leaves the formation. Along those lines, we typically see ascending triangles resolve downwardly; descending triangles usually resolve upwardly.

Volume and price action are also key in how to read a triangle pattern. Every chart pattern should tell you a story, much like candlestick patterns. Are bulls absorbing downward pressure in a descending triangle? Or, are bears selling to the bulls in an ascending triangle?

Each pattern will show you, if you look intently enough, the path of last resistance on the horizon. Once you spot it, the triangle pattern gives you a great risk to reward setup for your trade plan.

Let’s look at each type of triangle pattern a bit more in depth.

Descending Triangle Patterns

The descending triangle pattern is one of the most recognizable chart patterns in trading. It usually forms as a reversal at the end of a down trend or as a continuation pattern in an uptrend. It offers a chance for bulls to reload after profit taking in a stock.

Often labeled a descending wedge, it is important to note that the stock can resolve in either direction, up or down. For that reason, it’s always best to respect your stops. However, it is generally assumed to be a bullish pattern.

In our tutorial on descending triangles, we teach you a handful of ways to trade this pattern. One of the most popular is the breakout strategy. In this strategy, you wait for the stock to put in a series of volatility contractions, then buy on the breakout of the upper trend line.

Descending triangle pattern breakdown — Descending triangle breakdown

As shown in the example above, you’ll want to measure the broadest part of the triangle, and then set that as your target distance once you overlay from the point of breakout. Your stop would be below the most recent low of the pattern.

Ascending Triangle Pattern

Ascending triangle patterns can also resolve in either direction. Just like it’s descending counterpart, you always want to respect your stops if you are wrong on the trade. However, ascending triangle patterns are generally accepted as a bearish pattern.

Ideally, what you will want to see is a series of higher lows forming in the stock. In order to take a bearish stance, we recommend looking for elevated selling pressure as the stock makes new highs in the formation.

Once the stock reaches its apex and selling has done its job, look for a breakdown entry through a signal line or lower trend line.

In the example above, notice how as the stock advances, selling pressure prevents it from putting in a new high. It’s akin to “walking the plank.” The end result is inevitable, it just takes a little time to get to the end of the plank.

For entries, take your position on the breakdown, risking the highs. Targets can be set at the lows of the structure, or by measuring the broad part of the triangle and applying it to your breakout point.

Symmetrical Triangle Patterns

Symmetrical triangle patterns are a lot like pennants. As the structure forms, you expect to see higher lows and lower highs. This contracts into an apex formation. However, unlike the ascending or descending triangles, it may be a bit harder to predict the direction of least resistance at first. Sometimes they can seem a bit 50/50 in nature.

Similar to the volatility contraction pattern we discuss in our best small account strategy, it can lead to big gains under the right circumstances. Here are a few chart examples of what to look for in a symmetrical triangle pattern.

In this example we have a false breakdown. As you can see, it is sometimes difficult to judge such a tight pattern. However, as the pattern evolved and reclaimed, you could flip your bias and risk off the most recent low for a long trade.

Here’s an example of managing your risk and setting your targets for the symmetrical triangle pattern:

Symmetrical triangle chart pattern breakout — Symmetrical triangle pattern breakout

In this example we measure the widest part of the triangle and apply it to our breakout in order to set our 1st target zone.

For more advanced early entry techniques, take a look at our explanation of VDU and Pocket Pivots for this strategy.

The Double Bottom Pattern aka the W Pattern

Trading the W pattern, or the double bottom, can be very lucrative and give you a definable area to risk off of. It is one of the more highly recognizable chart patterns in stock trading. After all, who doesn’t know what a “W” looks like?

What is a W Pattern / Double Bottom?

The W pattern is a consolidation pattern where a stock essentially retests a support area twice. Hence the “double bottom” name associate with the pattern. Usually you’ll find this pattern as a pause in an uptrend, or as a bottoming pattern in a downtrend.

The double bottom signals to potential traders that the stock is having a hard time making new lows. As a result, long-biased traders may take advantage of the opportunity by buying the stock and risking off the support of the “W”.

It’s also fair to mention that if you are familiar with the double top pattern, this is essentially the mirror image of that strategy. We discuss this strategy in depth in our tutorial here.

How to Read a W Pattern / Double Bottom Chart Pattern

There are many different schools of thought on how to read a double bottom, but we think it best not to overthink it. Some educators like to see the second dip of the “W” slightly undercut the first dip. Others may not require this. At the end of the day, what you’re looking for is a support area to form, whether the second dip is lower or not.

Ideally, you want to see volume peak as the W pattern bases along the two “troughs” of the pattern. What this tells us is that weak hands are selling here, while stronger hands are absorbing their shares and supporting the stock. This will likely lead to higher volume along the lows.

As the second trough of the double bottom forms, it should immediately be on your radar. You might also look for longer term support from any prior high volume bars from prior high volume days. These are often footprints of larger position holders who may decide to support their position here. We discuss this in a recent podcast episode on the Simcast regarding vwap boulevard.

Trading the Bullish W Pattern / Double Bottom Chart Pattern

For obvious reasons, the double bottom is considered a bullish chart pattern. There are never 100% certainties in the markets, however. And that is why it is always best to implement stops, and respect them!

Let’s look at an example of where you could enter a bullish double bottom pattern in this chart of PLTR recently.

Notice how the stock has a sharp pullback into the 12:00pm hour. Like we mentioned above, we want to see volume increase as the stock pulls back into the first trough of the W pattern. This example didn’t let us down. We got a nice long bottoming wick and elevated volume in the first trough of the “W”.

Then, as the stock forms the second trough, we get a slight increase in volume again along the lows. Only this time, less selling pressure enters the market than the first time. As supply dries up, we see the stock rocket away from this demand zone. The second pullback was a classic retest of the support in the first trough.

Our first entry could be on the diagonal trend line drawn across the top of the bullish double bottom pattern.

Applying stop out and target areas to double bottom patterns

Once you enter the stock, make sure your trade plan includes a proper stop. In this case, we put our stop below the most recent W pattern trough. Then, we measure the depth of the W and apply that to our breakout entry to get a potential target.

In this example we reached our target of $12. A $0.30 correction gave us a $0.30 profit, with only $0.13 risk from our entry. Not bad!

Bearish W Chart Pattern / Double Bottom

There really isn’t a “bearish” double bottom, per se. There is only a failed doubled bottom. Unless, of course, you want to play the bearish counterpart to the double bottom pattern, which is the double top.

Failed double bottoms typically look like bear flags. The W turns into an “M”, in other words, and kind of looks like this:

On the other hand, if you’re looking for a topping pattern, the double top is a great strategy to add to your arsenal. Much like the double bottom, a bearish double topping pattern fails after a retest of the highs. Ideally, you’ll take the trade short on the break of the signal line, setting your stop at the high of top #2.

Double topping pattern — Double topping chart pattern

This is another example from PLTR. As the stock runs up, it is clear that selling pressure is present given the amount of wicks on the candles. After the first sign of weakness, PLTR makes a failed attempt to set new highs in Top 2. This traps breakout buyers and then the bid is pulled. The path of least resistance is obviously downward from then on.

Like our double bottom pattern, we would initiate a position on the break of the red signal line, set our stop at the highs, and measure the move for a potential target zone.

More can be found on this setup in our W pattern guide found here.

Golden Cross Chart Patterns

The golden cross is a bit unlike some of the chart patterns we’ve already mentioned in that it requires two moving averages. In fact, you could almost trade without candles using this chart pattern, though we don’t recommend doing that.

What is a Golden Cross Stock Pattern?

A golden cross occurs when a stock’s faster moving average crosses a slower moving average to the upside. For this reason, golden cross stocks are usually found after they have been in a correction for a while. There is also a very specific set of moving averages involved in this strategy.

The golden cross occurs when the 50 period moving average crosses above the 200 period moving average. This is typically seen on a daily chart, but it can also be found on smaller time frames like the hourly, 30-minute, or even intraday 1, 2, or 5 minute charts.

It signals to trend followers that the current correction in a stock or the market could begin a new uptrend.

How to Read the Golden Cross in Stock Trading?

In order for a golden cross to occur, the 50ma must — obviously — be trading below the 200 moving average. To that end, you expect to see this happening in the context of a downtrend. Price is trading lower than it was 200 days ago. And along those lines, the faster 50ma will be below that longer time frame average.

When the cross occurs, it signals to investors that momentum could be shifting. Couple this with other chart patterns like the double bottom we mention above, and you may find even more confirmation for your strategy.

Ideally, you’d like to see the speed of upward movement on the shorter time frame overtaking the longer time frame’s rate of change. When this occurs, it may be time to buy.

That being said, there are three stages of a golden cross that you should understand.

Three Stages of a Golden Cross Stock

Stage 1

In stage 1 of a golden cross, we have a downtrend. On a chart, you’ll want to see your 200 moving average trending clearly downward, along with the 50 moving average. However, the 200 moving average needs to be above the 50ma on the chart.

Here is an example with AMC. AMC was in a clear downtrend before all the hype about the squeeze occurred in 2020/2021. Before the cross occurs, we would consider this stage 1. In Wyckoff methodology, the down trend is losing steam during this stage, and preparing for a potential reversal of trend.

AMC 200 and 50 moving average stage 1 golden cross

As you can see, we have the 200 simple moving average in black trading above the red 50 simple moving average. However, if you pay close attention to the chart, you’ll notice that AMC began to slow it’s downward progression and tested a “cross” before the real golden cross occurred in early 2021. This is stage 1 of a golden cross stock.

Stage 2

This is the crossover stage. Once a stock recovers from the downtrend, puts in a consolidation and gives institutions time to accumulate shares, it is time to mark the price of the stock up again! As part of this process, the trending 50 and 200ma will eventually cross as the new uptrend begins.

Here are those stages again using AMC as our chart pattern:

The three stages of the golden cross chart pattern — The three stages of the golden cross

Notice that AMC rockets higher in price before the golden cross occurs. This send the faster moving 50ma closer and closer to the 200ma.

In our circled annotation on the chart, you would have actually got a very nice buyable pullback if purchasing based upon this strategy. The launch was enough to make the cross, and the pullback gave you a great entry. Once the stock made a golden cross, it really never looked back before launching yet again in June of 2021.

Stage 3

Stage 3 is the new uptrend phase of the golden cross stock pattern. Once the 50 moving average is trending above the 200 moving average, you expect it to remain that way for some time. Take for instance this example of a golden cross in TSLA:

Golden Cross chart pattern Example — TSLA Golden Cross Example

TSLA’s golden cross in 2019 lasted until July of 2021 and resulted in an over 1000% increase in price by the time the 50ma crossed back below the 200ma. That’s a massive gain! Obviously, this won’t happen all the time, but it goes to show that a solid trending environment with a strong stock can create a really lucrative golden cross pattern.

That being said, the golden cross strategy lasts only as long as the 50ma crosses above and stays above the 200ma. For this reason, you may get false signals in the early stages of the new uptrend, or along the way depending on how strong the uptrend is.

Golden Cross Cheat Sheet Signals

Although the golden cross pattern is pretty straight forward, here are a few examples for you to use as a cheat sheet when trading.

You need to know that the opposite pattern of the golden cross is the death cross. In an uptrend, the 50 moving average crossing below the 200 moving average is a signal to longer term traders that the trend might be changing in the opposite (bearish) direction. It becomes your sell signal.

Here is an example of using this strategy to complete your golden cross trade:

Although you wouldn’t have timed the top of CMG in this example, it is clear that you would have gotten the “meat of the move” from the original buy signal. Hopefully it is clear that a solid trending environment works best for this chart pattern.

There are some caveats and other ways to manage your position, like trendline breaks, or selling at prior resistance levels. However, if you want to stay true to the trend following strategy, you’ll buy on the golden cross and sell on the death cross.

For more information on trading this strategy, be sure to read our in-depth post on golden crosses.

Bear Trap Chart Patterns

Bear traps may conjure images of famous fur trappers and mountain men like James Beckwourth or Jedidiah Smith, but these men weren’t as deadly to brokerage accounts as bear trap chart patterns are.

What is a Bear Trap in Trading?

As a short seller, the market presents a peculiar risk. Your losses are much more magnified and exponential on the short side. This creates a vulnerability in certain situations that bulls can take advantage of.

Think of it this way. If you buy a stock at $10 and it goes to $0, you’ve lost your entire investment. However, if you short a stock at $10, what if it goes to $30? Not only have you lost your original investment, you’re now in debt. This little aspect of short selling can often create trigger happy short sellers who are willing to cry uncle when their positions go against them.

On that token, when heavy pocketed bulls know that shorts are digging into a position, they may support the stock in an effort to “squeeze” the shorts above their high water mark. Once this happens, short covering can fuel a stock price higher, giving bulls the liquidity they need to sell their positions.

But, first, the bear trap must be set.

How to Read a Bear Trap Flag Pattern

There are a lot of reasons behind what causes a chart pattern, but a bear trap is pretty simple. The reason is to trap short sellers. And like any other chart pattern, it takes a lot of pattern recognition to spot this setup.

Here are a few things you want to look for in order to read a bear trap flag pattern:

The setup should look like it is about to break down. Ideally, you’ll want a nice run up — perhaps even parabolic in nature. The flag should then look like one of the triangle patterns we mentioned before.
As the stock slowly bounces and contracts into the flag, you want to see the break down. This sets the hook for bears. Like the symmetrical triangle pattern, you want bears chasing the stock down.
Absorption or soaking action. Now that bears feel like they are firmly in control, you want to see the stock stall. Ideally, this will occur after a high volume kill candle and near or below a prior support level.
Reclaim and rally. After the kill candle, if the stock isn’t dead, you better watch out. This is usually where the carnage begins for bears who were confident that the stock was dead.

Bear Trap Cheat Sheet Examples

Now that you know what to look for, let’s visualize this with some real-world examples of bear traps in trading.

Example 1

The first example is a failed breakdown of stock SOLY. This stock was a lower float, lower priced stock that had run up considerably intraday. After chopping around on heavy volume mid day, we saw a huge kill candle form. This was an ideal 1-3pm Bloodbath setup, but as you can see, the stock selling pressure was absorbed.

SOLY Bear Trap chart pattern example — SOLY Bear Trap

As SOLY began trading lower than the 11-1:30pm trading range, it retested the underside of that key level. From that point, the stock reclaimed the trading range and never looked back. In other words, bulls saved the stock and trapped the bears. The rest of the day, bears did their best to mitigate their losses by covering and fueling the stock price higher.

To trade this, you want to set a trendline at the lows of the trading range that broke down. IF the stock reclaims 50% of the kill candle, take your long position and risk to the most recent lows.

Example 2

In this example, we’ll point out a popular personality on Twitter who goes by AllDayFaders. He’s recognized the traps often over the years and explains them well in this thread:

$AMC update on the "you gon learn today" setup. Do u think shorts learned or nah? pic.twitter.com/2CY8FzEHhx
— AllDayFaders (@team3dstocks) May 27, 2021

As you can see, it is better to wait for the failed retest if you’re a short biased trader.

Example 3

Often times, if you can combine multiple strategies, it will help your odds of success.

In this 30m chart of Google, we see a bear trap combined with a hammer candlestick pattern. This gives us clear evidence of an impending reversal after a failed breakdown.

Bear Trap and Price Action Trading — Google bear trap and hammer candle

Not only do we get a hammer candle reversal, but it comes on the heels of a descending triangle pattern as well. What better way to combine as many chart patterns as possible in order to create your trade thesis. And that’s exactly what you should be doing. Combining chart patterns and elements of trading together only increases your chances of success.

If you’d like to learn more about the bear trap stocks pattern, please visit our detailed tutorial here.

Chart Patterns Summary and Cheat Sheet

As you can see, there are many different types of chart patterns in the stock market. We recommend taking your time while educating yourself with many of the resources we’ve listed here. Keep in mind that successful trading is a marathon, not a sprint.

Not all chart patterns will work for you. For that reason, we always preach risk management. Learn to be wrong when the market doesn’t go your way. It will save you the headache and heartache of big drawdowns in your account.

For more information on chart patterns, check out many of the resources here at TradingSim.com. Also, be sure to sign up for our 7-day free trial and practice these chart patterns in the simulator with no risk! We’ll leave you with this chart patterns cheat sheet of many of the more popular chart patterns.

stick sandwich candlestick patterns banner

Candlestick patterns have been around for centuries. They are very useful in finding reversals and continuation patterns on charts. While we discuss them in detail in other posts, in this post we will focus on the stick sandwich pattern.

Stick Sandwich Definition

The stick sandwich candlestick pattern can occur in both bull and bear markets or intraday. The pattern consists of three candlesticks, where one candlestick has an opposite colored candlestick on both sides. The closing prices of the two candlesticks that surround the opposite colored candlestick must be same.

Think of it this way: it’s like an engulfing candle that gets reversed yet again.

Bearish Stick Sandwich Charting Example

The bearish stick sandwich is a rare candlestick pattern. Despite its name, it isn’t a bearish pattern. It simply means the bearish engulfing candle gets sandwiched.

The first candlestick in the formation is a long white (green) candlestick that closes near its high. The second candlestick is a black (red) candlestick that gaps down from the previous close and closes below the previous day’s open. The third candlestick is a white (green) candlestick that completely engulfs the second candlestick and has the same closing price as the first candlestick.

Notice how the bearish engulfing candle in the middle is sandwiched on either side by bullish candles, and eventually continues trend upwards. Traders should wait for the low of the third candlestick to be broken prior to taking any short positions.

Bullish Stick Sandwich Charting Example

Like the example above, the bullish stick sandwich is not actually bullish. It is bearish.

The bullish stick sandwich is a rare candlestick pattern. The first candlestick in the formation is a long black (red) candlestick that closes near its low. The second candlestick is a white (green) candlestick that gaps up from the previous close and closes above the previous day’s open. The third candlestick is a black (red) candlestick that completely engulfs the second candlestick and has the same closing price as the first candlestick.

Traders should wait for the high of the third candlestick to be broken in the bullish stick sandwich formation prior to taking any long positions.

Examples of Stick Sandwich Chart Pattern

Let us now review real-life chart examples of the stick sandwich candlestick pattern. Again, the stick sandwich can have a bearish or bullish characteristic.

Bullish Engulfing Stick Sandwich Candlestick Pattern

Bullish stick sandwich pattern — Bullish Engulfing Stick Sandwich Candlestick Pattern

This is the 5-minute chart of AAPL from January of 2022. In the blue circle, you see the bullish candlestick being engulfed by two bearish sticks.

The first candle of the pattern is bearish and closes near its low. Next, a bullish candle develops with a small gap and closes above the first candle of the pattern.

The third candle is bearish and fully engulfs the bullish candle. The last sign of the bullish engulfing stick sandwich is that the third candle closes near the closing price of the first candle. or lower.

After the pattern completes, the price reverses sharply to the downside over the next couple of minutes.

Bearish Engulfing Stick Sandwich Candlestick Pattern

This is the 5-minute chart of TSLA from January 2022.

After a price decrease, TSLA begins to form a bearish engulfiing stick sandwich candlestick pattern.

The first bullish candle closes near its high. Then the second candle is bearish, gaps down from the previous candle, and closes near the bottom of its range.

The third and final candlestick almost engulfs the second candlestick and closes near the closing price of the first candle of the pattern. The final candle launches the reversal, as you can see.

After the confirmation of the pattern, the stock begins an impulsive move higher, resulting in a $30 increase.

How to Manage Risk when Trading the Stick Sandwich Pattern

Now that you can recognize the stick sandwich candlestick pattern on the chart, let us now cover a few methods for how to manage risks when trading the pattern.

How Much Should You Risk?

There is a common saying that equity traders should not risk more than 2 to 3% of their capital in a single trade We believe this is a wise approach to risk management.

Now, if we use the premise of a maximum drawdown per trade of 1% with a success rate of 20%, what would be the results?

Imagine you have a bankroll of $10,000 and instead of risking 3%, you only risk 1% of your capital per day trade; this means that a single trade could result in a maximum loss of $100.
You use a trading strategy, which gives you a 20% success rate, which is 1:5 ratio.
At the same time, your strategy gives you a 6:1 risk-to-return ratio, or a 6% price target per trade.

Some of you will instantly say “Hey! This system will not work and you will surely lose your bankroll!”

Let us now calculate the results from five consecutive trades using this money management strategy starting with $10,000 in capital.

Your first trade is a loser and results in a $100 loss.
First, you invest $9,900 in an unsuccessful trade. You lose $99.
Next, you invest $9,801 in an unsuccessful trade. You lose $98.01.
Then, you invest $9,702.99 in an unsuccessful trade. You lose $97.02.
Lastly, you invest $9,605.96 in a winning trade. Your trade is a 6% winner resulting in your account shooting back up to $10,182.32.

This is how a strategy with only a 20% success rate can actually turn into a profitable trading system.

Higher Winning Percentages

Granted, it will be difficult for some people to trade like this. That’s a lot of losing to absorb mentally and emotionally. For some, we to constantly feel the money flowing into our account. After 4 or 5 consecutive losers, you might become susceptible to bending your rules to account for the losses.

If you suffer from the need to win frequently, then this approach will not work for you.

Now, shifting gears back to our stick sandwich candlestick pattern. Since it is a three-candle formation, it is considered more reliable than the two or one candlestick patterns.

For this reason, it is likely to give you at least a 50% success rate versus the 20% as illustrated above. You of course will need to test out the strategy to find the right level of risk/reward for you, but the math supports the theory that you can turn a profit.

Where to Place a Stop Loss when trading the Stick Sandwich Reversal Patterns

When you trade stick sandwich candlestick formations, you should always use a stop loss. On that token, with any trading system – you must use a stop loss!

No matter how good you think you are, at some point the market will take you for a ride if you let it.

Back to how to place a stop loss with the stick sandwich formation, you should place the order right below the low of the bearish engulfing candlestick pattern and the high of the bullish engulfing candlestick pattern.

This is the same TSLA chart from the previous example, but this time we have placed a stop loss order below the bearish engulfing stick sandwich candlestick pattern.

The great thing about the stick sandwich pattern is that you can keep a tight stop. This way you can increase your risk to reward ratio on each trade.

Taking Profits when trading the Stick Sandwich Reversal Pattern

The suggested price target for the stick sandwich candlestick pattern is three times the size of the formation.

Once the stock has moved three times the size of the formation, there are two simple tactics you can use to take profits:

Close a portion of the trade (one-third or half). This way if the price starts moving against you, you have booked profits and limited your downside risk. (On a positive note, if the stock continues higher, you can take advantage of the upside without the stress of carrying the entire position.)
Adjust your stop loss order below the low of the candlestick, which hits the price target. Now that you have placed your stop, you can then use a simple moving average or price action to keep you in the trade.

Putting it All Together

Let’s now put it all together to illustrate how to trade the stick sandwich candlestick pattern.

This is the 5-minute chart of TSLA, illustrating a bearish engulfing stick sandwich (highlighted in the blue circle).

The first candlestick in the formation is bullish and closes near its high. The second candlestick opens with a gap and closes below the first candlestick.

The third candlestick is bullish and nearly engulfs the second candle – closing at approximately the same level of the first candlestick.

Everything looks great based on the requirements of the formation and we go long, with a stop loss order right below the low of the pattern.

TSLA starts moving higher as expected and reaches our price target of three times the formation, 25 minutes after opening the trade.

Once reaching our price target, we adjust our stop loss order below the candle that hit the target.

Notice that the price starts to rollover for a time, but our stop loss remains untouched and TSLA is able to rally higher.

However, we see topping action and a hammer reversal pattern, which implies that this might be the end of the trend. For this reason, we adjust our stop below the hammer candle as shown on the image (Stop 3). We can also close out the position as it is the end of day.

Conclusion

The stick sandwich candle pattern is a rare chart occurrence where two candles sandwich another one.
The pattern has a reversal characteristic.
The sandwich pattern is a rare chart occurrence.
When we trade a sandwich candle pattern, we should pursue a minimum profit equal to three times the size of the formation.
A stop loss should be placed below the pattern.
A proper stick sandwich trading strategy should lead to at least a 3:1 return-to-risk ratio.

To practice this, there is no better way than to search for these patterns in the simulator. Also, be sure to check out our tutorial and cheat sheet on candlestick patterns!

The shooting star is a single bearish candlestick pattern that is common in technical analysis. The candle falls into the “hammer” group and is a first cousin of the – hanging man, hammer, and inverted hammer. If you’re unfamiliar with any of these patterns, check out our Quick Reference Guide.

Our trading expert, Aiman Almansoori describes these patterns and how to trade them in a fantastic webinar. Be sure to follow our YouTube channel to watch more educational content like this.

What is the Shooting Star Candle?

The shooting star has a small body and a very long upper candle wick.

As you see, the candle has a small body located in the lower part of the pattern.

However, this also looks like an inverted hammer candle pattern.

So, how can we distinguish the two? The answer to this question is hidden in the price direction before the creation of the candle.

The shooting star candle is a reversal pattern of an upwards price move. The inverted hammer occurs at the end of a down trend.

Shooting Star Confirmation

If a stock is in a bullish uptrend and you identify a shooting star candle, then there is a solid chance that the trend will reverse. For this reason, traders use this candle to enter short trades on the assumption that the bullish move is running out of steam.

Once you are able to identify the shooting star, you should look to open a short position on a break of the low of the candle.

The expectation for the profit potential for the shooting star is 3:1 the size of the candlestick.

Here is an example with AMC. Note that we are aiming for 3x the width of the shooting star candle:

AMC bearish candlestick pattern — AMC bearish shooting star candlestick pattern

Psychology of the Pattern

The shooting star candlestick is considered one of the most reliable candlestick patterns. One of the reasons for this is the unique structure – a small body with a high upper candlewick.

The psychology of the trade has many layers of complexity.

First, buyers are enjoying their gains as the stock shoots to a climactic high. As this euphoric moment begins to set in, short traders begin to sell the stock on a flurry of buy orders.

At this point, the longs who were late to the party begin to get scared and start to sell out as well. This panic long selling and short selling leads to a sharp reversal in the price action, thus generating a small candlestick body on the chart.

It is important to mention that the shooting star candlestick pattern is even more reliable when it develops after three consecutive bullish candles.

This creates exponential bullish pressure on the chart. In other words, exhaustion.

In such cases, the shooting star candle is likely to have an even bigger upper candlewick. This implies that the price is about to reverse with even bigger strength.

3 Steps to Trading the Shooting Star

1) Trade Entry

Before entering a shooting star trade, you should first confirm the pattern.

Here are handful of criteria to ensure success:

Identify an active bullish trend.
Spot a candle with a small body and a big upper candlewick.
Wait for a bearish candle to break the low point of the shooting star body.
Ensure elevated volume, signifying heavy supply
This will confirm the validity of your shooting star on the chart.

If you are able to identify the presence of these signals, then you should short the security. After all, you are anticipating an upcoming bearish price move.

2) Stop Loss

You should always use a stop loss order when trading the shooting star candle pattern. After all, nothing is 100% guaranteed in stock trading, and you may experience false signals when trading the shooting star pattern.

For this reason, place the shooting star candle pattern above the upper wick of the pattern.

3) Taking Profits

The price target for the shooting star is equal to the size of the pattern (the length of the candle).

Similarly, our target is for a price move equal to three times the length of shooting star, including the wick.

Shooting Star Trading Strategy

Now that we have the shooting star confirmation criteria behind us, we will combine these three basic steps into a trading strategy.

Example #1

This is the 2-minute chart of Hewlett-Packard from June 10, 2016. The image illustrates a classical shooting star trading example.

Our trading analysis starts with identifying that the price is trending upwards.

Suddenly, a shooting star candlestick appears, which is marked with the green circle on the chart. We have a small candle body and a big upper candlewick, which confirms the shape of the pattern.

Entry

The next candle after the shooting star is bearish and it confirms the pattern.

Therefore, we sell the security after the pattern confirmation. At the same time, we place a stop loss order above the upper wick of the shooting star candle in order to secure our short trade.

This way, if the price creates an unexpected bullish move caused by high volatility, we will be protected.

Our maximum loss will be equal to the distance between the level we short HPQ and the level of the stop loss order.

The first blue arrow on the image measures the size of the candlestick. According to our shooting star trading strategy, we should seek a target equal to three times the size of the pattern.

Profits Raining

Thus, we apply the size of the pattern three times starting from the lower candle wick. This is how we get the big blue arrow, which points out the minimum target of our trading strategy.

In order to maximize our profits, we need to stay in the trade until the price action closes a candle beyond the minimum target.

On the way down, the price creates one correction during the bearish move. The downward activity then resumes and 18 periods after we short HPQ, the price action closes a candle below the minimum target of the pattern.

Exit

Luckily, this candle is relatively big and goes way beyond the minimum target. A perfect opportunity to exit.

As you see, the shooting star candle pattern gives us an indication that the trend might reverse. This creates a nice premise to short HP right in the beginning of an emerging bearish trend. Despite the small correction on the way down, the shooting star reaches the target of three times the size of the candlestick.

Example #2

Let’s now try this strategy one more time on another shooting star trading example:

We now have the 1-minute chart of Apple from December 22, 2015.

The chart starts with a price increase – Apple creates higher highs and higher lows. On the way up, the price action forms a shooting star candlestick pattern on the chart (the green circle on the image).

Now we have a reason to believe that the price action could be reversed. We wait to see if the next candle is going to confirm the authenticity of the shooting star reversal pattern.

Entry

Fortunately, the next candle is bearish and breaks the low of our shooting star candle on the chart. This gives us a strong bearish signal and we short Apple at the end of the bearish candle. At the same time, we place a stop loss order at the highest point of the shooting star – above the upper candlewick.

Now, the trade is protected against rapid price moves contrary to our trade.

Raining Profits

The blue arrows on the image measure and apply three times the size of the shooting star candle pattern. After we short Apple, the price enters a downtrend.

After the first bearish impulse on the chart, the price creates a range between $107.30 and $107.40 per share. The range is then broken and the price action creates a new bearish impulse on the chart.

This impulse leads the price to complete a total bearish move of three times the size of the shooting star pattern. This is the minimum target for our trade and we close the position.

Another successful trade in the books.

Recap

The shooting star falls into the “Hammer” candle family.
There are three basic tricks for trading the shooting star candlestick figure:
- Sell the security after the creation of a bullish trend, a shooting star candle, and a bearish confirmation candle.
- Put a stop loss right above the upper candlewick of the shooting star figure.
- Stay in the short trade for a bearish price move equal to at least three times the size of the shooting star candle including the upper and the lower candlewick.
This shooting star trading strategy contains around 3:1 Win-Loss ratio.

How to Practice This Strategy

If you find yourself overwhelmed or new to candlestick patterns, the best way to get a firm grasp of the strategies is through deliberate practice.

There is no more efficient way of doing that than in a trading simulator with a realistic trading environment.

To that end, we’ve put together a handful of reference guides for the best bullish and bearish candlestick patterns to help guide you along the way. So, be sure to check those out and download our cheat sheets.

Bullish and Bearish abandoned baby chart pattern

We have discussed a number of candlestick patterns on the Tradingsim blog. If you haven’t checked out our other resources be sure to do so, you’ll find a really nice candlestick pattern cheat sheet to help with your training. But for today, we’ll focus on the long and short side of the Abandoned Baby candlestick pattern.

In this post, you will learn how to spot both bearish and bullish abandoned baby patterns, how to trade them, and some caveats to watch out for.

If you would like to watch a video tutorial on how to trade candlestick patterns, subscribe to our Youtube channel. Our trading expert Aiman Almansoori has put together a great webinar on the topic.

Abandoned Baby Definition

The abandoned baby candlestick pattern is a three bar reversal pattern. It is similar to the morning and evening star formations and is a very reliable reversal signal when it occurs after a sharp rise or drop.

Stars, dojis, and babies candlestick patterns

While it is very similar to the morning star and evening star, it has one key difference. The real bodies and shadows cannot overlap from bar 1 to 2 and 2 to 3. This makes this pattern very unique, rare, and reliable at the same time.

Structure

The first candlestick is in the direction of the primary trend
The second candle is a doji which gaps in the direction of the primary trend, exhibiting no overlap with the real body or shadow of the previous candle
The third candle is in the opposite direction of the first day and gaps in the opposite direction of the doji.

Despite having “baby” in its name, just as the concealing baby swallow formation, it has more in common with the island reversal pattern.

Typically, the body of the candle will be a narrow doji candle, but can also be any number of indecision candles, like the dragonfly, gravestone or others.

The Psychology

When you think of the psychology of a candlestick pattern, it is best to think about the “story” between the bulls and bears. This can really help your confidence in knowing when to take the trade and understanding the context behind the pattern.

The abandoned baby signifies a rapid shift in momentum from the bulls to the bears or visa versa. Typically, it catches the other side off guard.

For example, during rallies off the bottom of an extended downtrend, a abandoned baby bottom can be very rapid as short sellers will be forced to cover fast.

Conversely, during declines after extended uptrends, the abandoned baby top can be just as fast as many longs sell their positions, aiming to keep most of their profits.

To that point, the abandoned baby represents a crossroads, or “indecision” at the top or bottom of a trend reversal. Within the candle is usually a lot of activity between retail buyers and institutional sellers, or vice versa. The result is typically a large amount of volume.

That volume tells us that a lot of effort went into the candle, but with little result, signaling the reversal.

Chart Example

Abandoned baby top and bottom — Abandoned Baby

In the above candlestick charting example, notice how the abandoned baby top comes in after a strong uptrend. This leaves the bulls trapped at the top of the formation with very little time to exit their winning positions, especially if they were buying at the top.

To the right of this formation is the abandoned baby bottom. This is the exact opposite of the abandoned baby top and is often the sight of a sharp short squeeze.

Congratulations! You are now familiar with the structure and characteristics of the abandoned baby candlestick pattern. Now it is time to apply trading techniques to the strategy with real market examples.

Trading the Abandoned Baby Candlestick Pattern

Bullish Example #1

We will now review a couple of chart examples, which show the price behavior after an abandoned baby candlestick pattern.

Bullish Abandoned Baby - Trend Increase — Bullish Abandoned Baby – Trend Increase

This is the 5-minute chart of Bank of America from June 2, 2015.

There is a clear downtrend, followed by an abandoned baby candlestick pattern, which is shown in the green rectangle.

After we identified the pattern, a strong uptrend emerges and BAC’s stock price increases a total of $0.25 per share. This may not sound like much of an increase, but Bank of America is a Titanic of a stock.

With larger cap stocks, what you are giving up in profits you don’t have to worry about in terms of risk.

Bullish Example #2

Let’s now review another example of this unique candlestick pattern.

Abandoned Baby - Trend Decline — Abandoned Baby – Trend Decline

This is the 5-minute chart of Netflix from May 5, 2015.

In the chart above, we see a bearish trend followed by an abandoned baby reversal candle pattern. You can see the formation in the green rectangle.

This time, the abandoned baby is a doji candle, which gives additional reliability to the pattern. The next candle opens with a gap from the abandoned baby, which confirms the pattern.

The followed bullish move is so strong, that even the next candle after the confirmed pattern opens with a bullish gap.

This trend reversal leads to a $3.42 price increase in Netflix.

Bearish Abandoned Baby Example

The lesson wouldn’t be complete without seeing this pattern play out bearishly.

Before the Covid Crash of 2020, the QQQ etf produced a beautiful climactic abandoned baby pattern before crashing for the next 4 weeks.

As you can see, this topping pattern occurred at the very top of an extended bull run, signaling the reversal. Perhaps the astute trader could have foreseen the crash if he’d known about this pattern?

Trading the Abandoned Baby

The good thing about the abandoned baby candlestick pattern is that if you spot it on the chart, you can trade it right away!

It is not necessary to use additional trading indicators to confirm the signal, because the pattern is pretty reliable.

This doesn’t mean that the pattern will work 100% of the time, so don’t go overboard!

Stop Loss Orders

When you trade the pattern you should always protect your trade with a stop loss order. The proper location of your stop should be or below the middle candle of the formation, depending on the direction of your trade.

Also, feel free to put the stop as tight as possible.

Profit Targets

You can always use a moving average or an oscillator to exit a trade. The other option is to rely on basic price action rules to close your profitable position.

In order to understand how this works, we’ll show you how to implement a few techniques when trading the pattern:

How to set Stop Loss — Abandoned Baby – Stop Loss

Above is the 5-minute chart of Electronic Arts from Oct 20, 2015.

After a strong price decrease, we see a candle which gaps down from the bearish trend (green rectangle). The next candle gaps up and we confirm a bullish abandoned baby.

We go long when the last candle of the pattern closes the period. Lastly, we put a stop loss order right below the lower wick of the abandoned candle as shown on the image.

EA’s stock price begins an impulse move higher and we start following the price action. Notice that the first candle from the pattern and the previous candle form a resistance area (blue horizontal line).

On its way up, EA breaks this resistance level. The price starts consolidating and the previous resistance begins acting as support (See the black arrows on the chart for reference).

The price starts increasing afterwards and breaks the high of this congestion area.

Notice that the two low wicks during the price hesitation help us build a bullish trend line – starting from the abandoned candle. The EA price tests the trend a couple more times without breaking it.

For this reason, we stay with our long position until the market closes.

In this trade, we generated a profit of $0.74 (74 cents).

Money Management when trading the Abandoned Baby Pattern

The abandoned baby candlestick pattern is one of the most reliable patterns.

As shown above, you can place tight stop loss orders when trading abandoned babies. This is because even a small contrary move will indicate that the pattern is false.

In the trade above, our stop loss was 0.42% from our entry price. Therefore, if you were to invest $40,000 of your buying power, a false pattern will lead to a maximum loss of $168.

However, the trade was successful and lead to a profit of 1.1% which translates to $440.

Managing with Moving Averages

Let’s now review another abandoned baby trade. This time though, we will rely on an exponential moving average to exit our trade.

Identifying Profit Targets using Moving Averages — Abandoned Baby – Profit Targets

Above you see the 5-minute chart of JP Morgan Chase & Co. from Nov 3, 2015. I have placed a 30-period exponential moving average on the chart, which is the blue curved line.

The chart begins with a price decrease, marked with the red arrow. At the end of the price decrease, we see a candle gapping down. This should be a signal for us that a potential abandoned baby candlestick pattern might occur on the chart.

Entry

The next candle gaps up and we confirm the pattern with its closing – we go long!

Let’s say we have a bankroll of $25,000. Since we have a day trading account we have a maximum buying power of $100,000.

Since the bullish and the bearish abandoned baby candlestick patterns are considered very reliable, we will invest 20% of our buying power. So, we invest $20,000 in a long trade based on an abandoned baby signal.

Stop Loss

Our stop loss is set below the lower candle wick of the abandoned candle. This is shown on the image above. In this trade, the stop is -0.45% from the entry price. This way, if our trade is unsuccessful, we will lose $90 (20,000 x 0.0045).

Identifying Profit Targets — Abandoned Baby – Profit Targets

After the confirmation of the pattern, JPM stock begins increasing. JPM reaches $65.86 and starts a corrective move. Notice that the price decreases, but it finds support at our 30-period EMA.

JPM price expands and breaks the $65.86 top and shoots to $66.06. Then we see a new decrease to the 30-period EMA. The price starts crawling on the exponential moving average afterwards; however, the level sustains the pressure of the price and we notice a new bounce from the 30-period EMA.

Exit

Although the price makes more of a sideways move rather than an increase, we see a new top at $66.10. The followed price action is in a bearish direction. The JPM stock price breaks the 30-period EMA, which is our signal to exit the trade.

In this trade, we managed to catch a .71% increase in JPM. This breaks down to a profit of $142 while risking $90. This gives us a 1: 1.58 risk-to-return ratio. Although this doesn’t look very impressive, $142 dollars here or there can add up to a mortgage payment at the end of the month.

Although the example above only uses 20% of your buying power, you can always invest more if you have really tight stops.

In comparison to other patterns, where you sometimes risk 2%, the abandoned baby candlestick pattern does not require you to have wide stops.

Just remember: you must use a stop loss order when trading abandoned babies. If you don’t place a stop, an unlucky trade might lead to tremendous losses, since you are leveraging your capital.

Recap

The abandoned baby is a three candle formation.
It resembles the evening and the morning star.
The doji candle needs to gap from the two candles which sandwich the pattern.
There should be no overlaps between the middle candle and the two candles surrounding it.
The abandoned baby is one of the rarest candle patterns.
A stop loss order should always be used when trading the abandoned baby candlestick pattern.
Stop loss proper location is at the end of the lower candlewick of the abandoned candle.
You can invest more than you usually invest in your deals when trading abandoned baby candle figures. There are two basic reasons for this:
- The abandoned baby is a pattern with a very high success rate.
- The stop loss when trading abandoned baby figures is usually placed very tightly. In some cases, you will risk less than 0.5% of your investment.
Two methods for managing positions are:
- Price Action Rules
- Moving Averages (EMA in our example)

How to Practice

We are big proponents of practicing in a risk-free environment until you are certain you understand a pattern and it’s unique trading qualities.

For this reason, there is no better way to practice than a stock simulator.

Be sure to ask yourself questions along the way, like these:

Is the trend in my favor?
Is it time for a reversal?
Does volume confirm my thesis?
Is the stock at an area of support or resistance?
Do multiple timeframes align with my idea?
What will I risk to, and where should I target for profit taking?

In time, you’ll find yourself confident in the pattern. Good luck!

Candlestick patterns can have some crazy names sometimes. Stars, dojis, and abandoned babies? The Japanese were fond of naming candlestick patterns after real-life visual representations. Shooting stars, morning stars, evening stars and abandoned babies are all examples of indecision reversal candle patterns. We’ll introduce you to them in this post.

If you haven’t checked out our complete explanation of candlestick patterns, be sure to do so. In it, we cover the construction of a candlestick chart, the history of candlesticks, and common candlestick reversal patterns. It also has a link to a free cheat sheet that includes the stars, dojis, and baby patterns.

What are Candlestick Stars?

As noted above, stars are a type of indecision candle. Typically we want to trade them as a powerful reversal pattern. But as with all candlestick patterns, context is everything.

Types of Candlestick Stars

The key rule to a star is that its real body does not overlap the previous candles real body. There are several variations of the star pattern:

morning star
evening star
doji star
shooting star

The Body

Stars will typically have a small body. This is particularly important for psychological reasons which we’ll get into in a moment. But for now, suffice it to say that stars usually open and close very tightly.

Of course, these candles can appear anywhere on a chart. With the examples below, we’ll teach you the proper context where they should appear for profitable reversal patterns.

Exhaustion Gaps

On a daily chart, the Candlestick Stars will typically appear with a gap at the highs of an extended run, or the lows of an extended sell off. This is the key to the reversal patterns

Candlestick Stars will typically be associated with increased volume at these climactic ends as well. This also is part of the psychology of the pattern.

Psychology of the Candlestick Star Pattern

As a star has a small real body, it represents indecision by bulls and bears.

How so?

Think about it this way:

When a stock is trending upward aggressively, strong hands and institutions will be selling into that strength. Meanwhile, retail traders may be buying here unaware that the stock is about to turn.

Likewise, because the stock is so extended, short sellers will be initiating their positions as well, adding more supply to the stock.

As all of this occurs at once, we get a star candle that can’t seem to make up its mind on moving higher or lower. A lot of activity, but not much movement in either direction. That is, until the next candle.

While the primary trend is still intact, the presence of the star is the first sign that the trend could turn. Think of it like a crossroads.

It is the second candle that will tell us whether the reversal pattern is confirmed or not.

Candlestick Star Variations

Morning Star

The morning star candle is a bottom reversal signal that comes after an extended downtrend.

This pattern is a three candle reversal setup. The first two bars are the typical star setup discussed above. The major difference with this pattern is the third candle in the formation.

It is a very strong green candle, which does not have to be a gap and closes at least halfway into the first candle.

Assessing the Strength of the Morning Star Signal

The further the green reversal candle closes into the first bar (the red bar preceding the star), the more bullish the formation.

On that note, outside of the morning star candlestick pattern revealing itself, look for other indications that this pattern is confirming. For example, you want to see high volume in the third candle, indicating strength.

Additionally, the morning star works very well when it occurs at previous support levels. The more criteria you can find, the better.

On the other side of the coin, if you buy a stock that prints the morning star, be prepared for some sort of pullback.

It is not uncommon for that to happen nearly 50% of the time. If there is a violation of the lows, then the morning star is failed.

Let’s take a look at the morning star candlestick at work with a live trading example.

Morning Star Trading Example

This is a beautiful morning star setup.

First of all, the morning star came in at previous support near the 60.37 level. The star candle came in the form of a hammer.

Refer back to our Candlestick Guide to learn more about the hammer.

There was high volume that came along with the hammer, and this was an even bigger sign that this level would hold as support. The following day, the stock accelerated with a gap higher and closed well into the top half of the first bar.

As mentioned earlier, the presence of this pattern does not indicate an immediate rally. As you can see, the gap created from the second to the third bar was backfilled.

Smaller gaps, such as this one, tend to fill in the short term. Even if one had waited for the high of the third candle in morning star to be broken above, five points could have been made in that short amount of time.

Evening Star

The evening star candlestick is the bearish version of the morning star.

It is a top reversal pattern that occurs after a sustained uptrend. The evening star is also a three candle pattern.

Evening Star Formation

The first candle is a strong bullish candle. The second candle is the star, and the third is a red body that closes well into the first candle.

Again, as with the bullish morning star, the third candle in the evening star does not have to be a gap.

Here are a couple of factors that increase the chances of this pattern succeeding:

The real bodies of all three candles do not overlap
The third candle closes well into the first one; preferably regaining 75% of the candle
Volume should lighten up on the first candle and increase on the third.

Just as the lows of the morning star pattern provide support, the highs of the evening star candle formation serve as resistance to any further upside movement.

Doji Stars

A candlestick doji pattern is a candle that lacks a real body. This means the open and close of the bar are essentially the same. It has a strong significance after substantial advances or declines.

The lack of direction is a potent reversal signal, especially if it is followed by a candle in the anticipated direction, and at the end of a trend.

When a doji is the star within the morning star and evening star candlestick patterns, the formations are known as the morning doji star and evening doji stars.

Notice, the Evening Doji star image above is an abandoned baby top, while the morning doji star is not. We’ll explain why below.

Abandoned Baby Candle

Another extremely powerful version of the doji star is the abandon baby top or abandon baby bottom. This pattern is the equivalent to what some know as the island reversal.

The abandoned baby candlestick has a doji as the second candle with a gap on both sides.

If you think about the psychology of this setup, the first gap came in an exhaustive fashion.

The stock was already in a strong uptrend or downtrend, and then it made a gap which closed near its open. This was the first sign that the directional pressure was fading.

Now, with the third candle gapping in the opposite direction of the trend, we have confirmation that a more significant trend reversal has taken place.

The Shooting Star

Shooting Star Candlestick Pattern — Shooting Star

The final star variation we will discuss is the shooting star, which occurs after a strong uptrend (or the inverted hammer that occurs after a strong move down).

The shooting star has a long upper shadow with a small real body at the lower end of the candle. This pattern usually presents itself as a sign of a short term correction rather than a more potent reversal signal.

Along those lines, it is telling us that the market’s rally could not be sustained. The market opened at or near its lows, shot up much higher and then reversed to close near the open.

The Body

Ideally, the real body of the shooting star should gap away from the previous candles’ real body. While it is not necessary, it adds confirmation to the validity of the impending reversal.

Why? Again, it all has to do with exhaustion in either direction.

Additionally, take a look at the previous candles; many times you will see overhead shadows on those candles as well. This indicates that the stock is struggling to go higher; just another clue as to what might happen.

When a shooting star forms near a resistance level, a very powerful resistance level is created.

As mentioned before, the shooting star is a short term topping formation, and any break above the high of this candle is a failed confirmation.

Variations

There is one variation to the shooting star you should consider; it is known as the gravestone doji. The gravestone doji is a shooting star with virtually no real body, the open and close are exactly the same.

This formation is more powerful than the typical shooting star and portends a more serious reversal.

Summary

Candlestick patterns are a great way to assess the trend of a stock. The key to its secret is the fact that candlesticks are a visual representation of price action.

These reversal candles can help the astute trader anticipate a trend change or continuation. Just remember, you need other validation points. These can come in the form of a technical indicator or other chart patterns.

How Can Tradingsim Help?

You can use Tradingsim to scan the markets and locate these candle reversal patterns. You can then apply your own trading strategy to find the optimum setups for profits.

Work on developing your own specific rules for entries, stops, and targets.

As always, be sure to ask yourself the following questions when practicing any setup:

what qualities work for each particular setup
what criteria were met, or not met
how was volume associated with the pattern
where could you have set your risk and profit target
how many of your trades worked or didn’t work

The Three White Soldiers pattern is a popular bullish candlestick pattern. It is fairly easy for most traders to spot in real time given the 3 large range successive candles. Moreover, in the right context it can signal a reversal of a trend. In this post we’ll discuss the context, requirements, and a free video on how to trade this pattern.

If you aren’t familiar with candlesticks in general, be sure to check out our Candlestick Pattern Guide. In that post we’ve put together a free infographic cheat sheet for you to use with your trading, along with many bullish and bearish examples!

Three White Soldiers Video Tutorial

Our in house trading expert, Al Hill has put together a quick video explaining the pattern. Have a look before you get started with the tutorial.

Overview

The three white soldiers is a Japanese candlestick pattern that is comprised of three or more bullish candles. ^[1]

The candles are white because positive price movement in eastern technical analysis is represented white and not green (as most charting platforms default to these days).

The reference to soldiers is in the context of the battle between the bulls and bears. Visually, they are marching forward with no impediment.

3 Requirements for Confirmation

Now that you have the image of the three white soldiers candlestick pattern in your mind, hopefully you’ll begin to see the pattern on your charts more often. Sometimes studying candlestick patterns can be a lot like listening to a new song, it gets stuck in your mind.

But not every sighting of a pattern is tradeable.

With most candlestick patterns, one trader may see a bullish setup, while another may see bearish signs. For this reason, it is imperative to qualify the context of the candlestick patterns before making a trade.

Next, we will dive into three clear requirements you should look for when the candles present themselves on the chart.

1st Requirement – Three Bullish Broad-Range Candles

The first rule for the pattern is that you need clean candles with decent size. By clean, we mean without a lot of selling pressure. Ideally, you don’t want long upper or lower wicks.

These candles all need to finish in the positive and the candles cannot breach the low of the prior candlestick. For reference, please see the above image.

Next, the candles need to be healthy in size, where the open is essentially the low of the period and the candlestick closes near its high. The price advancement for each candle should be considerable compared to other candles on the chart

We aren’t looking at a doji or narrow body candle here.

In the right context, this suggests ease of upward movement. A bullish sign.

2nd Requirement – Formation at the End of a Bearish Move

This requirement is a bit more subjective and tougher to identify. You essentially need to identify weakness in a stock and then the three white soldiers show up to the rescue.

Contextually, it can come when there is a lack of supply in the market after a heavy sell off, signaling a big reversal. Short covering can fuel the Three White Soldiers off the lows.

This can occur after a clear bear trend down or after a stock retreats to the bottom of a trading range.

3rd Requirement – Heavy Volume Signature

This one is not discussed as often, but you need to see volume in the setup to validate its strength. ^[2] If you encounter three white soldiers that are on light volume this could mean there was a handful of weak retail traders that jumped in too soon.

Without volume this pattern has a higher probability of rolling over, thus stopping you out of your position.

Three White Soldiers Chart – Example 1

In the first chart example, we’re reviewing the symbol SBAC. One of the first interesting points is that the stock has a sharp move upward at the open and then immediately rolls over.

Out of this weakness, SBAC then prints Three White Soldiers. This was an indication that the weakness had subsided and the stock would then attempt to develop some sort of base.

The one issue with this particular setup is the volume. As we stated earlier, the volume must accompany the setup in order for the signal to carry real weight.

The light volume in the Three White Soldiers pattern for SBAC did not ruin the trade as the stock was able to make a run for the daily highs.

However, the stock topped out at that point and developed a range.

So, in this example, while SBAC did not roll over, the stock also did not make the sizeable move we would have hoped for with this setup.

Three White Soldiers Chart – Example 2

In this example, do you see how MTN sold off the entire day? The stock had a high volume down event followed by three white soldiers. Yet again, the volume did not follow through with the soldiers.

So, what happened next?

The stock had a minor pop back up to the downtrend line only to drag lower into the close.

Are you starting to see a trend with weak volume?

That’s right, sometimes the soldiers may print on the chart, but these are not always your front line heroes.

Three White Soldiers Chart – Example 3

Now that the failed examples are out of the way (it is always good to have a healthy does of skepticism with any pattern), let’s turn our attention to a Three White Soldiers formation that works out nicely.

After a steep selloff into a support zone, DK prints three white soldiers with decent volume and the stock shot back up to the most recent swing high.

Three White Soldiers Chart – Example 4

We’ll save the best for last. In this example, EYES is trending upward from a consolidation in the morning. Now that it is above its prior resistance, we get a little pullback in the price action — just enough to suck shorts into the trade.

Once shorts are getting nice and cozy, bulls come with a vengeance to reclaim their trend.

Like the other examples, note the massive volume signature on these Three White Soldiers marching to new highs.

This particular stock ran another 400% from this point. So you can see that context is everything.

Why The Three White Soldiers Candlestick Pattern Is Difficult To Trade

Everything you have read on the internet probably praises this formation and the power of its trend forecasting capabilities. And it can be a great pattern for that reason, no doubt.

However, depending on your trading style, you may find this pattern difficult to trade for a few reasons shared below.

1. Difficulty Buying Selloffs

Many traders do not like to buy selloffs or stocks floating lower. You may have heard of the old adage, “don’t try to catch a falling knife?” Well, this is no different.

Trying to time the bottom can be difficult and risky, you never know when the stock could flush lower, stopping you out. Or even worse, stopping you out with a horrible fill.

2. Risk Is Too Wide

The difficulty with buying the Three White Soldiers is that they are very wide bodied candles. As you notice from the examples above, waiting for the last soldier to form may create an emotional hurdle if you plan to set your risk at the low of the day.

If you were to buy three white soldiers at the confirmation of the last candle, that’s three really large candles to set a stop against. It’s simply too much risk in the trade relative to the profit potential on the upside.

As a consolation, if the pattern is extremely bullish with accompanying volume, you might decide to put your stop at the low of the last soldier candle. This could be a work around for the risk issue.

Otherwise, you might wait for a pull back to retest the demand in these three candles and take your long position there.

3. Buying The Pullback May Not Work

Those of you familiar with the setup will say, “well, duh, don’t buy the break of the third candle.” As mentioned above, you could just wait for a slight pullback on light volume after the three white soldiers develops.

Perhaps buy a 50% retracement from the high of the pattern, if you get that.

This doesn’t always work. As you can see with the EYES example above, we never got that retest.

However, the silver lining in the EYES example is that we did retest the high of the third soldier candle two times, and both times held the new trend well.

EYES holds support at the Three White Soldiers

Again, the key is context and the ability to set risk according to the potential profit you might make in the trade.

An Alternative Buy Point

Experienced traders prefer their patterns to start and move with a sense of urgency. For this reason, you could initiate a position into the runup of the three white soldiers, adding as volume confirms.

This is more of an anticipatory strategy if you sense heavy demand in the tape or Level II. After the completion of the formation you can make a decision to add or cut the trade depending on the context.

How To Practice the Three White Soldiers

If you are contemplating trading the three white soldiers pattern you can practice identifying the setup within a simulator by replaying tick data for over 11,000 symbols for the last 3 years.

You can then work on developing your own specific rules for entries, stops, and targets.

As always, be sure to ask yourself the following questions when practicing any setup:

what qualities work for each particular setup
what criteria were met, or not met
how was volume associated with the pattern
where could you have set your risk and profit target
how many of your trades worked or didn’t work

For more information on candlestick patterns, please check out our free technical analysis section devoted to these great trading tools.