Doji – – Tradingsim

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!

The doji candlestick is one of the most common candlestick reversal patterns you will find in the market. The Gravestone Doji is a variation of this reversal pattern. When correctly confirmed, the Gravestone Doji can lead to great opportunities for profit in day trading.

In this post, we’ll cover how to trade the Gravestone Doji with real examples, plus strategies on how to enter trades and manage risk based on this popular indicator.

7 Steps to Graveston Doji Trading Success

How is the Gravestone Doji Formed

The Gravestone Doji is a candlestick bar whose open, low, and close all culminate at the low of the bar.

Bearish Gravestone Doji Japanese candlestick pattern

As the name implies, imagine looking at the side profile of an actual gravestone. Hence the long upper wick and the narrow base at the bottom reflect what a gravestone would look like from the side. The Japanese were fond of naming candlestick patterns for their likeness in real-life.

You might also say that a Gravestone Doji represents the gravestones of the bulls that have died defending their territory.

As mentioned, the Gravestone Doji is a bearish trading setup. For this reason, its success rate is greatly increased when the candle forms at a market top.

Its bullish counterpart is the Dragonfly Doji. We cover this pattern in another post.

The psychology behind the candle is that the bulls were in control in the beginning. They drive the price of the security up to an unsustainable level. From there, the bears take control and are able to sell the security down to its low by the end of the session.

Contextually, when this occurs at the highs of an extended uptrend, we interpret this as exhaustion. This gives us the confidence to take a short position when all criteria are confirmed.

Charting Example of Gravestone Doji

Now that you have an understanding of the setup, let’s review a real-life chart example.

Bearish Reversal Doji Candle Example — Bearish Reversal Candle Example

Above is a classic Gravestone Doji at the end of an uptrend.

Showing up this late in the uptrend, it was an early sign that the bulls were losing control and a price drop was likely on the horizon.

Once the bears took control, this led to heavy selling on high volume.

Our job as traders is to use these price analysis tools to help us take advantage of opportunities like this.

While this first example covers a bearish reversal setup, we can find some examples as continuation patterns. It is essentially the same as a reversal, just on a smaller rally.

Bearish Doji downtrend continuation pattern — Bearish doji downtrend continuation pattern

Note the attempt to rally here, only for bears to quickly reassert their dominance in the downtrend. Markers like this can offer opportunities to add to short positions with confidence as you manage the down-trending trade.

Trading the Gravestone Doji

Now that we have covered the basics, let’s dive into a trading example.

It is important to mention that the risk management rules for this strategy will vary due to the size of the wick. We will cover this in more detail shortly.

Entering a Gravestone Doji Trade

Whenever you see a Gravestone Doji appear in the context of a bullish uptrend, this should give you reason to pause as the trend reversal could come at any time!

Once you identify the candlestick pattern, you will want to find a trigger that lets you know when to enter the trade.

A simple trigger is the low of the candlestick. Once a candle closes below this level, you can open a short position.

Bearish Gravestone Doji Trigger Line — Doji Trigger Line

In the image above, we outline the trigger line that shows the exact moment when you should short the stock after identifying the doji candle.

The reason you want to wait for a close below that line is clear. We see a slight hesitation comes on the next candle, which is relatively small and doesn’t manage to break the trigger line.

What if this had continued higher?

Let’s look at the example from above one more time to see when that might occur:

This image has an empty alt attribute; its file name is image-31.png — Bearish Reversal Doji Candle Example

Notice that the first reversal doji gives us a false confirmation. We never close below the candle. It is the second doji that puts the nail in the coffin, no pun intended.

Thus, the short signal comes on the second candle after the doji with a break and close below the trigger line.

Risk Management when Trading the Gravestone

When you trade the Gravestone Doji, you need to determine where to place your stop loss order.

Like any other setup or trade formation, you always need to protect your capital.

The proper location of a stop loss is above the high of the Gravestone Doji candlestick.

The one caveat, as we mentioned earlier, is that for each Gravestone Doji, your level of risk will vary depending on the length of the candlestick wick.

Doji Trade Stop Loss and Trigger Line — Bearish Gravestone Doji with Stop Loss and Trigger Line

This is the same sketch from above. However, this time we have added the location of the stop loss order.

Pretty straight forward right?

Profit Targets for the Gravestone Doji Pattern

Please remember that without a target for when to exit a trade, you will find it extremely difficult to turn a profit.

For this particular candelstick pattern, we have devised a method for how to set profit targets for when to exit the trade.

Doji trade example with Profit Targets — Bearish Gravestone Doji with Profit Target

Ideally, we want to have our reward be at least double our risk. For that reason, here is a simple calculation:

The fist profit target equals the size, or range, of the doji candle. This would give us a roughly 1:1 reward/risk ratio. Not ideal, but at least we can lock in some profits.

The second profit target is double the size of the gravestone doji. This will get us closer to a 2:1 reward/risk ratio. Much better.

You will need to determine which profit target to use based on the volatility of the chart and the range of the Gravestone Doji wick.

Risk Management after Reaching Target 1

When the price reaches the first target, you can either decide to exit the trade, or wait to see if target two is reached.

A simple method for protecting your portfolio if you want to chase the big gains is to move your stop to breakeven after the first target is reached.

If you find yourself emotional, take a small portion like 1/4 of your position and bag those profits. This way, if you move your stop lower, you’ll never be red on the position, giving you patience to let it work.

Trading with the Gravestone Doji Candlestick Pattern

Now that we’ve summarized all the basic rules required to trade the Gravestone Doji candle, we will now cover a few real-life trading examples.

Example 1

Above is a 2-minute chart of AT&T intraday.

The trend is upward with a last push to increase price only to close lower. The result is a Gravestone Doji reversal candlestick.

The next candle after the doji breaks the trigger line, therefore we open a short position.

Our stop loss should be placed above the high of the gravestone doji to ensure we protect ourselves if the trade goes against us.

For this example, we are going to go with twice the size of the Gravestone Doji as our profit target.

Eight minutes later, AT&T reaches our initial target. At this point we could exit the trade and book our profits. The other option is to wait for a further price decrease and exit the trade later.

Profit targets will vary for different traders. Here at Tradingsim, we like to exit at the profit target. Our reasoning is that the stock market moves extremely fast, and you may not have the luxury of waiting on a bigger move.

In addition, there is the psychological strain of always wanting more, but never quite getting all of a move.

Of course, this can depend on the bigger picture and how oversold the stock is on multiple time frames. In this case, it may be worthwhile to wait for lower lows.

Patience can pay off sometimes, just don’t let the trade become a headache.

From our example above, once you wait for more, AT&T reversed and moved higher only to stop us out of the position.

Let’s now take a look at another trading example.

Example 2

This is the 2-minute chart of Visa. The image shows another Gravestone Doji trading example; however, this time the results are more favorable than our first trading example.

The price action is very similar to our last trading example, but in this case the stock does not reverse after hitting our target, but rather continues lower.

Patience paid off.

Our initial target is located at a distance equal to twice the size of the doji pattern — shown by the blue line. This gives us a 2:1 Reward/Risk ratio, or “2R”.

While the price reaches our initial target on the chart after 6 minutes, we adjust our stop loss and hold the position in hopes of more profits.

Ultimately, we were correct and the price breaks down further to make new daily lows. We exit the trade after we see two bullish candles in a row, our signal to exit.

We nearly doubled our profits!

Tutorial Review

Let’s review a few bullet points on how to spot the Gravestone Doji pattern and trade it with success:

The Gravestone Doji candlestick pattern is a reversal formation, which usually comes at the top of a bullish trend.
The psychological factor behind the pattern says that the bulls bring the equity to an unsustainable level, where the bears take over.
Visually, traders say that this pattern symbolizes the side profile of a gravestone for the bulls.
You should short the stock when a candle closes below the tiny body of the Gravestone Doji.
A stop loss should be used for every gravestone doji. This stop loss should be placed above the highest point of the candlestick.
You have two options for setting profit targets when trading the gravestone doji:
1. Seek a price move equal to the size of the formation. I recommend this for longer gravestone doji candles.
2. Pursue targets equal to twice the size of the gravestone doji. This is a better option when the doji candle is smaller.
After your initial target is reached, be patient if the stock keeps trending in your favor. But follow these two simple rules:
1. Adjust your stop above the initial target.
2. Stay in the trade until you see two bullish candles in a row. This hints that the bearish move might be over.

How to Practice the Gravestone Doji

As with any pattern or strategy in the stock market, it takes time and effort to recognize them in real-time.

We recommend trading in a simulator with at least 20 successful attempts on this bullish reversal pattern before employing real money in the market.

Once you have your dataset, you can measure your success. Then you will have confidence to take the trade knowing your ratio of wins to losses!

A proper education in price action wouldn’t be complete without understanding when, how, and where to go long on a stock. Especially using bullish candlestick patterns.

While we’ve discussed some of the history of candlesticks in other recent posts, and outlined the 8 most popular bearish candlestick patterns, today we’re going to talk about the following:

The Hammer
Bullish Engulfing Crack
Bearish Engulfing Sandwich
Morning Star
Tweezer Bottom
Piercing Line

In addition, be sure to use our Bullish Candlestick Pattern Cheat Sheet for your trading and training purposes as you read along!

Bullish Candlestick Patterns Cheat Sheat

Bullish Candlestick Patterns Explained

Let’s face it. Day trading is difficult. It can be fast and furious, especially for beginners.

Stocks are up one minute, down the next. You want to get in at the bottom, but you’re unsure of yourself. You want to short the top, but how do you know it will come back down?

Not knowing how to make sense of charts in the heat of the battle only adds to the difficulty of day trading.

Thankfully, a lot of the work has been done for us – four centuries ago, actually. It is simply up to you to put in the time to understand price action trading.

Therein lies the importance and functionality of bullish candlesticks and candlestick patterns.

In this post we’ll explain the most popular bullish candlestick patterns. For each pattern, we’ll cover:

What these patterns look like
How to set entries and risk for each
What are the criteria for confirming them
What story do they tell
Some common mistakes when interpreting them
A few strategies for each

1. The Hammer

If you are familiar with the bearish “Hanging Man”, you’ll notice that the Hammer looks very similar. But as the saying goes, context is everything. Much like the Hanging Man, the Hammer is a bullish candlestick reversal candle.

The context is a steady or oversold downtrend. This creates the plot for the story that builds within the next few candles. As price declines more rapidly, we anticipate the eventual bounce.

But how do we anticipate without getting caught in more of the selloff?

This is where the Hammer comes into play. It offers us evidence that selling pressure is diminishing or being absorbed. In addition, if the volume signature associated with the Hammer candle is significant, it adds even more confidence to our thesis.

We are looking to capitalize on shorts who are taking their profits and covering, along with dip buyers who are taking a chance here on the oversold conditions. The expectation? A rally.

Ideally, you identify the hammer candle, take a position long on the break to the upside of the candle, and set a risk in the body of the Hammer, or at the lows.

Bullish Hammer Example

Let’s look at a real-life example with PLUG. Right off the open, PLUG retests the lows from the pre-market. Once it reaches those levels, volume increases slightly as it reverse on the 5-minute chart seen here.

Real example of a bullish Hammer candlestick pattern — PLUG reversing in the first 30mins of trading with a Hammer candle pattern

Visibly, there is a “shelf” forming near the lows of the hammer candle’s body. The bar to the left and right also close and open in that price “shelf” area.

The second 5-minue chart opens with a bit of weakness, then rallies strongly above the Hammer candle.

This is your signal to go long. The break of the Hammer candle body.

Set the stop below the close of this bullish 5-minute candle.

2. Bullish Engulfing Crack

Imagine the surprise if you are a short seller when a stock appears to confirm your downward thesis, only to completely reverse on you. Such is the case with the Bullish Engulfing Crack.

The down trend appears to be continuing. Shorts are nice and comfortable. Then suddenly we get a complete retracement of the preceding bearish candle.

How do we explain this?

Well, you can imagine that shorts will begin covering as they witness the rising price of the stock. This adds fuel to the buying pressure already present.

The result is a bullish candlestick pattern that engulfs the efforts of the bears. For the long-biased trader, the opportunity is perfect.

As with any setup, we are looking for evidence to build our confidence in either direction. The fact that bears were completely overcome in this single bar, is evidence enough for us.

You go long at the break of the prior bar, and set a stop at the lows.

Bullish Engulfing Examples

Let’s use PLUG as another example, on the same day as the prior example.

This time, later in the day, PLUG has a sharp selloff. After the steep decline, price reaches the support level from the prior Hammer candle mentioned above. This time, we get two bullish reversal candles that completely engulf the prior bearish candles.

PLUG with a bullish engulfing candlestick pattern — PLUG with a Bullish Engulfing Crack reversal pattern mid-day

Again, notice that the context is everything here. We are in an oversold condition with climactic selling pressure. Analyzing the volume at the lows, we can see that support is coming in as weak hands cough up their shares.

Let’s look at another example.

Here is a snapshot of TLRY, which offered us a beautiful Opening Range Breakout (ORB) opportunity right out of the gate on this particular day:

TLRY Opening Range Breakout and Engulfing Bullish candle example — TLRY with the ORB off the open using a Bullish Engulfing Crack pattern

After the selloff, buyers come in and overcome the prior selling pressure from the pre-market, engulfing the bears before moving higher.

To be safe, you would enter long on the break of the red candle, setting your risk at the lows, or in the body of the first green candle.

There are some advanced traders who are more aggressive and may take their positions early if they sense the reversal is imminent.

3. Bearish Engulfing Sandwich

Do not be confused. Just because the name says “bearish” doesn’t mean this is a bearish pattern. Far from it, actually. It is often referred to as the Stick Sandwich

The name is derived from the sandwiching of a “bearish engulfing” candle by two bullish candles. Thus, it is a bullish candlestick pattern in this context.

Very similar to the above example of the Bullish Engulfing Crack, this pattern simply takes a bit longer to “get going,” so-to-speak. An extra bar, essentially.

Again, the idea here is to think about who is getting trapped. In this case, the bears think that they have won the battle.

The assumption is that the trend has reversed and we are now headed down. After all, the Bearish Engulfing candle gives us that confidence, right?

Well, if you are on the short side, that is the hope. However, stocks don’t always do what we want them to. We have to react to what the market gives us, not what we think should happen.

In this case, the Bearish Engulfing Crack is consumed by two bullish candles that resolve to the upside. If you are short, hopefully you have respected your stop loss. If you are long-biased, you have a great opportunity here.

Bearish Engulfing Sandwich Example

PLTR offers a great visual of this in real-time after the open with a 5-minute candle chart.

PLTR Bearish Engulfing Sandwich — PLTR with a Bearish Engulfing Sandwich at the opening bell

In this case, the right side of the sandwich acts very similar to a Bullish Engulfing Crack candlestick pattern. For all intents and purposes, you should treat your entries and risk similarly to that pattern.

4. The Morning Star

Morning Doji Star and Morning Star Candlestick patterns

Technically speaking, the morning star should gap down. This is difficult to find on an intraday basis. For that reason we suffice for solid doji candle reversal pattern.

The initial candle should be long-bodied and bearish. The middle candle is short-bodied. The reversal candle is another long-bodied bullish candle (typically a gap up). The close of this bullish long-bodied candle should close above the midpoint of the 1st candle.

What is the story behind this pattern?

The plot is typical: oversold conditions (the gap down). But the body of the middle candle tells us that there is either indecision, or lack of follow through to the downside.

The result: without further selling pressure, the candle rallies to higher prices as sellers cover and buyers take advantage of discounted stock pricing.

Morning Stars can also appear as Morning Doji Stars. They look almost identical except for the body of the middle candle. The story of buyers and sellers remains the same.

Bullish Morning Star Example

You can see this in action with the PTON example below. A long bodied bearish candle, followed by a narrow bodied indecision candle. The bulls take control on the next candle and the rest is history.

PTON Morning Star Example — PTON displaying a Morning Star reversal pattern

It is worthwhile to note the volume in the first candle. We cannot assume that it is completely bearish. As you can see, there is some buying pressure at the lows. This gives us confidence as the doji candle forms.

Consequently, as price moves away from the lows in the green candle; it does so on low volume.

How can we explain that?

It took less effort for the price to rise. Therefore, we can assume that there is “ease of movement” to the upside. This should give us confidence in our long position.

For more examples of the Morning Star and other doji candles, visit our tutorial.

5. Tweezer Bottom

The Tweezer Bottom bullish candlestick pattern consists of two candles– usually with small bodies. The first should be a red/bearish candle, the second a green/bullish candle.

The bodies of the candles are typically very close with regard to their closing and opening prices, or wicks. This produces a “visual” of a pair of tweezers.

Thematically, the Tweezer Bottom alerts the chart reader to the fact that price is trying to be pushed lower, but to no avail. The two small-bodied candles represent the presence of demand in the market.

The volume signature will likely appear elevated as supply is being absorbed, keeping the candles small in the presence of selling pressure.

Entry should be taken as price breaks higher from the second candle. Stops can be set at the lows.

Bullish Tweezer Bottom Example

BNGO displays a beautiful Tweezer Bottom candlestick pattern for us here on the 5-minute chart. Pay close attention to the narrow body of the two candles, their symmetry, and the red to green close.

BNGO with a Tweezer Bottom reversal pattern

The volume is of particular interest on this first red doji. Notice how elevated it is here. Given the context, we can interpret this as absorption of supply.

The second candle (green) then diminishes rapidly in volume. Thus, our thesis is confirmed that selling has been absorbed and exhausted.

And what happens in the absence of selling pressure?

The price of the stock rises.

6. Piercing Line

The Piercing Line can look very similar to a Bullish Engulfing pattern. The exception is that the Piercing Line doesn’t completely engulf the prior candle.

It is still considered a bullish candlestick pattern because it overcomes the downward momentum to close at least midway into the body of the previous candle.

Hence the name: it pierces the lower line, but inevitably retracts.

The entry is on the next candle, confirming the uptrend, with a stop at the lows

Bullish Piercing Line Example

Piercing Lines can offer a great risk to reward at the lows of support. They can even act like springs in trading ranges.

This 5-minute chart of BB shows a combination of an Opening Range Breakout (ORB) with a Piercing Line. Together, it is a combination that can really add confidence to our entry.

BB Piercing Line and Opening Range Breakout Strategy — BB with an ORB and Piercing Line pattern

As with any setup, the more evidence we have to confirm our bias and plan, the better. For this reason, it is always good to ask yourself:

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?

Your criteria may be more involved, but the idea is the same. Candlestick charts are just a last line of confirmation for a overall plan of attack.

Think of them like an extra indicator.

Conclusion

You may be asking yourself, “How do I recognize these patterns in real time?”

That’s a great question.

The answer lies in practice, practice, practice. Trading Psychologist Brett Steenbarger, Ph.D., believes that this is exactly “how expertise is created.” According to him, if we turn trading into a series of performance drills, it can increase our chances of consistency.[efn_note]Steenbarger, B. (2014, November 14). The One Trading Drill That Can Most Improve Your Trading Performance. TraderFeed. https://traderfeed.blogspot.com/2014/11/the-one-trading-drill-that-can-most.html.[/efn_note]

You may be thinking, well I don’t have the luxury of 10,000 hours of practice. And that may be true. You have a job, kids, obligations, whatever the case may be.

But as Steenbarger notes, if you can drill down the process to specific repeatable patterns, you can achieve mastery much faster.

There is no better way to do this than training your “chart eye” with a stock simulator.

How does this work?

Build Your Mental Repertoire

Imagine being able to replay three years worth of stock trading days.

For each “training” session, you decide to focus on a single candlestick pattern. As you click through the stock charts for any random day, you look for examples of that one pattern. Over time you save a repertoire, mentally (and digitally if you can take screen shots).

Once you feel you can recognize this pattern, you practice it in replay mode. You spot the pattern, you make the trade. You make notes on what confirmed the pattern, what was the context, what you did right and what you did wrong.

Then, you move on to the next pattern.

Repeat.

This is what we call deliberate practice. And it pays off in the end.

Want to learn more about Candlestick Charts? Check out our free resources here.

The Abandoned Baby Candlestick Trading Pattern: Bullish & Bearish