Japanese Candlesticks –

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!

Trading without candlestick patterns is a lot like flying in the night with no visibility. Sure, it is doable, but it requires special training and expertise. To that end, we’ll be covering the fundamentals of candlestick charting in this tutorial. More importantly, we will discuss their significance and reveal 5 real examples of reliable candlestick patterns. Along the way, we’ll offer tips for how to practice this time-honored method of price analysis.

Also, feel free to download our Candlestick Pattern Quick Reference Guide!

Why Do Candlestick Patterns Matter?

After all, there are traders who trade simply with squiggly lines on a chart. Astonishingly, some don’t even look at the charts! Instead, they pay attention to the “tape” — the bids and offers flashing across their Level II trading montage like numbers in The Matrix.

Level II montage gif — A Level II montage. Source: CenterPoint Securities

No doubt, there are countless ways to make money in the stock market. In fact, there is no right or wrong way to read a chart. But unless you are just a gambler, you need some form of data to make informed decisions.

We believe the best way to do this is by understanding candlestick patterns.

For newer traders, even reading candlestick charts can seem like an insurmountable learning curve. There appears no rhyme or reason, and no end to the amount of price and volume data being thrown your way.

It’s daunting, for sure. Especially when you’re just getting started.

But be of good cheer! There is a method to the madness. The method is in the patterns. The patterns reveal probabilities. And the right probabilities create opportunities.

More importantly, the right opportunities can create profits.

This is where candlestick patterns come in handy. They help us to decipher the patterns of the market. They’re like little road signs on crowded streets. And with enough repetition, enough practice, you just might find yourself a decent chart reader.

That’s why you’re here, right? To learn to navigate the murky waters of the market?

Trust us, it is a worthwhile endeavor.

Who Discovered the Idea of Candlestick Patterns?

Munehisa Honma, 1724-1803 The father of candlestick patterns — *Munehisa Honma, 1724-1803*[efn_note]https://ninjatrader.com/blog/candlestick-charting-legend-of-munehisa-homma/[/efn_note]

According to Investopedia.com, it is commonly believed that candlestick charts were invented by a Japanese rice futures trader from the 18th century. His name was Munehisa Honma.[efn_note]Farley, A. (2021, April 29). The 5 Most Powerful Candlestick Patterns. Investopedia.Com. https://www.investopedia.com/articles/active-trading/092315/5-most-powerful-candlestick-patterns.asp.[/efn_note]

Honma traded on the Dojima Rice Exchange of Osaka, considered to be the first formal futures exchange in history.[efn_note]NinjaTrader. (2019, April 17). Candlestick Charting: Legend of Munehisa Homma. NinjaTrader.Com. https://ninjatrader.com/blog/candlestick-charting-legend-of-munehisa-homma/.[/efn_note]

As the father of candlestick charting, Honma recognized the impact of human emotion on markets. Thus, he devised a system of charting that gave him an edge in understanding the ebb and flow of these emotions and their effect on rice future prices.

Honma actually wrote a trading psychology book around 1755 claiming that emotions impacted rice prices considerably.[efn_note]Beyond Candlesticks: New Japanese Charting Techniques Revealed, Steve Nison , Wiley Finance, 1994, ISBN 0-471-00720-X.[/efn_note]

When all are bearish, there is cause for prices to rise.
Munehisa Honma[efn_note]Beyond Candlesticks: New Japanese Charting Techniques Revealed, Steve Nison , Wiley Finance, 1994, ISBN 0-471-00720-X, p14.[/efn_note]

In recent history, Steve Nison is widely considered the foremost expert on Japanese candlestick methods. After all, he wrote the book that catapulted candlestick charting to the forefront of modern market trading systems.

Beyond Candlesticks: New Japanese Charting Techniques Revealed, is one of his most popular books and a definitive resource for candle patterns.

Since the 90s, this method of charting has become pervasive throughout all financial markets: equities, futures, forex, and more.

In his books, Nison describes the depth of information found in a single candle, not to mention a string of candles that form patterns. It truly puts the edge in favor of a skilled chartist.

The Story That Candlesticks Tell

Candlesticks are telling us a story. The story is a reflection of what buyers and sellers are doing.

Emotions and psychology were paramount to trading in the 1700s, just as they are today. This is the foundation of why candlesticks are significant to chart readers.

How so?

Every candle reveals a battle of emotions between buyers and sellers.

As the great trading psychologist Brett Steenbarger notes, “proper training is the best source of discipline and the most effective safeguard against intrusive anxiety and impulsivity.”

With this in mind, understanding the emotional story within candlesticks is a great place to start that training.

How are Candlesticks Formed?

There are three types of candlestick interpretations: bullish, bearish, and indecisive. This is painting a broad stroke, because the context of the candle formation is what really matters. But for all intents and purposes, we’ll stick with these three categories.

The elements of a candlestick graph — The elements of a candlestick

What Is a Candlestick?

The formation of the candle is essentially a plot of price over a period of time. For this reason, a one minute candle is a plot of the price fluctuation during a single minute of the trading day. The actual candle is just a visual record of that price action and all of the trading executions that occurred in one minute.

Similarly, a daily or weekly candle is the culmination of all the trading executions achieved during that day or that week.

The open tells us where the stock price opens at the beginning of the minute. The close reveals the last recorded price of that minute. The wicks (also known as shadows or tails) represent the highest and lowest recorded price from the open and close.

According to Nison, the Japanese placed much less emphasis on the highs and lows of individual candles. For them, as it is for modern technicians, the opening and closing prices were more relevant.[efn_note]Beyond Candlesticks: New Japanese Charting Techniques Revealed, Steve Nison , Wiley Finance, 1994.[/efn_note]

Essentially, the broader context of candles will paint the whole picture.

What Is a Bullish Candle?

A bullish candle is formed when the price at the closing of the candle is higher than the open. This can be on any time frame: from a 1-minute candle to a 1-month candle. It will all be the same.

A bullish candle explanation — A bullish candle opens low and closes high.

Typically these candles close with a green or white body color, though most charting platforms allow for customization these days.

What Is a Bearish Candle?

Conversely, a bearish candle is assumed when the closing price is lower than the opening price. In other words, the price dropped in the amount of time it took for the candle to form.

A bearish candle explanation — A bearish candle opens high and closes low.

By default, most platforms will show a red or black candle as bearish.

What Does the Candle Formation Tell Us?

This is the real question we need to ask ourselves. It isn’t enough to know that the candle opened and then closed lower, or vice-versa.

As renowned trader and best-selling author Dr. Alexander Elder explains, “The main advantage of a candlestick chart is its focus on the struggle between amateurs who control openings and professionals who control closings.”[efn_note]Elder, A. (2014). The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management (Wiley Trading) (1st ed.). Wiley.[/efn_note]

Dr. Elder may be referring to daily candles, but his point is still important. The candle represents a struggle between buyers and sellers, bulls and bears, weak hands and strong hands.

Every trader wants to understand the price action and read it well to improve their trading. Studying candlestick patterns helps us understand the price action and where the stock is more likely to go the next minute or the next few minutes.

Armed with that knowledge, let’s dig in and see what picture those little candles are trying to paint for us.

The High of the Candle

The high of each candle, whether it is the tip of the wick at the top, or if the body closes at the top, represents the maximum effort of bulls. If it is a daily candle, buyers could not push the price of the stock one cent more during that day.

Why is that important? There are two reasons:

This could represent a near term level of resistance which will have to be broken for the price to move higher.
In order to find enough demand to push through that resistance, the stock may need to consolidate lower until enough shares are accumulated.

The Low of the Candle

Just as the high represents the power of the bulls, the low represents the power of the bears. The lowest price in the candle is the limit of how strong the bears were during that session.

Why is this important? Again, two reasons:

This could represent a near term level of support where bulls were able to stop the downward momentum
To move lower, more supply may need to enter the market at higher prices.

The Closing Price of Each Bar

This is where the story gets interesting.

When a candle closes above its opening price, we can assume that the bears won in some form or fashion. How much it closes above the open tells us with what intensity the bulls were in control during that session.

Let’s look at few examples to better understand this:

In this chart, we see the “Three White Soldiers,” which is a candlestick pattern describing three bullish candlesticks in a row. What can we interpret from this?

Three White Soldiers candlestick pattern

It is clear to see that the candles open low and close high. Bulls were clearly in control during each session with very little energy from the bears.

Now contrast that with what we see in the next example. Ask yourself, who was in control during this session?

Apparently there is indecision as to who is in control. How do we know? Think about the story behind this “Spinning Top” candle:

The stock opens, proceeds lower as bears are in control from the open, then rips higher during the session. But after putting in a decent high, the bulls settle back and give the bears some control into the close.

Are you beginning to see how the story unfolds?

These are the stories that candles tell us on charts. Who is in control (greed), who is weak (fear), to what extent they are in control, and what areas of support and resistance are forming.

The Range between the Open and Closing Price

This is one of the most important aspects of interpreting candles. As Dr. Elder notes, the range between open and close “reflects the intensity of conflict between bulls and bears.” [efn_note]Elder, A. (2014). The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management (Wiley Trading) (1st ed.). Wiley. p 53.[/efn_note]

In day trading, momentum is everything. On this token, the character of the candles can tell us if there is demand or if a stock is sleepy and uninteresting — whether we are about to launch, fall off a cliff, or just grind sideways.

Additionally, the nature of the candles can tell us when to enter with tight risk. Or, when to take profits into climactic candles.

In the end, it all boils down to context and the story of buyers and sellers behind the tape.

5 Real Examples of Reliable Candle Patterns

Without practice, none of this information really matters. It takes screen time and review to interpret chart candles properly. There are no free lunches in the markets.

With that being said, let’s look at some examples of how candlestick patterns can help us anticipate reversals, continuations, and indecision in the market.

1. The Hammer / Hanging Man

The hanging man occurs at tops and the hammer occurs at bottoms.

The Hanging Man is a candlestick that is most effective after an extended rally in stock prices. The story behind this candle tells us that there were extensive sellers in the formation of the candle, signified by the long wick.

It is usually accompanied by heavy volume.

The Hanging Man pattern — The Hanging Man appears at the top of an extended uptrend before reversing.

The Hammer is another reversal pattern that is identical to the The Hanging Man. The only difference is the context. The Hammer occurs at the end of a selloff, signifying demand or short covering, driving the price of the stock higher after a significant selloff.

Like the Hanging Man, you want to see a solid volume signature associated with these candles.

The Hammer pattern — Hammer candles appear at the bottom of a downtrend before a reversal

2. Engulfing Patterns

Engulfing patterns offer a great opportunity to go long while keeping risk defined to a minimum. As you can see in the example below, the prior bearish candle is completely “engulfed” by the demand on the next candle.

A bullish engulfing candlestick pattern — A bullish engulfing candle at the market open.

Another example of engulfing patterns is the Bearish Engulfing Sandwich. Here we have what appears to be a bearish reversal, but the next candle completely swallows the supply from that red candle:

A bearish engulfing sandwich, also know as a stick sandwich — A bearish engulfing sandwich pattern, also know as a stick sandwich

3. The Morning Star

The Morning Star is yet another reversal signal. It can be found at the end of an extended downtrend or during the open. It takes 3 candles to confirm the setup.

The first candle must be a strong downtrending candle.
The second candle is the star. It’s usually a narrow body candle that, ideally, does not touch the body of the prior candle.
The third candle is a strong bullish candle confirming the new uptrend.

The morning star candlestick pattern explained at the open — The morning star candlestick pattern at the open

4. The Evening Star

Similar to the Morning Star, the Evening Star is its bearish cousin. It forms at the top of parabolic or extended bullish runs. Much like the Morning Star, the body of the candles should not touch.

Here are three criteria for spotting the shooting star:

The bodies do not overlap
The third candle is a strong bearish candle closing into the body of the first candle
Volume should increase from left to right in the pattern

The Evening Star explained on GME — The Evening Star candlestick pattern on GME

As with all of these formations, the goal is to provide an entry point to go long or short with a definable risk. In the example above, the proper entry would be below the body of the shooting star, with a stop at the high.

5. Indecision Candles

The doji and spinning top candles are typically found in a sideways consolidation patterns where price and trend are still trying to be discovered.

Indecision candle patterns — Indecision candlestick patterns

The “doji’s pattern conveys a struggle between buyers and sellers that results in no net gain for either side,” as noted in this great article by IG.com.

Will it continue upward? Go sideways? Or reverse?

With indecision candles, we typically need much more context to answer these questions.

The Gravestone Doji is a perfect example of this:

The Gravestone Doji indecision candlestick explanation — Gravestone Doji candles can represent indecision on a chart.

Note the trend is mostly sideways in this first circled example. For this reason, waiting for the reaction to these candles is usually best for risk management.

Eventually, the price falls in this particular case as the trend becomes more extended into the rally. Correspondingly, the Shooting Star that occurs just beyond the Gravestone Doji is confirmation of that falling price action.

The Best Way to Practice with Candlestick Patterns

As always, it is best to practice a strategy before putting money to work in the market. There is no better way to do this than with a simulator.

One of the best methods to train your “chart eye” to see these patterns is to simply replay the market, noting each time you see a particular candle.

As you put in deliberate practice, ask yourself the following questions:

What candle formation is this?
What is the context? Uptrend? Down trend? Sideways?
Does this candle meet the criteria for a proper reversal?
Where could I enter with the least amount of risk?
What would confirm the pattern?

We have a wealth of knowledge on many different candlestick patterns, so be sure to check out those lessons, too!

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.

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