5 important multiple candlestick patterns - Part 2

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Continuing from where the previous chapter left off, let’s take a look at another set of 5 important multiple candlestick patterns, starting with the bearish engulfing pattern. 

 

1. Bearish engulfing pattern

 

The bearish engulfing pattern is basically the opposite of the bullish pattern. It features a green candle followed by a much larger red candle. The red candle appears in such a way that it completely engulfs the green candle. The bearish engulfing pattern looks like this. 

Inference: The bearish engulfing pattern holds significance only when it appears during an uptrend. Now, let’s get to the candlestick analysis to understand the pattern’s logic. The first green candle in the pattern essentially confirms the uptrend and reiterates the hold of the bulls in the market. In the second red candle, the price opens at a higher point than the previous session’s close and makes an attempt to rise even further. 

However, at this point, the selling pressure intensifies tremendously and drives the price lower than the previous day’s opening point. This sudden and strong comeback by the bears breaks the market rally. The bears then take over the market and the price continues to fall even further for the next few trading sessions.

 

2. Piercing line

 

Remember the bullish engulfing pattern from the previous chapter? The piercing line also features a red candlestick followed by a green candlestick. However, there’s a major difference between the two patterns. In the piercing line pattern, the second candle only engulfs the bottom half of the first candle. For better clarity, let’s take a look at the structure of the piercing line.   

Inference: Candlestick analysis tells us that when the piercing line appears at the bottom of a downtrend, it is considered to be an indicator of reversal of the trend. The first red candle confirms that the market is in the hands of the bears. The second green candle indicates that the price opened lower than the low of the previous day with the idea of carrying on with the downtrend. 

However, a huge wave of buyers stepped in sometime during the second trading session to lift the prices. Ultimately, due to the flood of bulls in the market, the price was able to rise up above the lowest point of the day and close at around the midway point of the previous day’s candle. Before taking on a trade based on this pattern, it is a good idea to confirm the trend reversal by tracking the pattern of the next trading session.   

 

3. Dark cloud cover

 

This is essentially an inverse of the piercing line pattern. Just like the bearish engulfing pattern, the dark cloud cover also features a green candle and a red candle. However, there’s a difference. The red candle of the dark cloud cover only engulfs only the top half of the green candle. Here’s what the pattern looks like. 

Inference: The pattern is considered to be a sign of trend reversal when it appears at the top of an uptrend. The green candle in the pattern acts as a confirmation of the market bullishness. The red candle indicates that the price opened higher than the previous day’s high. 

But the upward movement couldn’t be sustained due to the intense selling pressure from the bears, which eventually brought down the price to around the midpoint of the previous day’s candle. As with the other patterns, if the next trading session also turns out to be negative, then the reversal trend is said to be confirmed. 

 

4. Morning star

 

Unlike the other multiple candlestick patterns, the morning star takes 3 trading sessions into consideration. The pattern features a red candlestick, followed by either a doji or a green spinning top, and then by a green candlestick. Here’s what the morning star looks like. 

Morning star (with a doji)

Morning star (with a spinning top)

Inference: Let’s get to the candlestick analysis segment now. The red candle confirms the fact that the market is in a bearish trend. In the second trading session, the bears tighten their grip. As a result, the price opens with a ‘gap down’, whereby the opening price is much lower than the previous closing price. 

The bulls then react to this gap down by infusing some buying interest, which pushes the price back to the nearabouts of its opening level. This pushback causes the formation of either a doji or a spinning top. 

As you’ve read in the previous chapters, both the doji and the spinning top patterns indicate indecisiveness and uncertainty in the market. This new infusion of uncertainty in the midst of a strong ‘gap down’ opening throws off the bears and creates an opening for the bulls to enter the market.

As expected, the bulls enter the market in the third trading session with a strong ‘gap up’, where the opening price of the third day is much higher than that of the previous day’s closing price. The bulls continue to go on a buying spree throughout the day and get the prices back up to around the midpoint of the red candle. In some cases, due to the intense buying by the bulls, the prices tend to rise past the red candle, recovering all the losses. 

In such a scenario, the trend is said to have been reversed and the buying interest is still likely to continue for the next few trading sessions.  

 

5. Evening star

 

As with the morning star, the evening star also takes 3 trading sessions into consideration. The pattern features a green candlestick, followed by either a doji or a red spinning top, and a red candlestick. Here’s what the evening star looks like. 

Evening star (with a doji)

Evening star (with a spinning top)

Inference: The green candle in the pattern indicates that the market is in a bullish trend. In the second trading session, the bulls tighten their position. As a result, the price opens with a ‘gap up’, whereby the opening price is much higher than that of the previous closing price. 

The bears then react to this gap up opening by intensifying the selling pressure, which pushes the price down to the nearabouts of its opening level. Due to this pushdown by the sellers either a doji or a spinning top is formed. 

The uncertainty in the market due to the formation of a doji or a spinning top in the midst of a strong ‘gap up’ opening throws off the bulls and creates an opening for the bears to enter the market.

As expected, the bears enter the market in the third trading session with a strong ‘gap down’, where the opening price of the third day is much lower than that of the previous day’s closing price. The bears continue to intensify the selling pressure throughout the day and lower the prices to around the midpoint of the green candle. In some cases, due to the strong bearish environment, the prices tend to go even lower than the green candle, creating new lows. 

In this scenario, the trend is said to have been reversed and the bearish price movement is likely to continue for the next few trading sessions.  

Wrapping up

Okay then, that wraps up our chapter on multiple candlestick patterns. You could look at some live charts and attempt to identify these patterns, so you can get more familiar with them. Aside from these patterns, there are many other metrics that can help you identify potential trends and trading targets. The support levels and resistance levels are among these metrics. We’ll look at these levels in the next chapter. 

A quick recap 

  • The bearish engulfing pattern is basically the opposite of the bullish pattern. It features a green candle followed by a much larger red candle. The red candle appears in such a way that it completely engulfs the green candle. 
  • The bearish engulfing pattern holds significance only when it appears during an uptrend.
  • The piercing line features a red candlestick followed by a green candlestick. The second candle only engulfs the bottom half of the first candle. When the piercing line appears at the bottom of a downtrend, it is considered to be an indicator of reversal of the trend.
  • The dark cloud cover features a green candle and a red candle. The red candle of the dark cloud cover only engulfs only the top half of the green candle. This pattern is considered to be a sign of trend reversal when it appears at the top of an uptrend.
  • The morning star takes 3 trading sessions into consideration. The pattern features a red candlestick, followed by either a doji or a green spinning top, and then by a green candlestick. It indicates a bullish takeover in the market.
  • The evening star also takes 3 trading sessions into consideration. The pattern features a green candlestick, followed by either a doji or a red spinning top, and a red candlestick. It indicates a bearish takeover in the market.
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