RIO PTM
CANDLESTICKS
What is a Candlestick?
A candlestick is a way of displaying information about an
asset’s price movement. Candlestick charts are one of
the most popular components of technical analysis,
enabling traders to interpret price information quickly
and from just a few price bars.
It has three basic features:
1. The BODY, which represents the open-to-close range
2. The WICK, or SHADOW, that indicates the intra-day
high and low
3. The COLOUR, which reveals the direction of market
movement – a green (or white) body indicates a price
increase, while a red (or black) body shows a price
decrease
BASIC CANDLESTICK PATTERN
Six bullish candlestick patterns
Bullish patterns may form after a market downtrend, and signal
a reversal of price movement. They are an indicator for traders
to consider opening a long position to profit from any upward
TRAJECTORY/JOURNEY/MOVEMENT.
1. Hammer
The hammer candlestick pattern is formed of a short body with
a long lower wick, and is found at the bottom of a downward
trend.
2. Inverse hammer
A similarly bullish pattern is the inverse/inverted
hammer. The only difference being that the upper wick is
long, while the lower wick is short.
It indicates a buying pressure, followed by a selling
pressure that was not strong enough to drive the market
price down. The inverse hammer suggests that buyers
will soon have control of the market.
3. Bullish engulfing
The bullish engulfing pattern is formed of two
candlesticks. The first candle is a short red body that is
completely engulfed by a larger green candle.
Though the second day opens lower than the first, the
bullish market pushes the price up, culminating in an
obvious win for buyers.
4. Piercing line
The piercing line is also a two-stick pattern, made up of a
long red candle, followed by a long green candle.
There is usually a significant gap down between the first
candlestick’s closing price, and the green candlestick’s
opening. It indicates a strong buying pressure, as the
price is pushed up to or above the mid-price of the
previous day.
5. Morning star
The morning star candlestick pattern is considered a sign
of hope in a bleak market downtrend. It is a three-stick
pattern: one short-bodied candle between a long red and
a long green. Traditionally, the ‘star’ will have no overlap
with the longer bodies, as the market gaps both on open
and close.
It signals that the selling pressure of the first day is
subsiding, and a bull market is on the horizon.
6. Three white soldiers
The three white soldiers pattern occurs over three days.
It consists of consecutive long green (or white) candles
with small wicks, which open and close progressively
higher than the previous day.
It is a very strong bullish signal that occurs after a
downtrend, and shows a steady advance of buying
pressure.
Six bearish candlestick patterns
Bearish candlestick patterns usually form after an
uptrend, and signal a point of resistance. Heavy
pessimism about the market price often causes traders
to close their long positions, and open a short position to
take advantage of the falling price.
1. Hanging man
The hanging man is the bearish equivalent of a hammer;
it has the same shape but forms at the end of an
uptrend.
It indicates that there was a significant sell-off during the
day, but that buyers were able to push the price up
again. The large sell-off is often seen as an indication that
the bulls are losing control of the market.
2. Shooting star
The shooting star is the same shape as the inverted
hammer, but is formed in an uptrend: it has a small lower
body, and a long upper wick.
Usually, the market will gap slightly higher on opening
and rally to an intra-day high before closing at a price just
above the open – like a star falling to the ground.
3. Bearish engulfing
A bearish engulfing pattern occurs at the end of an
uptrend. The first candle has a small green body that is
engulfed by a subsequent long red candle.
It signifies a peak or slowdown of price movement, and is
a sign of an impending market downturn. The lower the
second candle goes, the more significant the trend is
likely to be.
4. Evening star
The evening star is a three-candlestick pattern that is the
equivalent of the bullish morning star. It is formed of a
short candle sandwiched between a long green candle
and a large red candlestick.
It indicates the reversal of an uptrend, and is particularly
strong when the third candlestick erases the gains of the
first candle.
5. Three black crows
The three black crows candlestick pattern comprises of
three consecutive long red candles with short or non-
existent wicks. Each session opens at a similar price to
the previous day, but selling pressures push the price
lower and lower with each close.
Traders interpret this pattern as the start of a bearish
downtrend, as the sellers have overtaken the buyers
during three successive trading days.
6. Dark cloud cover
The dark cloud cover candlestick pattern indicates a
bearish reversal – a black cloud over the previous day’s
optimism. It comprises two candlesticks: a red
candlestick which opens above the previous green body,
and closes below its midpoint.
It signals that the bears have taken over the session,
pushing the price sharply lower. If the wicks of the
candles are short it suggests that the downtrend was
extremely decisive.
