As useful as a single candlestick can be in providing information on bullish / bearish movements within a time frame, it is only when viewed together with preceding candles that a trader can take an educated view on the direction of the asset. This is where Complex Candle Stick Patterns are useful.
Indeed, some candle stick patterns can only really be formed after observing a number of candles. It is this combination of Candle Sticks that we look at below.
As one can tell from the name, engulfing candlesticks are when the candle that follows the most recent one is much larger in size and body. These can either be a bearish engulfing pattern or a bullish engulfing pattern.
In the two patterns above, we have the Bullish engulfing pattern on the left and the bearish pattern on the right. As you can see, the candle is completely “engulfed” by the candle proceeding it.
With the bullish engulfing pattern, we can see that the open is lower than the previous close, the close is higher than the previous open and both the max and min in the period are higher and lower than the previous candle.
This indicates to the trader that the price has moved down, found some support and buying volume and has recovered. When this pattern is observed in an uptrend it is a good indication of a continuation. It could also be a sign of a reversal if observed in a downtrend.
The opposite is the case with the Bearish Engulfing candle. This indicates a possible continuation when in a downtrend and reversal when in a uptrend.
A Harami can be considered the opposite position of an engulfing pattern. With this, the candle in the current time is much smaller in body and wick size than the candle before. It is not surprising then that “Harami” means pregnant in Japanese.
The image on the left is a Bullish Harami. This is because the second candle closed up but still below the previous candle’s open. The image on the right is a Bearish Harami and is the opposite.
Although the Harami can also demonstrate a reversal or continuation, it is usually considered a less strong signal than an engulfing pattern.
When the second candle in the formation is a cross, this is termed a Harami cross. When a large Green candle is followed by a Cross towards the top of a trend, then a reversal is possible. Conversely, if you have a large Red Candle followed by a cross then you have a possible reversal of a downtrend.
Morning / Evening Star
In terms of candle definitions, a Star is when a candle has a small body and it does not overlap with the preceding candle and the candle after it.
There is usually a gap between the first candle and the star. This gap is usually only presented in periods when the markets were closed such as overnight for stocks and over the weekend for forex. Hence, stars are not usually evident in intraday charts.
In the above image we have a morning star on the left. This is where there is a long red bear candle with a star below it (can be bullish or bearish). Lastly, after the star (second candle), there is a bullish candlestick that closes within the body of the first candlestick.
On the right we have an evening star. This is where you have a long green or Bullish candle first. It is then followed by either a bullish or bearish star. Lastly, it has a bearish red candlestick that closes within the body of the first candle.
Breaking down the morning star pattern, we can see that in the first candle, the sellers are in control. However, the star gives a slight indication of a movement to a bullish market. This is what the final candle can confirm for us.
The evening star follows a similar rationale but on the selling side. The final candle is a confirmation of a bearish presence. Both the evening and morning star can show reversals or continuations in the trend.
The trader should look at buying above the last candle with a morning star or below the last candle with an evening star.
You may also sometimes hear about the morning and evening Doji stars. These are merely where the star is a Doji candle and has no body.
Three White Soldiers / Black Crows
With the three white soldiers, each of the three candlesticks are green and open within the previous candle’s body. They also close near its high. The three black crows is the opposite formation to the three white soldiers.
In the above formations, we have the three white soldiers on the left and the three black crows on the right. These candle formations are usually a continuation indicator.
What the three white soldiers signify is that a bullish trend is indeed in place even though the second candle opened within the body of the first. The same can be said on the downside for the three black crows.
Three Method Formations
A three method formation can either be bullish of bearish. It is comprised by 5 candles in which the middle 3 are of a smaller size in body and shadow are a different colour and are within the range of the first and last candle.
On the left we have the Rising 3-Method formation. As we can see, the first candle is a long green candle. The next three candles are small-bodied red candles within the range of the first candle. Finally, we have a long green candlestick which creates a new high and suggests that the bullish trend is back
On the right above, we have the “Falling Three Methods” or “Bearish Three Methods”. As one can guess, it is a bullish indicator and suggests that sellers are back in control after a slight rising trend.
Piercing Line and Dark Cloud Cover
A piercing line and dark cloud cover are bullish and bearish variants of the same two candle indicators. The important place to look is the middle of the second candle.
With the Piercing line pattern, the first candlestick is bearish and red. The second candlestick then opens below the first one and closes above its midpoint.
With the Dark Cloud Cover, we can see that he first candlestick is a bullish green candlestick. In an opposite fashion to the Piercing line, the second candlestick opens above the high of the first and closes below its midpoint.
In the above image, we can see that Piercing Line and Dark Cloud Cover. It is important to note that this formation is unlikely to present itself intraday. This is because there is usually a gap between the first and second.
What these signify is an unfortunate reversal for the Bears in the case of the Piercing line and for the Bulls in the case of the Dark Cloud cover. These indicators are very useful when looking for bullish or bearish reversals after the break of trend lines.
Falling / Rising Windows
A window formation is a slight variation of the Piercing line and Dark Cloud Cover. The window occurs when there is a large gap between the two candles.
A Falling window on the left is instantly recognisable as the high of the second candle is below that of the preceding candle. This is usually a sign of Bearish continuation pattern.
On the right we have the rising window as the open of the second candle is above the close of the first. This is considered a strong bullish sign and should further be a confirmation of a rising trend.
Tweezer Tops and Bottoms
Tweezer formations are when two or more candles have matching tops or bottoms. These may not be consecutive and they may not necessarily have the same colours.
Above on the left we have the Tweezer Tops. As one can see, the tops of these candles are at the same level with a high at the close. Tweezer tops are considered weak signs of trend reversal where the third candle can give more clarity on movement. On the right we have the Tweezer bottoms where both candles have matching bottoms. These could also be candles with different colours.