7 Candlestick Patterns You Can Take Advantage of While Day Trading

7-Candlestick-Patterns-That-You-Can-Take-Advantage-of-While-Day-Trading

As a day trader, I use patterns for my trade setups.

But how do I see the patterns? What is it I’m looking at to determine entry and exit points?

The simple answer: charts. But not just any chart …

I primarily use candlestick charts and patterns.

Why? Because they contain a high amount of information in an easy-to-read graphic. It’s a representation of a trading period I can use for detailed technical analysis.  

If you want to learn to read candlestick charts in depth, I suggest you join my Trading Challenge. In the meantime, here’s a primer on candlesticks (with some great key tips after the lesson) …

What Are Candlestick Patterns?

Candlestick charts give you a ton of information. A candlestick shows you the opening, closing, high, and low prices for the specific time frame.

But wait, there’s more! You can also see what the general sentiment was and whether buyers or sellers had the upper hand.

One of the reasons I use candlestick charts is because it’s easy to see patterns.

Candlestick chart patterns are almost like a template. The patterns don’t always look exactly the same, but they look similar enough that when you see them over and over, you realize they’re predictable — and that’s when things can get really interesting.

And they have cool names!

Candlestick patterns are named based on what the pattern or individual candlestick looks like. A couple of examples (which I’ll get to later) are the hammer and the shooting star.

First, let’s start with the basics: how to read the charts.

How to Read Candlestick Charts?

Reading candlesticks isn’t difficult once you know what you’re looking at. Candlesticks have two main parts: the candlestick body, and the shadow.

The body is the part that looks like the body of a candle. The shadow is the part that looks like a wick. Take a look a the picture below. Candlestick shadows can (and often do) extend from both the top and bottom of the body.

candlestick-pattern
© 2018 Millionaire Media, LLC

The body tells you three things:

  1. The opening price
  2. The closing price
  3. Whether the share price went up or down

In most modern charting software, a green or white candlestick tells you the price closed higher than it opened. Red or black candles signify a closing price lower than it opened.

Traditional candles are black (filled in) for bearish or downtrending candles and open/white (not filled in) for bullish candles.

The bottom of the candlestick body gives you either the opening or closing price. Let’s stick with red and green to make this simple.

A red candlestick shows the open price at the top of the body and the closing price at the bottom of the body.

A green candlestick shows the open price at the base of the body and the closing price at the top of the body.

So what’s with the lines (shadows) sticking out the top and bottom? The shadows tell you the high and low for the time frame. The top shadow gives the high for the period, regardless of whether the candle is bearish or bullish. The bottom shadow gives the low for the period.

Trending Candle vs. Non-Trending Candle

Trending vs. non-trending can mean a couple of different things …

When you look at a candlestick chart, some candles continue or confirm a trend. These are considered trending candles. If a candle goes against the trend it might be considered a non-trending candle.

Something else you often see is candles without an upper or lower wick or shadow. When you see a candle with no shadows it signifies a strong trend during that time frame.

For example, if you see a green candle with no shadows, the open was the same as the low and the close was the same as the high for the time frame. Likewise, for a red candle with no shadows: the open equals the high and the close equals the low. In both cases, there was no resistance to new price movement.

If the price of a stock rises for the first three minutes of a five-minute candle, but then settles back just above where it opened, a shadow remains above the body. The shadow is an example of higher prices being resisted. Yes, the price went there, but it couldn’t hold. Instead, there’s a shadow.

You can consider the shadows as tests of a price range while the body confirms the range for the period.

Clean candles with no shadow signify a strong trend in one direction because the new prices are confirmed instead of resisted. Candles with a long body moving away from a short shadow (e.g. a green, long body, short lower shadow) also signify trend. As do candles with a short body and long shadow …

… confused?

Don’t give up. I think I can make this easier for you. Check this out …

I’m going to explain different types of candles with examples below. This will likely make a lot more sense once you see the examples!

The important thing to remember is that candlesticks provide information about the trend. While they aren’t 100% accurate (trends change, right?) they give you an idea what to look for — and that’s an edge you want with your trading.

So stay with me here. Once this sinks in, you’re gonna be glad you hung in there and learned it.

Benefits of Using Candlestick Patterns

benefits-of-candlestick-patterns
© 2018 Millionaire Media, LLC

How do you use candlestick patterns for day trading?

What if I told you I had a trading tool that gives you the following information:

  • Price action: weak or strong?
  • Trend: bullish or bearish?
  • Who’s in control: buyers or sellers?
  • Has there been any low or high testing of prices but they were rejected?
  • Are there a lack of buyers or sellers?

You might say to yourself, “Tim, that sounds like an awesome tool. What is it? How do I use it?” Well, that’s what candlestick charts tell you. You just have to learn how to read the message and then put it to use in your trading!

See, this is awesome stuff. So stick it out and learn it!  

Remember, there’s not one right trade vs. wrong trade. We’re all different. You have to figure out a pattern that works best for you. Candlestick patterns are a good way to figure out what’s right for you.

(Also, a good primer for newbies is my trader checklist. It’s free. Check it out.)

Types of Candlestick Patterns

Bullish Candlestick Patterns

A bullish candlestick has a higher closing price than opening price. Bullish candlestick patterns have an upward trend. If the upward trend is contained within the period represented by a single candlestick, it will be either green or white.

Be aware a pattern may develop over several candlesticks and the pattern might include one or more bearish candlesticks. You’ll see this in the pattern examples below.

Bearish Candlestick Patterns

A bearish candlestick signifies the closing price is lower than the opening price. A bearish pattern has a downward trend. Like the example above, a bearish pattern doesn’t mean every single candlestick is bearish. A lot depends on the time frame for the candlestick.

Japanese Candlestick Patterns

Don’t let this confuse you. When I (or any other trader) talk about candlestick patterns, we’re talking about Japanese candlestick patterns.

The whole concept of candlesticks — open-high-close-low in a simple graphic representation — comes from Japanese rice dealers. They used a few different styles of charts but what we now call the candlestick was likely introduced sometime in the 1860s.

Back in the late 1980s, candlesticks were introduced to the West by Steve Nison. He was the author of several books on the topic including the classic “Japanese Candlestick Charting Techniques.”  

Jump forward to today and candlestick charts are the go-to style for many traders. Big props to the Japanese rice trader who figured this out. His name was Homma Munehisa and he made my trading career much simpler …

… and you’ll likely say the same if you learn how to read candlesticks and take advantage in your trading!  

7 Candlestick Patterns That You Can Take Advantage of While Day Trading

As you study the following candlestick patterns, remember that context makes a difference.

Sometimes an individual candlestick looks the same in two different patterns. This is true of numbers 5 and 7 below.

They have different names based on the context — the overall trend. You might see the particular candlestick that gives these two their names and be confused at first. Take a step back and figure out what preceded them.

In the following section, I’ll give you the 7 candlestick patterns — explained — with examples to clarify.

I’ll show you what each candlestick looks like in the context of a chart so you can see what I mean.

#1 The Supernova

The supernova is one of my favorite chart patterns to play. Ok here’s your supernova mantra… repeat after me…

“I will trade volatile stocks.”

Supernovas occur when stocks experience high volume and high volatility. It’s an explosion in price that can provide many buying opportunities on the way up. Then there’s a huge drop in price which provides opportunities for short selling on the way down.

You only need to get in on a small piece of the move to be able to bank.** If you take a small chunk of the move over and over again it can add up fast because these stocks are so volatile.

The supernova can be triggered by almost anything. News, world events, company hype, message boards — I’ve seen it all. Be careful. Sometimes supernovas last longer or are bigger than you think they’ll be going in.

Example of The Supernova

candlestick-pattern-supernova
PURA chart: Supernova Source: FreeStockCharts.com

#2 The Stair Stepper

A stair-stepper is almost like a slower version of a supernova. It rises progressively with brief periods of pullback and consolidation. The consolidation period sometimes trades in what many traders call sideways price action. It’s another of my favorite candlestick formations.

Be aware that the stair stepper can turn on you suddenly. If there’s not a proper catalyst and the price keeps rising, eventually it will come falling back down.

Notice on the TNDM example below —  the first few ‘steps’ in March, April, and May (left side of chart) are small steps followed by long periods of sideways price action. Jump forward to June, July, August, and September and you see big steps with pullbacks.  

Example of The Stair Stepper

candlestick-pattern-stair-stepper
TNDM chart: Stair-stepper Source:FreeStockCharts.com

#3 The Snore

Let’s see if I can sum up the snore in a few words: random-ass charts with no predictability.

The snore is a boring pattern — I don’t recommend trying to trade it.

This is one I include so you can avoid trading it. Learn to recognize it and stay away. The obvious sign is a lack of price movement even with news you’d normally expect to be a catalyst.

The best thing to do with snores is wait until you see something to verify they are in play. Remember, stocks can change patterns. You might have a stock that’s a supernova one year and a snore the next.  

Take a look at the ENZN chart below. It shows a period of several months when this stock did nothing but make me want to snore. It’s difficult to see anything in terms of plays or momentum. This is an extreme example of the snore. Best stay away from these.   

Example of The Snore

candlestick-pattern-snore
ENZN chart: the Snore Source: FreeStockCharts.com

#4 The Crow

Have you ever watched a crow pecking away at food? One bite at a time — but never stopping until it’s gone.

I named this pattern the crow because that’s what I visualize when I see it. A crow, picking away at your money, one chunk at a time. Never stopping until there’s nothing left. This pattern looks like a long, slow fall. The stock sinks lower and lower in price.

The crow is caused by continuous selling pressure. Sometimes there’s a pushback — spurts of price strength — making it look like a reverse stair-stepper.

Take a look at the AGTK chart below. I included this chart because you can see it was in play back in December of 2017. At that time it went supernova. It stayed in play well into January and then started the long, slow decline characteristic of a crow.

Example of The Crow

candlestick-pattern-the-crow
AGTK chart: the Crow Source: FreeStockCharts.com

#5 Shooting Star Pattern

The shooting star is bearish and found at the top of an uptrend. It has a short body, a long upper shadow, and little or no lower shadow. Look for three or more consecutive rising candles, each with higher highs. Then look for a falling candle with an upper shadow at least twice as long as the body.

During the time frame, the price rose high above the open, only to fall below it on the close. Price action drove the price up but it met selling pressure. A shooting star can signify a bearish reversal. It has to be at the top of an upward trend to be considered a shooting star.

Check out the NBEV chart below. This is an interesting one because it shows you just how this is not an exact science. Technically this one would be considered an unconfirmed shooting star. Maybe even a failed shooting star.

Look at the circled candle. It follows at least three uptrending candles with new highs each time. It has a long upper shadow from testing higher prices and it closed down. So why unconfirmed? Because the next candle didn’t close lower than the shooting star.

This is an example of a brief pullback where the candlestick looked like a shooting star but was unconfirmed. Instead, the bulls won the battle. A good reason to step back and wait for confirmation before making a play.   

Example of Shooting Star Pattern

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NBEV chart: Shooting Star Pattern Source: FreeStockCharts.com

#6 Hammer Doji

A Doji candle occurs when the open and close are equal (or at least very close together).

Doji means “same time” in Japanese. There are several different types of doji such as the long-legged doji, the gravestone, and the dragonfly. For today, we’ll focus on the hammer doji, which is a type of dragonfly.

In a dragonfly, the open and close are virtually the same but there is a lower shadow. A hammer doji is a dragonfly at the bottom of a downtrend. It is a bullish reversal pattern and signals the price could start to rise.

A traditional hammer candle looks like a hammer (right?) but the hammer doji looks like the nail ready to be driven down. By itself, it’s not a bullish signal. But it lets you know there is a balance between the forces of buy and sell.

Here’s an interesting chart — it’s a one day chart for KGKG in 5-minute candlesticks. First, you can see there was a big price jump when the market opened. If you are wondering why the previous day closed at 1 p.m. — that was Black Friday. It’s only a half day of trading.

Anyway, there’s a big percent gain first thing in the morning. Then there was some consolidation which looks a lot like a bull pennant. The circled candlesticks are two hammer dojis in a row after several bearish candles. They signaled a brief upswing into more consolidation.  

There’s a lot going on in this chart —  from a bull flag to hammer dojis and our next candlestick pattern, the inverted hammer. By the way, this one’s on my watchlist right now.

(Want to get my weekly watchlist? There’s no cost; you just sign up with your email.)  

Keep in mind with all these patterns, you might not see them in every time frame. For day trading, you’ll be looking at what’s going on right now most of the time. But you can also confirm patterns by looking at a chart with a longer time frame.

Example of Hammer Doji

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KGKG chart: Hammer Doji Source: FreeStockCharts.com

#7 Inverted Hammer Candle

The inverted hammer looks like an upside-down hammer. The shadow extends above the short body.

It’s interesting to note that this candle looks an awful lot like a shooting star. However, it is bullish rather than bearish (close is higher than open).

The inverted hammer is found after a downtrend and it signals a bullish reversal. I’m going to show you the same KGKG chart with an emphasis on the next candlestick after the hammer dojis we identified.

In this case, the inverted hammer is a confirmation of the reversal created by the price support of the hammer dojis. You might say it was the hammer that drove the nail down. Like I said, there’s a lot going on in this chart.

One thing to consider when looking at this chart: Notice the low trading volume (lower graph) during the late morning and early afternoon? This is also when most of the consolidation happened. Big price swings happen during high-volume trading. I prefer to make plays during the big swings.

Example of Inverted Hammer Candle

candlestick-pattern-inverted-hammer
KGKG chart: Inverted Hammer Source: FreeStockCharts.com

Key Candlestick Patterns Tips

I hope you now understand the importance of the candlestick chart in technical analysis.

I have a few key tips for you:

  1. The doji and all its variations are important. They signal a balance between buyers and sellers. They often signal a reversal. Learn your dojis!
  2. Long shadows have meaning. When there is a long shadow, it tells you there was either selling or buying pressure that was resisted. The battle between buyers and sellers was hard fought but somebody came out ahead.
  3. Candlesticks capture the momentum of a stock’s price over the given time frame.
  4. Finally, time frame is important. Don’t get caught thinking some major pattern is unfolding without confirming it. If you see something on the 1-year daily chart, it might not be true at 2 p.m. on the day you’re trading. Make sense?

Bonus Tip: Never Stop Learning

I’ve only scratched the surface of candlestick patterns. Since you’re serious about trading, you need to study this subject. A lot. Like, every day. Make it a habit. You should be looking at charts and trying to find these patterns so you can identify them. They need to become second nature.

Which leads me to…

Learn Candlestick Patterns With the Trading Challenge

Yes, I teach my Trading Challenge students my favorite candlestick patterns. Better yet, other students jump into the chat room and help out. You can’t find a better, more engaged, trading community anywhere. Are you ready? Apply for my Trading Challenge.

The Bottom Line

Candlesticks patterns are packed with information that you can take advantage of while trading. I hope you see there’s a simple beauty to candlesticks, but there’s also a huge amount to learn.

Like everything to do with day trading, you can’t cheat success. Since you want to master this set of skills, it’s time to get to work. Put in the time and effort and it can potentially pay off for you.

Are you a trader? Tell me about your favorite candlestick patterns in the comments below. If this is all new to you, I’d love to hear from you.

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