Chapter-4 Multiple Candlestick Pattern | Technical Analysis

Multiple candlestick pattern Technical Analysis Stock market
Multiple candlestick pattern Technical Analysis Stock market

In multiple candlestick patterns as the name applies we have two or more candles to study the trading behaviour of the stock. In previous chapter, we learnt about various single candlestick patterns including Marubozu candlestick pattern, the spinning top, hammer and doji. In this chapter, we will learn about the types of multiple candlestick patterns in a very simple language. In multiple candlestick patterns we use multiple candles to portray the trading behaviour of a stock. Let us understand each multiple candlestick chart patterns in detail :


Types of Multiple Candlestick Patterns:

Let’s discuss about various types of multiple candlestick patterns with some easy examples:

1. Engulfing Candlestick Pattern:

In engulfing candlestick pattern, we use two candles to study the trading behaviour of a stock. The two candles used here generally represent two trading sessions. In a typical engulfing candlestick pattern, there are two candles in which one candle is a smaller one and other candle is longer in size. The longer candle completely engulfs the smaller candle and hence it is called engulfing pattern.

Let’s understand types of engulfing candlestick patterns.

Your attention please : Engulfing candlestick pattern requires two trading sessions since we are dealing with two candles.

There are mainly two types of engulfing candlestick patterns:

  • Bullish engulfing candlestick pattern
  • Bearish engulfing candlestick pattern.

1.1 Bullish Engulfing Candlestick Pattern:

In a bullish engulfing pattern there are two candles :

  • the first candle is a bearish candle (red candle) and
  • the second candle is a bullish candle (green candle).

The length of the bullish candle is relatively longer than the bearish candle and totally engulfs the real body of bearish candle. The point to be noted here is that this type of bullish engulfing pattern should occur in the bottom of a downtrend, not in middle or top.

Your attention please : Bullish engulfing pattern indicates that the change in trend (from downtrend to uptrend) that is now buyers are more in control as compared to sellers. The bullish engulfing pattern differs with Spinning top and Doji which we learnt in previous chapter, in such a manner that it does not indicate indecision in the market but represents a change in trend.

The long candle (green candle) that completely engulfs the smaller candle (red candle) shows that there has been a change in trend that is from downtrend to uptrend. It also shows that buyers are now in full control and they have taken over the sellers with very high volumes.

Bullish engulfing pattern always occur in a bearish trend in the market and it mostly indicates the reversal of trend.

A trader should look for following signs to get an idea of a greater potential for reversal :

  • If the length of the green/blue candlestick is more longer as compared to the smaller red candle that precedes it then the chances of potential reversal becomes very high.
  • When the red candle is completely surrounded by the green/blue candle.
  • When green/blue candle is formed with very high volumes.

Below chart shows formation of Bullish Engulfing candlestick pattern :

Bullish Engulfing Pattern Multiple Candlesticks pattern Technical Analysis

Bullish engulfing pattern gives an indication of long trade.

A trader looking for buying opportunity can buy at closing price of second candle that is the green candle and the stop loss for the trade will be the lowest point between the two candles.


1.2 Bearish Engulfing Candlestick Pattern:

In a bearish engulfing pattern there are two candles :

  • the first candle is a bullish candle (green candle) and
  • the second candle is a bearish candle (red candle).

The length of the bearish candle is relatively longer than the bullish candle and totally engulfs the real body of bearish candle. The point to be noted here is that this type of bearish engulfing pattern should occur at the top of an uptrend, not in middle or bottom.

Your attention please : Bearish engulfing pattern indicates reversal of trend (from uptrend to downtrend) that is now sellers are more in control as compared to buyers. The bearish engulfing pattern is similar to a bullish engulfing pattern, but the colors of candles are exchanged.

The long candle (red candle) that completely engulfs the smaller candle (green candle) shows that there has been a change in trend that is from uptrend to downtrend. It also shows that sellers are now in full control and they have taken over the buyers with very high volumes.

Bearish engulfing pattern always occur in a bullish trend in the market and it mostly indicates the reversal of trend.

A trader should look for following signs to get an idea of a greater potential for reversal :

  • If the length of the red candlestick is more longer as compared to the smaller green candle that precedes it then the chances of potential reversal becomes very high.
  • When the green candle is completely surrounded by the red candle.
  • When red candle is formed with very high volumes.

Below chart shows formation of Bearish Engulfing candlestick pattern :

bearish engulfing Pattern Multiple Candlesticks pattern Technical Analysis

Bearish engulfing candle gives an indication of Short trade.

A trader looking for shorting/selling opportunity can initiate trade on second candle that is the red candle and the stop loss for the trade will be the highest point between the two candles.


2. Piercing Candlestick Pattern:

A piercing pattern is very much similar to a bullish engulfing pattern. However, it differs in a way that in a piercing candlestick pattern, the bullish candle doesn’t engulf the bearish candle completely. In Piercing candlestick pattern, the bullish candle should engulf more than 50% but less than 100 % of the length of the bearish candle.

Piercing pattern Multiple Candlesticks pattern Technical Analysis

As shown in above snapshot, we can see that the green candle engulfs more than 50% but less than 100% of red candle, if this condition is not met then it will not be called a piercing pattern.

In the chart below we can see that the red candle doesn’t engulfs more than 50% of red candle and hence it will not be called a piercing pattern.

Piercing pattern Multiple Candlesticks pattern Technical Analysis

This type of grouping of candles indicates an upward trend, as this type of pattern mostly occurs in a downtren.

Your attention Please: The occurrence of this type of pattern should be in a downtrend. If this condition is not met, then this type of pattern will not be a valid one.

Some important points to ponder :

  • This type of pattern should occur in a downtrend.
  • The first candle must be a bearish candle that is the first candle should be a red candle which generally occurs due to fall in price of the stock with very high volumes.
  • The opening of the next candle should always be below the low point of the first candle (red candle) but the price is clearly turned upward reaching the second candle (green candle) closing above the half (50% or more but less than 100%) of the previous candle.
  • One should not be mistaken and compare this pattern with the “bullish engulfing” candle as it differs in a manner that it does not exceed the ends of the real body above the previous candle.

The trader who wants to go long after identifying a piercing pattern should buy around the closing price of second green candle and should keep stop loss at lowest point of the two candles.


3. Dark Cloud Cover Candlestick Pattern:

The Dark Cloud Cover Candlestick Pattern is an indicator of a “bearish reversal candlestick pattern”. It is mostly called a bearish candlestick pattern because it gives a sign for the beginning of a down trend. It means that when a dark cloud cover is identified on the chart, it can be assumed that the price of the stock is much likely to go down. It is also known as reversal candlestick pattern because a dark cloud cover is formed at the top of an uptrend. When this type of pattern occurs at the top of an uptrend, it indicates the bears (sellers) have now taken full control from bulls (buyers).

Below chart shows formation of Dark Cloud Cover Candlestick Pattern :

darkcloud pattern Multiple Candlesticks pattern Technical Analysis

In a dark cloud cover candlestick pattern there are two candles.

  • The first candle (green candle) must be a bullish candle, and
  • the second candle (red candle) which is the main candle in this pattern, must be a bearish candle.

The opening of the second candle is little higher the closing price of the first candle. And after that it falls all the way down, and closes little above the opening price of the first candle.

In this the second candle (red candle) engulfs about 50 to 100% of green candle.

Dark cloud cover can be seen as the opposite of a piercing pattern.

It shows a Short/Sell trade that is who wants to short or sell can short at closing price of red candle and should keep the stop loss of highest point between the two candles.

4. Harami Candlestick Pattern:

Your attention please : We know what you are thinking right now but please don’t confuse this word with the word used in hindi language.

In Japanese, Harami means pregnant. In a Harami candlestick pattern, the two candles forms a shape in such a way that it looks like a pregnant woman standing. A Harami candlestick chart patterns consists of two candles.

Components of Harami Candle :

  • The first candle is a large candle which forms in direction of trend.
  • The second candle is smaller than first candle and of opposite colour.

There can be a small shadow or no shadow at all during the formation of candles. The real body of the second candle should be within the real body of the first candle. Even though the body of the second candle is smaller than the body of the first, the length of the second candle should be larger than normal so that the harami candlestick pattern has a good strength.

Below diagram shows the formation of harami pattern :

 

Types of Harami Candlestick Pattern :

  • Bullish harami Candlestick Pattern
  • Bearish harami Candlestick Pattern

4.1 Bullish Harami Candlestick Pattern


A bullish harami candlestick pattern is formed by two candles together. It indicates reversal in trend to bullish from bearish This type of pattern must occur after a considerable period of downward trend where a large red candle body occurs. The next candle must be a green colored candle which should fall within the real body of the previous red candle including shadows.

In a bullish harami candlestick pattern, the first candle is bigger in size and red in color while the second candle is smaller and green in color. The point to note here is that the second candle is should be fully contained in the body of the first candle. There is also one case called Harami Cross, which is formed when the second candle is a doji.

bullish harami pattern Multiple Candlesticks pattern Technical Analysis

Bullish harami Pattern suggests a Long trade.

The trade who wants to go long can initiate buying at close price of second candle (green) and the lowest point of the two candles should be kept as a stop loss.

4.2 Bearish Harami Candlestick Pattern:

A bearish harami candlestick pattern is formed by two candles together. It indicates reversal in trend to bearish from bullish This type of pattern must occur after a considerable period of upward trend where a large green candle body occurs. The next candle must be a red coloured candle which should fall within the real body of the previous green candle including shadows.

In a bearish harami candlestick pattern, the first candle is bigger in size and green in color while the second candle is smaller and red in color. The point to note here is that the second candle should be fully contained in the body of the first candle A bearish harami gives an opportunity to trader to start small trades on the short side.

bearish harami pattern Multiple Candlesticks pattern Technical Analysis

Bearish Harami Pattern suggest a Short trade.

The trade who wants to go short can initiate selling at close price of second candle (red) and the highest point of the two candles should be kept as a stop loss

In next chapter we will learn How to Analyse Trends which forms one of the most important topic of technical analysis as it is popularly called “Trend is King”

SHARE