Anatomy of candlestick charts, patterns, and formations: Part 2

This is the second part of our comprehensive guide to reading Japanese candlestick chart patterns. If you would like to start with the first part, our Chief Market Analyst Joshua Mahony has already delved deep into the basics, and the one candlestick patterns. If you’re already familiar with those, this article is delving deep into two candle formations.

Two candle patterns - engulfing, cloud and piercing

Bullish Engulfing: A bullish engulfing pattern is formed when a larger bullish (green) candle completely engulfs the previous smaller bearish (red) candle. It indicates a potential bullish reversal coming into play. The price action seen under a bullish engulfing pattern is much like a hammer, with initial losses reversing to provide a more positive outlook. The body is what is most important here, with the second candle fully engulfing the first.

Attributes:

• Bullish reversal signal
• Market in a downtrend
• Both candles have a full body (not doji)
• Second candle completely surrounds the first

Bearish Engulfing: A bearish engulfing pattern is the opposite of a bullish engulfing pattern. It occurs when a larger bearish (red) candle completely engulfs the previous smaller bullish (green) candle, signaling a potential bearish reversal. The price action for a bearish engulfing pattern is much like that of a shooting star, but taking place over the course of two candles.

Attributes:

• Bearish reversal signal
• Market in an uptrend
• Both candles have a full body (not doji)
• Second candle completely surrounds the first

Dark Cloud Cover: A dark cloud cover formation is a bearish reversal pattern that can be observed within an uptrend. This pattern required a gap into the second candle, with price closing below the midpoint of the first candle’s body.

Attributes:

• Bearish reversal pattern
• Market in an uptrend
• Candle one is a strong bullish candle
• Candle two opens above the high of the previous candle, creating a gap
• Candle two closes below the midpoint of candle one

Piercing Pattern: A piercing pattern is a bullish reversal pattern that can be observed within a downtrend. This pattern requires a gap down into the second candle, with the price closing above the midpoint of the first candle's body.

Attributes:

• Bullish reversal pattern
• Market in a downtrend
• Candle one is a strong bearish candle
• Candle two opens below the low of the previous candle, creating a gap
• Candle two closes above the midpoint of candle one

Bulls and bears - harami and tweezer patterns

Bullish Harami: A bullish harami is a bullish reversal pattern that can be observed within a downtrend. This pattern is characterized by a small bullish candlestick completely contained within the previous larger bearish candlestick.

Attributes:

• Bullish reversal pattern
• Market in a downtrend
• Candle one is a large bearish candle
• Candle two is a small bullish candle completely within the range of candle one

Bearish Harami: A bearish harami is a bearish reversal pattern that can be observed within an uptrend. This pattern is characterized by a small bullish candlestick completely contained within the previous larger bearish candlestick.

Attributes:

• Bearish reversal pattern
• Market in an uptrend
• Candle one is a large bullish candle
• Candle two is a small bearish candle completely within the range of candle one

Tweezer top: A tweezer top is a bearish reversal pattern that occurs at the end of an uptrend. It consists of two candlesticks with similar highs, suggesting a potential shift in market sentiment.

Attributes:

• Bearish reversal pattern
• Market in an uptrend
• Candle one is a long bullish candle, indicating buying pressure
• Candle two is also a bullish candle, forming a similar high to candle one
• The upper wicks of both candles should be relatively long, while the lower wicks are short or non-existent.

Tweezer bottom: A tweezer bottom is a bullish reversal pattern that occurs at the end of a downtrend. It consists of two candlesticks with similar lows, suggesting a potential shift in market sentiment.

Attributes:

• Bullish reversal pattern
• Market in a downtrend
• Candle one is a long bearish candle, indicating selling pressure
• Candle two is also a bearish candle, forming a similar low to candle one
• The lower wicks of both candles should be relatively long, while the upper wicks are short or non-existent.

Key Considerations when analyzing chart Japanese candlestick chart patterns:

- The formation of tweezer tops suggests a struggle between buyers and sellers, with sellers gaining momentum

- The pattern signifies a potential exhaustion of the uptrend and a possible trend reversal to the downside

- Traders often look for confirmation signals, such as a subsequent bearish candle or a break below a key support level, to validate the pattern

- The tweezer top pattern is considered stronger and more reliable when it forms near significant resistance levels or when accompanied by other bearish indicators or patterns