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📈 Mastering Candlestick Patterns: Advanced Reversals, Doji, and Dual-Candle Patterns
In our previous discussions, we explored bullish and bearish reversal patterns, their confirmations, stop-loss placements, and profit-taking strategies. Now, we’ll move further into advanced candlestick formations, including the Doji, Dual-Candlestick Reversal Patterns, and their significance in trading.
🎯 The Power of Candlestick Reversals: More Examples
🔨 The Hammer Pattern in Real Trading
A hammer signals bullish reversal after a downtrend. Let’s analyze some recent examples:
📌 SIPLA:
After a downtrend, a hammer formed and the next candle confirmed it by moving higher.
The stock reacted positively, providing a profitable trade setup.
📌 Lupin:
The stock fell from ₹1240 to ₹1150 (~10% decline).
A hammer formed, but in this case, the third candle moved down, hitting the stop-loss.
This highlights an important reality: not every trade works out, and stop-losses must be respected.
📌 Dr. Lal Path Lab & Jubilant Food:
Both stocks saw a hammer after a sharp decline, leading to significant upside movement.
📉 The Bearish Shooting Star: A Mirror Image of the Hammer
A Shooting Star is a bearish reversal pattern that appears after an uptrend.
📌 Key Characteristics:
Formed after a strong up move.
Has a long upper shadow and a small body near the bottom.
Can have a red body (stronger signal) or green body.
Confirms when the next candle breaches the low of the shooting star.
📍 Example:
Tata Motors: After a strong uptrend, a Shooting Star formed, followed by a price breakdown.
Entry: Once the low of the shooting star was breached.
Stop-Loss: Above the high of the pattern.
Profit-Taking: 50% at first target, rest with supertrend indicator.
📌 Important Rule:
Never trade a pattern if the stop-loss is more than 4% (on daily charts).
For intraday charts (hourly/75-min), the max stop-loss should be 1-1.5%.
📉 The Inverted Hammer: A Bullish Reversal Signal
The Inverted Hammer looks exactly like a Shooting Star but forms after a downtrend, signaling a potential reversal to the upside.
📌 How to Identify an Inverted Hammer?
Forms after a strong down move.
Has a small body at the bottom with a long upper shadow.
Shows that bulls attempted to push prices higher but couldn’t fully sustain it.
Confirmation occurs when the next candle breaks the high of the inverted hammer.
📍 Example:
BHEL Stock:
After a sharp decline, an Inverted Hammer appeared.
The next candle breached the high, confirming the pattern.
The stock moved upward afterward, validating the reversal.
📌 Key Difference Between Hammer & Inverted Hammer:
Hammer: Stronger signal because bulls closed the price near the top.
Inverted Hammer: Weaker than Hammer but still bullish because buyers showed strength after days of selling pressure.
🚨 The Bearish Hanging Man: A Warning Sign After an Uptrend
A Hanging Man looks exactly like a Hammer, but the key difference is:
📌 Hammer appears after a downtrend (bullish). 📌 Hanging Man appears after an uptrend (bearish).
🔍 Characteristics of a Hanging Man:
Occurs after an uptrend.
Has a small body at the top and a long lower shadow.
Indicates that bears tried to push prices down but bulls managed to recover.
However, the long lower shadow suggests selling pressure is increasing.
If the next candle breaches the low of the Hanging Man, it confirms a bearish reversal.
📍 Example:
Coromandel International: Formed a Hanging Man, followed by a price drop once the low was breached.
📌 Important Rule:
The lower shadow should be at least twice the body size.
If the next candle confirms the pattern, it signals a downtrend continuation.
🌀 The Doji: A Candlestick of Indecision
A Doji is not a trade-taking signal—instead, it’s a profit-taking signal.
📌 Characteristics of a Doji:
Open and Close prices are nearly the same.
Indicates indecision between buyers and sellers.
Can appear after an uptrend, downtrend, or sideways market.
🚨 How to Trade a Doji?
If you are already in a trade and see a Doji, exit 70-80% of your position.
If a fresh breakout occurs later, you can re-enter the trade.
Do not enter new trades based on Doji formations alone.
📍 Example:
Reliance Stock: A Doji formed after an uptrend, signaling traders to book profits.
🔥 Dual-Candlestick Reversal Patterns: Bullish Engulfing
Moving beyond single candlesticks, we now enter dual-candlestick reversal patterns, which provide stronger confirmation signals.
🟢 Bullish Engulfing Pattern (Strong Reversal Signal)
📌 Definition:
Appears after a downtrend.
Consists of two candles:
First candle is red (bearish).
Second candle is green (bullish) and completely engulfs the first candle’s body.
Signals that buyers have taken control from sellers.
📍 How to Trade the Bullish Engulfing Pattern?
Identify the pattern after a downtrend.
Entry: When the next candle breaches the high of the engulfing candle.
Stop-Loss: Below the low of the engulfing candle.
Profit Targets:
50% at 1:1 risk-reward ratio.
Trail the rest using supertrend indicator.
📍 Example:
Infosys Stock: Formed a Bullish Engulfing Pattern, leading to a strong upward breakout.
🎯 Key Takeaways
✅ Hammers, Inverted Hammers, Shooting Stars, and Hanging Man are reversal patterns but depend on positioning in the trend. ✅ Shooting Stars and Hanging Man are bearish, while Hammer and Inverted Hammer are bullish. ✅ Doji is an indecision candle—it’s a profit-taking signal, not a trade-taking signal. ✅ Bullish Engulfing Pattern is one of the strongest bullish reversal signals after a downtrend. ✅ Always confirm reversals within 4 candles—without confirmation, the pattern is meaningless. ✅ Stop-loss placement is crucial—never trade with more than 4% stop-loss on daily charts.
🔜 Coming up next: More Dual-Candlestick Patterns, Advanced Trading Strategies, and Risk Management Techniques! 🚀
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