Trading chart patters

How to Trade the Double Bottom Chart Pattern

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Do you know how to trade the double bottom chart pattern? Many traders overlook this profitable
price action trading pattern because they don’t know how to trade it properly. In this addition to
my free price action course, I’m going to show you a few profitable ways to trade the double
bottom chart pattern.

There are many ways to trade this chart pattern, but in this article, I want to focus on three profitable
techniques that I have used to trade the double bottom chart pattern. I’m also going to show you
which technique I prefer to use, and why I don’t trade the traditional techniques for this pattern
anymore.

By the end of this article, you should be able to identify and trade good double bottom chart
patterns. After you learn how to properly trade the double bottom, it may become one of your
favorite price action chart patterns.

What is a Double Bottom Chart Pattern?

A double bottom chart pattern is a strong bullish price action signal that occurs at the end of a
downtrend. It happens when an equal, or almost equal, low forms during a downtrend, instead of
another lower low.

The idea behind the pattern is that failure to make another lower low could be a signal of
momentum leaving the trend. The first low in the pattern becomes support that provides a strong
bounce for the second, equal low.
As you can see from the image above, a second horizontal line is also drawn at the middle peak.
This is the traditional breakout point of the double bottom chart pattern. I’m going to refer to this
line as the breakout line.

To get your profit target, you measure from the support line to the middle peak (or breakout line).
Then you take that measurement and duplicate it upward, starting from the breakout level.

Note: There is no ascending or descending version of this pattern, unlike the head and shoulders
chart pattern. All of your important levels (other than the main trendline) will be drawn
horizontally only.

Trading the Double Bottom Chart Pattern

Starting with the standard way to trade the double bottom, your entry is taken after price breaks
the breakout line. Most traders opt to wait for a candlestick to close above the breakout line to
enter. Your stop loss is placed under the most recent low.

Note: As you can see in the example below, waiting for a close above the breakout line would have
resulted in a missed opportunity. Often there is a pullback to the breakout line, but in this case, it
did not happen.
The reason I don’t trade the standard double bottom technique anymore is because the reward to
risk ratio is not good enough. Some traders use the traditional take profit target to partially close
their position, leaving the remaining position to ride the trend (which can improve the risk to
reward).

The next technique is more aggressive and provides a better risk to reward scenario. In this
technique, you wait for a candlestick to open and close above the trendline. If that happens, you
enter at the open of the next candlestick (see the image below). Your stop loss is placed under the
most recent low.

If you’re going to use this technique, I recommend moving your stop loss to break even before
price makes it back up to the breakout line. The breakout line often acts as resistance, so it’s a
good idea to move your stop to break even, as long as your trade still has a little room to breath.

The reason I haven’t continued to trade this technique is because the reward to risk is still not good
enough. The risk to reward scenario is better in this aggressive entry, but the strike rate is also
lower because you’re not waiting for the double bottom to be confirmed (with a breakout).

This last technique is the way I like to trade the double bottom chart pattern. It is much more
aggressive, but the risk to reward scenario is often excellent. In the example below, you could have
made over 9 times what you had risked.
I start looking for a bullish entry trigger where a double bottom chart pattern may be forming. In
the example above, we got a nice bullish engulfing candlestick pattern right on the support line.

Your entry would be the standard entry for a bullish engulfing pattern, which is the open of the
next candle. Your stop loss would be placed under the most recent low, and your take profit would
be the standard take profit target for the double bottom.
Trading the Inverse Head and Shoulders Chart
Pattern

What is an Inverse Head and Shoulders Chart

Pattern?
An inverse head and shoulders chart pattern is a strong bullish reversal signal. It occurs when a
downtrend fails to produce another lower low and instead produces a higher low. The idea is that
the failure of the downtrend to produce another lower low is a sign that momentum may be
leaving the trend.
The neckline is typically drawn off of the real bodies of the candlesticks of the high after the left
shoulder and before the right shoulder (see the image above). In the image above, the neckline is
perfectly horizontal.

The neckline can be horizontal, ascending, or descending. Traditionally, if the neckline is

ascending the inverse head and shoulders chart pattern is considered to be more bullish and if the
neckline is descending the pattern is considered to be less bullish.

Note: Although an ascending neckline is typically considered to be more bullish, I prefer to trade
these patterns with horizontal or descending necklines. In my experience, patterns with
horizontal or descending necklines provide better reward to risk ratios (more on this below).

Traditional Inverse Head and Shoulders Strategies

Starting with the standard inverse head and shoulders trading strategy, entry is taken when price
breaks the neckline. Some traders prefer to wait for a candlestick to close above the neckline
before entering the trade.

Note: Waiting for a candlestick to close above the neckline will often lead to missed
opportunities or poor reward to risk scenarios.
The stop loss is placed below the right shoulder (see the picture above). To get your target,
measure from the neckline to the lowest low of the pattern (I prefer to measure to the candle
body low). Then take that measurement and duplicate it upward.

Note: With a descending neckline (all examples in this article), you should duplicate your
measurement up from your entry point. With an ascending neckline, you should duplicate
upward from the same point that you took your measurement.

In my experience, this is the way that has worked best, and it’s also why I say that patterns with
horizontal or descending necklines provide better reward to risk ratios. Ascending necklines use
up much of the reward before the entry is even taken.

Another traditional inverse head and shoulders chart pattern trading strategy is to wait for price
to break above the neckline and then take the entry if and when price pulls back to the neckline.
The benefit of this technique is that it’s a more conservative approach (because price is already
established above the neckline) that often leads to a good reward to risk ratio, especially with
descending necklines (see the image above). However, you’re never guaranteed a pullback.

Place the stop loss under the right shoulder. To get your target, simply duplicate the
measurement from the neckline to the lowest low as in the previous example.

My Favorite Inverse Head and Shoulders Strategy

In order to trade my favorite inverse head and shoulders strategy, you need to combine this
pattern with another trading signal. I prefer to use price action signals like the hammer (with
confirmation and pullback) or bullish engulfing pattern as an entry trigger for this pattern.

In this aggressive technique, you must take your entry before the right shoulder is fully formed.
In the example below, I used a bullish engulfing pattern as my entry trigger.
Place your stop loss under the right shoulder of the pattern as in the previous two techniques. To
calculate your target, simply duplicate your measurement from the neckline to the lowest low as
in the two previous examples.

The reason I prefer this aggressive technique is because the reward to risk ratio is usually much
better than any other technique that I have used for this pattern. Although the example above is
not a great example the reward to risk ratio is still better than the other two examples on this
page.

Final Thoughts
Your reward to risk ratio is a huge part of your trading success. Trading the inverse head and
shoulders chart pattern will typically provide you with a good reward to risk ratio, especially if
you use my aggressive strategy.

I’m a big fan of divergence trading. Combining hidden divergence with this chart pattern or even
regular divergence between the left shoulder and head of this pattern can help to qualify good
trading setups.

As a bullish reversal pattern, a true inverse head and shoulders will only occur at the bottom of a
trend. Taking these patterns out of context is an easy way to ruin their effectiveness and lose
money.
Using my aggressive technique, I prefer to move my stop loss to break even before price returns
to the neckline when possible. In the example above, this wouldn’t have worked because it’s
important to leave the trade with enough “breathing” room. Moving my stop loss to break even
in that example would’ve been too restrictive.

If you’re a price action trader or like to incorporate price action signals and pattern into your
other trading systems, I hope you’ll give the inverse head and shoulders chart pattern a try. Did
you already use this pattern? Do you like my inverse head and shoulders strategy or know of
another way to trade this pattern? Let me know in the comments below.

Trading the Hammer Candlestick Pattern

What is a Hammer Candlestick Pattern?

The hammer formation is a Japanese candlestick that consists of a long lower shadow with a
relatively small real body at or near the top of the range of the candlestick. The lower shadow
must be at least 2x the length of the real body of the candlestick. The color of the real body
(bullish or bearish) does not matter, and it should have a small upper shadow.

Like the shooting star, this candlestick is a reversal formation. A hammer candlestick must be
traded within the context of the market or trend, i.e., a true hammer formation only occurs after
downward trending candles. Trying to trade the hammer or shooting star from a neutral/ranging
market is a good way to lose your money.

Trading the Hammer Candlestick Pattern

In the picture below, you can see a good example of how trading the hammer candlestick
formation can be very profitable. This hammer signal was followed by a nice rally in price.
It formed on the Aussie (AUDUSD) market on the Daily time frame. As you can see, price
reversed aggressively after this hammer formation.
If you would have gotten into this trade at the 50% entry, you would have been risking about 80
pips. This swing in price has already moved about 828 pips from the 50% entry of that hammer,
and could possibly go further. So, far this trade would have given you more than a 1:10 risk to
reward ratio.

I took this trade, but my take profit was set to a 1:2 risk to reward ratio, which was hit within
three days. In retrospect, I would have done much better to close only half of my position when
price reached 2x what I was risking. I could have let the remaining half ride up to 3x my original
risk, and then closed half of that position, leaving the remaining half (one quarter of my original
position) to ride the swing to the top.

After moving the stop loss to break even, this becomes a free trade. The only risk in this trade, at
that point, is risk to potential profit. Each time the upward trend made a new higher low, I could
have moved my stop loss to just below the latest higher low – effectively capturing the majority
of this swing in price (see the image below).
Another piece of advice that you might consider is that these price action formations are more
meaningful on longer time frames. I typically do not take any trades based on the price action of
a chart less than 15 minutes; however, the 1 Hour chart is more meaningful, the 4 Hour chart is
better, the Daily chart is even better, etc….

That being said, you will not see as many of these price action formations as you move up to
higher time frames. That should be pretty obvious, because there are simply less candlesticks for
any given amount of time on a higher time frame chart.

This is true, not only for price action trading, but for any style of trading. There will always be a
delicate balance of trying to get enough trading setups, while also trying to choose the most
meaningful trade setups.

Trading the Morning Star Candlestick Pattern

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In the last couple of articles of this price action course, we began learning about multi-
candlestick patterns. In this article, we will learn about trading the morning star candlestick
pattern – our first three-candle pattern.

The morning star candlestick pattern is considered to be a fairly strong price action reversal
signal. Many traders find this pattern reliable enough to consider it their favorite trading setup.

At the same time, many price action courses leave this candlestick pattern out altogether, because
it can be tricky to qualify. I trade this pattern, and have found it to be pretty useful. If you learn
how to trade it correctly, you might find that this price action pattern is pretty useful to you as
well.

What is a Morning Star Candlestick Pattern?

A true morning star candlestick pattern is a bullish reversal signal, and therefore, only occurs
after an established downtrend in price. Traders vary on what they consider to be a downtrend.
Some require lower highs and lower lows, while others require only a short streak of consecutive
lower candlesticks.

Note: Steve Nison is the authority on candlesticks, and has created a proprietary method for
defining a downtrend. Many of his courses go into these methods, as well as other qualifiers. I
highly recommend Steve Nison for price action training.
A morning star pattern, in Forex, is basically a variation of the bullish engulfing pattern.
However, the second candlestick in this three-candle formation must be a low range candle, like
a spinning top or doji (not required in a regular engulfing pattern).

This pattern consists of a relatively large bearish candle, followed by a small real-bodied second
candle that is either slightly bearish or a doji (since there are rarely gaps in Forex), and then a
third candle who’s real body pulls into and closes past, at least, the halfway point of the first
candle’s real body (see the image above).
A non-Forex morning star is similar. The only difference is that, since most other markets gap
quite often, the second candle needs to be isolated outside of the other two candles in the pattern.
The second candle can have a small bullish or bearish real body, or it can be a doji. The second
candle must not be an inside bar (or harami).

The third candle, in a non-Forex morning star, should open at or below the first candle in the
pattern. However, it should not engulf the second candle, but leave it isolated (see the image on
the right).

Note: Occasionally, in Forex, you will see a morning star that looks like a non-Forex morning
star (except it will most likely have a slightly bearish second candle). If the third candle gaps up,
and leaves the second candle isolated, this is a strong bullish signal. These cases are rare, but
they can be very high probability signals.

Trading the Morning Star Candlestick Pattern

In the images above, the candlesticks of the morning star patterns did not have very long lower
shadows (or wicks). The risk to reward ratio is best with this pattern when all the lower shadows
are short, and the third candle in this formation closes just above the 50% mark of the first candle
of the formation.

Remember: Your stop should be placed one pip below the lowest low of the cycle. In a buy
position, you do not have to include the spread cost into your stop loss positioning. The spread is
added to your entry level.

However, the morning star doesn’t always form with those ideal conditions, and that type of
formation is not necessarily the highest probability signal that this pattern provides, either.
In the image above, you will see a strong bearish price movement, followed by a morning star
candlestick pattern. As I mentioned earlier, in Forex, the morning star usually looks like a
variation of the bullish engulfing pattern. In the pattern above, the last candle of the pattern
engulfs the previous three candles (nearly four).

This is a strong bullish signal, but the length of the third candle has diluted the risk to reward
potential on this trade (assuming you were planning on entering at the open of the next candle).
To make things worse, the second candle in the morning star pattern was a dragonfly doji. The
long lower wick of this doji means an even lower risk to reward scenario, yet it is a slightly
bullish signal.

This pattern would have actually worked out nicely any way you decided to trade it. They don’t
always work out like this. If you would have entered at the open of the candlestick immediately
following the morning star pattern, and placed your stop loss one pip below the lowest low, you
could have still made a profit of about 2x your risk.
However, there is another way to trade this pattern. The guy that first taught me how to trade the
morning star would have waited for a pullback on this one. Occasionally, when the third candle
of this pattern is relatively large, price will pull back into that candle.

Like the pinbars, 50% of the total range of the third candle is a good target, or even 50% of the
real body of that candle works well. If you would have entered the trade after price pulled back
near the 50% mark of the outside (third) candle, you could have made more than 3x your risk.

Note: The pullback does not happen every time a large third candle forms when trading the
morning star candlestick pattern, or even most of the time. This is simply a technique to raise
your risk to reward potential on a trade that you would have otherwise not taken. Watch for a
rejection of price at the 50% area.

Final Thoughts
I’ve said many times before than context is everything when it comes to candlestick
signals. When taken after an established downtrend, trading the morning star candlestick pattern
can be very profitable. Some traders use this pattern as their main trading setup.

In Forex, the market doesn’t gap very often, especially when trading the major pairs.
Consequently, the second candlestick in a Forex morning star pattern should be slightly bearish
or a doji. The alternative leads to an inside bar, and a third candle with no relevance to the
pattern.

The third candlestick in this pattern needs to pull into and close, at least, in the top half of the
first candlestick. However, the third candlestick can be larger, and it often engulfs the previous
two candlesticks or more. When that happens, it is a strong bullish signal, although it necessarily
lowers your risk to reward potential.

Trading the Bullish Engulfing Candlestick

Pattern
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In the last addition to my free price action trading course, we went over the bearish engulfing
pattern. In this article, we will go over trading the bullish engulfing candlestick pattern.

The bearish and bullish engulfing patterns are considered fairly strong candlestick reversal
signals. The bullish engulfing pattern is essentially the opposite of the bearish engulfing pattern.

Like I previously stated, in my article, Trading the Bearish Engulfing Candlestick Pattern, these
engulfing patterns are often misused. Rather than revisiting all the same points again, I’ll simply
define the bullish engulfing pattern, and then we’ll try to expand upon our knowledge of trading
these useful candlestick signals.

What is a Bullish Engulfing Candlestick Pattern?

The bullish engulfing pattern consists of a candlestick that opens at or below the close of the
previous candle (almost guaranteed in Forex), and then closes above the open of the same
[previous] candle. As I stated before, the most effective way of trading these signals is based on
the price action of the real bodies (open to close) of the candles – not the total range (high to
low).

I’m defining a bullish engulfing candlestick pattern as one in which the bullish real body of a
candle engulfs the bearish real body of the previous candle. In some frequently gaping markets,
you may encounter cases in which a bullish candle engulfs another bullish candle. I don’t have
experience with these, as I am purely a Forex trader.

Effective candlestick patterns must be traded within the context of the market. Since this pattern
is considered a bullish reversal signal, a true bullish engulfing pattern will only come after a
bearish movement in price (consecutive lower lows).
Note: Occasionally, you may find engulfing patterns occurring during periods of market
consolidation that would have been effective, but we are only interested in what usually happens
– not what occasionally happens. In the long term, you will lose more often than you win by
taking these signals during consolidation periods.

Trading the Bullish Engulfing Candlestick Pattern

In the image above, you will see a small bearish movement in price, followed by a bullish
engulfing candlestick pattern. You could have made a nice profit by entering a buy position at
the open of the candle following the bullish engulfing pattern. Placing your stop loss at the
bottom of the bullish engulfing candlestick, this trade would have been worth nearly 2x your
risk.

Like many of these candlestick reversal signals, trading the bullish engulfing candlestick pattern
is usually more effective, or at least a higher probability trade, when it follows a sharp decline in
price. The reason for this is pretty simple; market prices are driven by psychology.

After a sharp incline or decline in price, traders lose faith that the market can sustain such a sharp
incline or decline for long. While amateurs may try to chase price, the big players will start
taking their profits or entering trades against a quick, volatile price movement (see the image
below).
Sharp price movements are not, however, a necessary precursor for trading these patterns. Many
times all that is required is a small consecutive movement in price in one direction or the other,
as you can see in the first image.

As I stated in my last price action article, the relative sizes of the candles involved in these
patterns are important. Some traders, for instance, will not trade an engulfing pattern unless the
engulfing candle is much larger than the previous candle.

I have not personally found that to be any better or worse in indicating how strong the potential
reversal that follows will be. In fact, if the engulfing candle is too large, it can sometimes
swallow up much of the price movement, and leave you with a poor potential risk to reward
ratio.

Final Thoughts
The context in which these patterns occur is very important. You should never trade reversal
signals from periods of market consolidation. That being said, these engulfing patterns, as well
as other candlestick reversal signals, can be very effective after just a few candles have made
consecutive higher highs or lower lows.

Occasionally, the engulfing candle in one of these patterns will be very large. Many traders
would say that a relatively large engulfing candle signifies a strong reversal ahead. However, a
larger engulfing candle requires a larger stop loss in pips (obviously), and may lower your
potential risk to reward ratio. Enter such trades with discretion.

Typically, an engulfing candle that engulfs more than just the previous candle is an even stronger
signal. The more candlesticks that are engulfed, the stronger the signal.

Again, keep in mind that the larger the engulfing candle, the less likely it is that you will be left
with a favorable risk to reward scenario. Since candlestick signals are only reliable in the short
term, there is no guarantee that price will continue to move in the direction that is indicated by
the signal.

Lastly, any good trader will incorporate good support and resistance levels into their trading
signals. Engulfing patterns that are bouncing off of relevant support or resistance levels are more
likely to reverse. Previous swing points, obvious supply and demand levels, relevant Fibonacci
levels, trend lines, dynamic support and resistance, etc… should be considered when taking these
trades.

trade. After a little screen time with your demo trading platform, you should be trading the
bullish engulfing candlestick pattern just like a pro.
Trading the Bullish Piercing Candlestick Pattern
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Have you ever wanted to learn how to trade the bullish piercing candlestick pattern? If so, then
you’re in luck. In this addition to my price action course, I’m going to show you how to identify
and trade the bullish piercing pattern.

This pattern is considered to be a moderately strong reversal signal – not in the same strength
category as, for instance, a pinbar (shooting star or hammer) or an engulfing pattern.

Since this signal is only moderately strong, price often will retest the low formed by the bullish
piercing pattern. Consequently, many traders become discouraged, trading this pattern, before
they get a feel for it, or understand how this pattern can really benefit their trading.

What is a Bullish Piercing Candlestick Pattern?

The bullish piercing candlestick pattern is, obviously, a bullish signal. It is also a moderately
strong reversal signal, as I mentioned earlier.

Like most of these candlestick patterns, the context in which this pattern occurs is very
important. A true bullish piercing pattern only occurs after a downward trend in price.

This pattern consists of a relatively large bearish candlestick, followed by a bullish candlestick
that closes somewhere above the 50% mark of the preceding candlestick’s real body (see image
below).
In Forex, the bullish candle should open near the close of the preceding bearish candle; there are
rarely gaps in Forex, because of the extreme liquidity of the market. In other markets, the bullish
candle should open below the preceding bearish candle (as seen above under Non-Forex
Piercing Pattern).

Trading the Bullish Piercing Candlestick Pattern

In the image below, you will see a bullish piercing candlestick pattern followed by a nice rally in
price. This bullish piercing pattern was preceded by a bearish (downward) price movement,
which is a requirement to qualify taking this trade; the context is very important whenever you’re
doing any kind of price action trading.

The doji could be a signal that the bears are running out of steam, but price continued to drop.
The next candle was another bearish candlestick, which had a real body that was bigger than the
previous 10 or so candlesticks. The idea is that this larger candlestick is more significant, and so
are any patterns that develop from it.
In order to make a bullish piercing pattern, the next candle must close somewhere above the
halfway mark of the preceding bearish candle’s real body, which our example below does
(barely).

If you would have taken this trade, you could have made some significant gains. Since the
bullish piercing candlestick pattern is only a moderately strong reversal signal, it would have
been nice to see some western technical analysis supporting this trade.

Note: Steve Nison recommends combining Japanese candlestick trading with your favorite
western technical indicators.
A good trend and reversal trading system can be very useful for trades like this one, and for
further qualifying price action trades in general.

Example: The Top Dog Trading system measures multiple market energies and combines that
with certain triggers for taking trades. These candlestick patterns can take the place of those
triggers, or at the very least, the Top Dog Trading system would have likely shown several
market energies that supported taking the trade in our example above.

I personally do not take any bullish piercing candlestick patterns as entry triggers without some
kind of confirmation from my main trading system. As opposed to the stronger signals, e.g.,
engulfing patterns, morning/evening stars, pinbars, etc., which I sometimes make exceptions for.

Maybe you prefer to trade pure price action, or perhaps all of the signals are lining up in your
trading system; either way, the piercing pattern above could have been profitable for any trader
that spotted it.

There are several ways that you could have taken this trade:

1. You could enter the trade when and if the new candle (the candle after the bullish piercing
pattern) breaks the high of the previous candle.

2. You could take this trade on the open of the new candle.

3. You could wait for the new candle to possibly pull back in price to 50% of the piercing
pattern’s bearish candle (real body) before entering.

4. You could wait and possibly enter when and if price retests the support level revealed by the
bullish piercing pattern’s formation.

Getting out of the trade:

Simply place your stop loss under the lowest low in the sequence of the piercing pattern. In the
example above our stop loss would have been placed under the low of the bearish candlestick in
the sequence.

Trading Japanese candlestick patterns doesn’t always work out as nicely as the one in the
example above did. Sometimes you lose on multiple signals in a row, which is why managing
your money correctly is so important in any trading that you do. Having the patience to take only
qualified trades while risking consistent, responsible amounts of money on each trade will go a
long way toward your continued success in trading candlestick signals.
Final Thoughts
It’s more profitable to trade Japanese candlestick patterns with western technical indicators. If
you’re already using a profitable trading system that takes advantage of these indicators, you will
be much more likely to benefit from trading Japanese candlesticks as entry signals.

Pure price action trading can still be profitable, but I would personally not recommend the
bullish piercing pattern for that style of trading. If you really prefer naked price action trading, I
would recommend sticking to the stronger reversal signals.

As always, the context in which these trades are taken is very important. A true bullish piercing
pattern only comes after a bearish trend in price. This movement in price, however, can contain
as few as three significant, consecutive, bearish candlesticks in order to qualify as a bearish
trend.

Never carelessly risk your hard earned money. Be sure to demo trade each new candlestick
pattern that you learn until you are confident in your candlestick trading techniques.

As with any type of trading, proper money management and patience will go a long way toward
your success with these candlestick strategies. Add some quality, practice screen time, and you
could be trading the bullish piercing candlestick pattern like a pro in no time

Trading the Inverted Hammer Candlestick

Pattern

Although not as common as its counterpart signal, the hanging man, the inverted hammer can
still be a useful tool – in the right hands. In this addition to my free price action course, I’m
going to show you how to start trading the inverted hammer candlestick pattern.

This candlestick formation is a weak reversal signal; therefore, it is not wise to take this
candlestick signal, alone, as an entry trigger.

Although it’s typically not taken as an entry signal on its own, just like the hanging man, the
inverted hammer can be great for building a strong case for a reversal trade or early exit. When
combined with stronger reversal signals, or a setup that works well with candlestick signals, it
can be especially useful.

Note: If you’ve been reading this blog for any amount of time, then you probably already know
that I don’t recommend pure candlestick trading – especially with the moderate or weak signals.
I prefer to combine candlestick trading with a reliable trading system that is profitable on its
own. At the very least, you should be taking these signals from significant support and resistance
levels.

What is an Inverted Hammer Candlestick Pattern?

The inverted hammer candlestick pattern is a weak bullish reversal signal. It looks just like a
shooting star, only it appears at the bottom of a trend. Like the shooting star, the inverted
hammer should have a long upper wick/shadow (at least 2x the size of the real body), and it
should have little or no lower wick/shadow.

The real body can be either bullish or bearish (as seen in the image above). The inverted hammer
candlestick, itself, is considered to be slightly more bullish if the real body is bullish. However, if
you use this signal in conjunction with a confirming candle (like I’m going to show you below),
it is actually slightly more bullish, in my opinion, when the real body is bearish. That’s because
the confirming candle will typically engulf, at least, the real body of the inverted hammer, and it
often engulfs more.
An inverted hammer formation is only considered to be a true inverted hammer when it appears
after a downtrend in price action. As with any of these reversal signals, it’s important to take
them in the correct context. Never trade these candlestick signals from consolidating price action
(flat or sideways markets).

The psychology behind this signal is that the bulls were buying during this time period, but were
unable to hold that buying pressure. That being said, the bulls have shown an ability to move
price up from the current level. This could make the bears nervous enough to start taking profits
at this level.

Trading the Inverted Hammer Candlestick Pattern

In the image below, you will see a couple of inverted hammer candlestick patterns. The length of
the lower wick in the second example is on the limit of what I would consider acceptable. Any
lower and this candlestick would be considered a high wave candlestick (indecisive).

In both cases, these formations signaled a support zone. Even in the second example, price
eventually went up from that zone significantly (although I had to cut the bullish price action off
to center the image). You might also notice, in the second example, that there was a high wave
candle before our inverted hammer, and a long-tailed doji afterward. These are also signals that a
support zone has been hit.
Either example (from the image above) could have been used as an early exit signal for a bearish
trade that you were in, which is how this particular candlestick signal is usually used.

Example: You enter a bearish trade, and price action has been on your side so far, surging lower.
You see the first inverted hammer, and you decide to close half of your position, locking in some
profits. You’re thankful that you kept some of your position in the market, because price has
continued lower. Upon seeing the second inverted hammer, as well as some other bullish signals
(or signals of indecision), you decide to close your remaining trade.
In the image above, you can see another great example of how trading the inverted hammer
candlestick signal can help you keep more of your profits. The high to the left of our inverted
hammer was capped off by a dark cloud cover candlestick pattern. Let’s assume you entered a
sell order at that point, and you’re waiting for an opposing, bullish signal to close your position.

After the initial, strong, downward move, there was a bullish piercing pattern. However, in this
case it was not very bullish, because of the relatively long upper wicks on both candles in the
pattern. Let’s assume you didn’t close your position there.

Next, you get a high wave candlestick, then our inverted hammer, followed by a couple of
spinning tops – one of which is part of a bullish harami. If you would have closed your position
when the inverted hammer formed, or shortly afterward, you would have locked in about as
much profit as you could have possibly expected from that trade.
I mentioned earlier that I do not recommend trading the inverted hammer candlestick pattern as
an entry trigger. If you choose to trade it as an entry signal, the technique above is the correct
way to do it.

When trading this signal as an entry trigger, you need to wait for a bullish confirming
candlestick. In the example above, the candlestick after the inverted hammer closed above it, but
it has a long upper shadow (which is bearish).

You would need to wait for a bullish candle that closes near the top of its range for a proper
bullish confirmation. A good rule of thumb is to wait for a candle that closes within the upper
1/3rd of its range (for a bullish confirmation). In our example, we got a proper bullish
confirmation on the very next candlestick.

In the example above, I added dashed lines to show you the proper placement of your entry level
and stop loss. The entry should be 1 pip above the high of the confirmation candle (as shown
above), or at the open of the candle immediately after the confirmation candle closes, depending
on your trading strategy. The stop loss would be placed 1 pip below the lowest low in the area of
the inverted hammer signal – not necessarily the inverted hammer itself.
Final Thoughts
Japanese candlesticks are a great way to predict short term market directions, but there is never a
guarantee on how long any particular reversal or continuation pattern will last – especially with
the weak signals. Combining price action trading with a profitable trading method can help you
qualify better trades and improve your strike rate.

Context is so important when trading any candlestick signal. Remember: A true inverted hammer
only occurs after a downtrend in price action. Never take this signal from a consolidating market
(flat or sideways price action).

Trading the inverted hammer candlestick pattern can be a powerful tool, if done the right way.
You should always and demo trade any new trading setup that you plan to add to your repertoire,
and use responsible money management when you decide to go live. Good luck and happy
trading!

Trading the Dragonfly Doji and Gravestone

Doji

So you’ve heard of the doji, but what about the dragonfly and gravestone dojis? In this addition
to my free price action course, my goal is to help you correctly identify and start trading the
dragonfly doji and gravestone doji.

These patterns are considered to be weak reversal signals (varying degrees of strength) or
indecision signals. I don’t recommend pure candlestick trading with these signals, but they can
be useful in addition to a profitable trading system that works well with candlestick signals.

The dragonfly and gravestone dojis can also be used as entry triggers on their own, although this
is not typically done. However, if that is what you would like to do, there is a higher-probability
method for trading these signals on their own, which I will teach you in this article.

What is a Dragonfly Doji or Gravestone Doji?

In the image below, you will see a dragonfly doji and a gravestone doji. Starting with the
dragonfly doji, it consists of a relatively long lower wick, no real body, and no upper wick. In the
Forex market, a real body or upper wick that are only a few fractions of a pip is acceptable.
The gravestone doji is the opposite of the dragonfly doji. It has a relatively long upper wick, no
real body, and no lower wick. Similar to the dragonfly doji, a gravestone doji can have a very
small real body or lower wick.

Unlike many of the other candlestick signals that we have learned about, the dragonfly and
gravestone dojis can have varying degrees of significance, depending on where they appear in
the overall price action of the market.

For instance, a dragonfly doji that appears after a downtrend (as shown above) is bullish. It
would be similar to a hammer signal, but not nearly as strong. That same dragonfly doji, if it
appears after an uptrend, becomes a slightly bearish or indecisive signal. In this case, it would be
similar to a hanging man signal, but not as strong.

Similarly, when a gravestone doji appears after an uptrend (as shown above), it is bearish. It
would be like trading a shooting star signal, but not nearly as strong. However, if that same
gravestone doji appears after a downtrend, it becomes slightly bullish or indecisive. In this case,
it would be like trading an inverted hammer signal, only it’s not as strong.
Both of these candlestick formations often appear in sideways or choppy markets as well.
However, to be useful to our trading, we would only consider them after uptrends or downtrends.
Never trade any candlestick signals during periods of consolidation/accumulation (sideways,
choppy, low liquidity, etc…) in the market.

Trading the Dragonfly Doji and Gravestone Doji

In the image below, you can see a gravestone doji and a dragonfly doji that appeared in a
choppy, (mostly) sideways period. These two candlestick signals only show indecision. They are
not very useful to us because of the context in which they occur.

Near the center of the image, you will see a long-tailed doji (or long-tailed spinning top). I do not
consider this formation to be a dragonfly doji, because the upper wick is a bit too long.

The long-tailed doji is, however, a bullish signal for a couple of reasons: 1, the long lower wick
is bullish; and 2, the size of this candle is very large relative to any other candlestick in the
image. Since it showed a rejection of lower price and was much larger than the other
candlesticks in the area, I would consider this to be a pretty strong bullish indication – even
though it occurred from sideways price action.

Note: We’re not taking the long-tailed doji as an entry signal. Normally, we would never
consider its significance at all, because it occurred in a sideways market. Its size is the trumping
factor here.
Also keep in mind that if a large candlestick occurs during periods of low liquidity in the market
(such as the end of the New York session, or during the Asian session), the significance of the
candlestick is nullified, because it’s much easier for fewer traders to move the market during
such periods.

Lastly, on the right side of the image above, you can see a dragonfly doji that appears after a
small downtrend in price. This occurrence of the dragonfly doji is actually useful to us. In this
case, the dragonfly doji is a bullish signal. Combine that with the long-tailed doji from earlier on
the chart and you could make a pretty good case for the market trending upward in the near
future.

The image above is an example of how to take the gravestone doji as an entry trigger. As I
mentioned earlier, I don’t recommend doing this, unless the trade is supported by a profitable
trading method that works wells with candlestick trading; however, if you do want to trade these
dojis as entry triggers, this is the way that I recommend doing it.
Instead of jumping into the market right away, when the gravestone doji first appeared, you
would wait for a bearish confirming candle. To be a bearish confirming candle, it needs to close
below the previous candle.

It should also close near the bottom of its total range. To put it another way, if the confirming
candlestick in question has a long lower wick, that is not a bearish signal. I like the confirming
candle to close in the bottom 1/3rd of its range for bearish confirmation (as in our example), or in
the upper 1/3rd of its range for a bullish confirmation candle.

In the example above, you can see a gravestone doji, followed by a bearish confirmation candle.
In this case, the bearish confirmation candle occurred on the very next candlestick, which is good
for reward to risk ratios.

Your stop loss would have been placed 1 pip (plus the spread) above the high, which was our
gravestone doji. The entry could have been taken at the open of the next candlestick after the
bearish confirmation candlestick closed, if you wanted to be more aggressive and improve your
chances of a good risk to reward ratio; or you could have taken the trade once price broke 1 pip
below the low of the confirmation, as I’ve shown in the example above.

To trade the dragonfly doji as an entry trigger, you would go through the same steps, except you
would wait for a dragonfly doji to appear after a downtrend, and you would wait for a bullish
confirming candlestick. Also, the stop loss would be placed only 1 pip below the low of the
downtrend (no need to account for spread). That’s because the spread is paid on entry during buy
plays, and it’s paid on exit during sell trades.
In the image above, you will see a failed gravestone doji setup, as well as a dragonfly doji
showing indecision in the market (because it occurred after an uptrend). The dragonfly doji could
be considered slightly bearish if it had been followed by a bearish confirming candle, but you
would never use this as an entry trigger either way.

Going back to the failed gravestone doji setup, you can see that it does meet the minimum
requirements of a traditional gravestone doji. Although it does occur after an uptrend, it occurred
after the uptrend had retraced slightly. In this context, it’s more of a sign of indecision than a
bearish signal.

Also, no bearish confirmation candle occurred to support the gravestone doji as an entry signal.
There was a bearish candlestick (second candle after the gravestone doji). It did close below the
low of the previous candlestick, and it even engulfed the real bodies of the previous two
candlesticks; however, looking at its lower wick, you can see that it did not close within the
lower 1/3rd of its range.

This is a great example of an entry that you should skip. If you were already in a buy trade, this
signal would not have been a good indication to exit your trade early either. The same goes for
the dragonfly doji that appeared later in the trend, but just look at that beautiful bearish engulfing
pattern at the very top of the uptrend.
Final Thoughts
Japanese candlesticks are a great way to predict short-term trends and trend reversals;
however, without a confluence of supporting market factors, it can be hard to predict which
trends or reversals will continue with enough follow through to hit your take profits.

Combining price action trading with a trading system that works well with candlestick trading
signals, like the Infinite Prosperity system, is a great way to qualify these candlesticks trades. I
do not recommend pure price action trading.

Note: Check out my recent article about trading MACD divergence with price action signals, or
learn how to trade divergence between price and other indicators.

Never take any candlestick signals out of context. It is important that you understand where these
candlestick signals are useful and where they are not. The dragonfly doji is only really useful to
us when it appears after a downtrend, and the gravestone doji is only really useful to us when it
appears after an uptrend. Other occurrences of these two candlestick just signal indecision.

Trading the dragonfly doji and gravestone doji can be profitable, if you do it the right way. Most
price action traders overlook these candlestick formations, because they are weak reversal
signals. Under the right circumstances, though, they can be very useful as early exit signals or
even entry triggers. As always, be sure to and demo trade these candlestick signals until you’re
consistently profitable with them, and have fun trading!
 Double Top Strategy

There are many ways to trade the double top chart pattern. In this article, I’m going to show the
two traditional double top strategies that I have used in the past. These are the most well known
double top strategies.

Although these traditional patterns are relatively profitable, I’m going to show you why I don’t
trade them anymore. I’m also going to show you my favorite Forex double top strategy and why
you should start trading this pattern like I do.

What is a Double Top Chart Pattern?

A double top is a strong bearish reversal pattern. It occurs when an uptrend fails to make a higher
high and instead, makes an equal (or near equal) high.

The psychology behind the pattern is that the failure to make a higher high could be an early sign
that the momentum is leaving the uptrend. The equal high is an indication that the previous high
is being tested and confirmed as resistance. All this means that a reversal is likely to happen.
As you can see from the image above, two horizontal lines are drawn off the double top. The top
line is the resistance line. The second line marks the middle valley. From here on, I’ll refer to
this line as the breakout line.

To get your profit target for this pattern, you measure from the resistance line to the breakout
line. Then you take that measurement (in pips if you’re trading the Forex market) and duplicate it
downward as in the image above.

Note: There are varying opinions on where to set your horizontal lines, but I always set my lines
off the real bodies of the candlesticks – not the highs or lows. I’m my experience this works
better more often than not.

Trading the Double Top Chart Pattern

Now that we’ve got the basics of the double top chart pattern down, let’s go over the two most
common ways to trade it. Both of these techniques are profitable, as long as you don’t try to
force a double top entry where there isn’t one.

The first Forex double top strategy that we will go over is the standard double top strategy. Entry
for this strategy is taken when price breaks below the breakout line. Some traders opt to wait for
a candlestick to close below the breakout line and a pullback to the entry point before entering a
trade.
Note: As I mentioned in my article about the double bottom chart pattern, waiting for a
candlestick to close past the breakout line often leads to missed opportunities. In the example
below, price never pulled back to the entry point.

Your stop loss is placed above the highest high in the double top pattern. As can see from the
image above, the reward to risk ratio of the standard double top strategy is not great, which is
why I don’t use this strategy anymore. In this example, the reward to risk ratio is less than 1:1.

The next Forex double top strategy we will talk about is a little more aggressive. For this
strategy, you need to draw a trendline from the most obvious lows of the uptrend to the middle
valley of the double top (see the image below). Entry is typically taken after the first candlestick
that opens and closes below the trendline.

Note: This technique works better when there is an obvious trendline because it’s more
meaningful when an obvious trendline is broken. This technique also works better with steep
trends because the reward to risk ratio tends to be better.
Place your stop loss above the highest high in the double top pattern. As you can see from the
example above, you typically get a better reward to risk ratio using this aggressive strategy.

It’s often possible to get 2:1 reward to risk ratios or better. In the example above, the reward to
risk ratio was around 1.5:1. This is an improvement over the standard technique, but the next
technique I’m going to show you is a huge improvement on both of the standard techniques.

My Favorite Forex Double Top Strategy

This next Forex double top strategy is my favorite technique because it typically provides
excellent reward to risk ratios. In the example below, you could have earned nearly 5x your risk.
This technique typically provides a 4:1 or better reward to risk ratio.

To take the entry, you need to use another trading strategy that provides bearish entries near the
tops of cycles. I prefer to use a few specific price action signals, mainly the bearish engulfing
pattern and the shooting star (with confirmation and pullback). The Top Dog Trading system
also works well for this.
In the image above, you can see a nice bearish engulfing pattern that occurred right at the
resistance line. Entry would be taken on the open of the next candlestick. The stop loss would be
placed above the highest high in the double top (as shown in the image above).

Note: When using this technique, it’s important that the first top in the double top pattern is
followed by a nice bounce down. This helps to confirm that top as a resistance zone, which is
important when you’re taking a very aggressive entry like I do with this strategy.

The get your take profit, use the same technique as you would with the standard double top
strategies. By getting a great entry and using the traditional take profit method, you can get some
great reward to risk scenarios with this trading strategy, which means you only need to be right 1
out of every 4 trades or so to be profitable.

Final Thoughts
With the traditional aggressive strategy as well as my favorite Forex double top strategy, I prefer
to move my stop loss to break even before price returns to the breakout line because the breakout
line could be a potential support zone which causes price to reverse and take out your stop loss.

In the traditional aggressive example above, the entry was too close to the breakout line to use
this technique. It’s important to give the trade room to breathe. In the example of my favorite
strategy, however, there was plenty of room to move the stop loss to break even before price
reached the breakout line.
I like to use strong price action signals as entry triggers for this strategy. For instance, I like to
wait for an engulfing pattern in which the engulfing candle closes in the bottom 1/3rd of its
range. Shooting stars should be followed by a bearish confirmation candle (which also closes in
its bottom 1/3rd range) and then a pullback to the close of the shooting star.

3 Profitable Ways to Trade the Head and

Shoulders Chart Pattern

Trading the head and shoulders chart pattern can be very profitable if you know how to trade it
properly. In this addition to my free price action trading course, I’m going to show you a few
profitable ways to trade the head and shoulders chart pattern, including the technique that I prefer
to use.

The head and shoulders signal is the first long-term price action pattern that I have gone over in
this free course. There are several ways to trade this, some more aggressive than others, and it’s
good to know how different types of traders are likely to approach this chart pattern, regardless
of the technique that you choose to use.

Note: There are bound to be other ways to trade this chart pattern, but when it comes to
understanding how the majority of the retail market will trade this pattern, there are really only
two classic techniques that you need to know.
What is a Head and Shoulders Chart Pattern?
The head and shoulders chart pattern is a strong bearish price action pattern that occurs when the
market makes the first lower high during an uptrend. The name comes from it’s resemblance to a
head and shoulders, with the right shoulder being the first lower high of the uptrend.

The neckline is typically drawn off of the candle bodies of the lows after the left shoulder and
before the right shoulder. In the image above, the neckline is perfectly horizontal, which is not a
requirement.

When the neckline is angled upward, the head and shoulders chart pattern is considered, by
some, to be less bearish. When it’s angled downward, this pattern is considered, by some, to be
more bearish.

Note: I haven’t personally found the angle of the neckline to be a good indicator of the strength
of this pattern. Instead, whether or not the uptrend has been an extended one seems to be a better
indicator of strength in my experience.
Trading the Head and Shoulders Chart Pattern
Beginning with the standard way of trading the head and shoulders chart pattern, the entry is
taken when the neckline is broken. Some traders wait for a candlestick to fully close below the
neckline before entering the trade. Others jump in as the neckline is broken, making sure to get
into the trade before it takes off to the downside.

Your stop loss should be placed above the right shoulder of the pattern. To get your take profit,
you measure, centered between the lows that form the neckline, to the highest high in the head of
the pattern. Then take that same measurement, from the same starting point, and duplicate it to
the downside to determine your take profit (see the image above).

The next traditional entry, which I’m calling the “pullback entry,” is similar to the standard
entry. Often when price breaks the neckline of the head and shoulders chart pattern, it will pull
back to test the neckline as resistance. When this happens, it can provide a good, slightly more
conservative, entry point.

The entry trigger in the “pullback entry” could be a number of things. Traders
sometimes combine this particular chart pattern with the signals from another trading system. It
could also be a candlestick signal, or simply a candlestick that bounces off of the neckline (like
the entry below).
Note: A more conservative approach would be to wait for the candlestick to close below the
neckline after touching it.

Like the standard head and shoulders chart pattern, your stop loss in the “pullback entry” would
be placed above the right shoulder of the pattern. Your take profit would be determined the same
way as the standard setup as well. Measure from the center of the neckline to the top of the head.
Duplicate that measurement to the downside for your take profit.

Finally, I like to trade the head and shoulders chart pattern using a more aggressive approach. If I
haven’t already entered at the top of the trend by trading MACD divergence, I try to anticipate
the top of a right shoulder forming using either a shooting star candlestick pattern or a bearish
engulfing candlestick pattern.
In the image above, the entry trigger was a dark cloud cover candlestick pattern. I wouldn’t
normally use this moderate candlestick signal on its own, but I would take it in combination with
other bearish indicators, such as bearish hidden divergence.

After drawing the neckline, I would determine whether or not to take my aggressive entry. I
prefer to be able to, at least, move my stop loss to break even before the neckline is tested again.
If I can’t do that, I will not take the aggressive entry, because price could find support at the
neckline.

Note: The trade pictured above would have reached a full take profit before re-testing the
neckline. This is ideal, although they don’t all setup this way.

My stop loss, in the example above, is 5 pips above the high of the right shoulder. This gives me
room to cover the spread plus a little cushion for 15 Minute time frame noise. My take profit is
twice my risk. In the example above, you could have easily used the neckline as your take profit
level instead.

Final Thoughts
The head and shoulders chart pattern can be tricky to spot at times, especially in the Forex
market. However, it’s worth learning to trade properly, because many strong reversals are
preceded by this chart pattern.

Just like with candlestick signals, the context in which you trade this chart pattern is very
important. A true head and shoulders chart pattern only comes after an uptrend. The more
extended the uptrend, the more reliable this chart pattern is.

There are many ways to trade the head and shoulders signal. I prefer to use a more aggressive
approach. I like to enter early, and move my stop loss to break even before the neckline is even
given a chance to act as support. That way, if the pattern doesn’t work out, I still have a chance
to make money or break even.

I hope you can see why I like trading the head and shoulders chart pattern. With the right
technique and a little practice, the head and shoulders could become one of your favorite trading
setups too. Did you enjoy this article? Let me know in the comments below. Good luck and
happy trading!

Trading the Shooting Star Candlestick Pattern

(Pinbar)

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The shooting star candlestick pattern, also known as the pinbar (or bearish pinbar) by some, is
one of the most popular candlestick patterns among price action traders. It was the first
candlestick signal that I relied on, and one that I still use today, although I trade it much
differently than most other price action traders.

I originally wrote this article back in 2012, and the method that I use to trade the shooting star is
much different now. I wanted to update this article for a couple of reasons.

First, I wanted to explain the proprietary techniques that I’ve been using to trade this price action
signal for the past few years, while still including the basic, standard shooting star techniques for
those who aren’t interested in trading it the way I personally do.

Second, I plan to eventually update my entire free price action course. I started with my favorite
price action signal, the bearish engulfing pattern.

I specifically chose to update the shooting star pattern next, because the proprietary filters and
entry that I use are different than most other patterns that I trade.

However, once you know the techniques that I use to trade the bearish engulfing pattern and the
shooting star, you can apply these two different methods to all of the other patterns that I’ve
written about.

The examples used in this article are geared toward the Forex market, but trading the shooting
star is effective in other markets as well.

In this article, I’m going to show you how to correctly identify and trade the shooting star
candlestick pattern, with both my own proprietary techniques and the standard pinbar techniques.

Just in case you’re completely new to the shooting star candlestick signal, we’ll start with the
basics.

What is a Shooting Star Candlestick Pattern?

The shooting star consists of a long upper wick (shadow) that is, at least, twice the size of the
real body. It should have a relatively small lower wick or none at all.

Its real body can be bearish or bullish (see the image below) and is usually relatively small in
comparison to previous candlesticks.
The shooting star candlestick pattern, like all the other candlestick entry signals, must be traded
within the context of the market. In other words, a true shooting star candlestick signal can only
come after an uptrend in price (see the image above).

Note: Never trade a candlestick formation that looks like a shooting star from consolidating price
action or a tight ranging market.

A shooting star candlestick pattern is a strong reversal signal, and unlike most other price action
signals, this one does not need another candle for confirmation, according to the standard trading
technique.

However, the proprietary filters that I personally use to qualify a good shooting star are quite
different, so let’s go over those now.

What Makes a Good Shooting Star (Pinbar)

Pattern?
Some of the filters that I use to qualify a good shooting star make taking the entry completely
different than the standard method. In my experience, these filters have drastically improved my
strike rate with the shooting star candlestick pattern.
The tradeoff is that I get fewer qualified setups. I’m personally okay with that because it’s
always preferable to trade quality over quantity.

If you’re only interested in the standard shooting star trading method, you can skip these filters
(qualifiers) completely.

Confirmation Close
The first filter that I want to talk about is the confirmation close. This is probably the most
important filter that I use on the shooting star, and it’s also the filter that changes the way you
must take your entry with this pattern.

Basically, as a sign that the uptrend is actually ending, after the shooting star signal, you want to
see a bearish candlestick that closes below the real body of the previous candlestick.

The sooner this happens after the shooting star appears the better.

Note: This is important because a bearish reversal has not actually begun until new candlesticks
start to close below the real bodies of previous candlesticks.
This isn’t enough reason to take a trade on its own, but in combination with a strong bearish
reversal signal, all things being equal, the odds of a reversal are higher.

In my bearish engulfing guide, I mentioned that the confirmation close is necessarily met by the
formation of the bearish engulfing pattern itself. With the shooting star candlestick pattern, this
isn’t necessarily true (see the image above).

However, it’s possible for the shooting star candlestick to meet this criterion on its own if a
bearish real body shooting star occurs after a smaller bullish candlestick (above – left) or another
bearish candlestick (above – right).

Note: In the case that a bearish real body shooting star occurs after another bearish candlestick
(above – right), it’s important that the shooting star candlestick makes the overall high (as in the
example).

Some price action traders will trade shooting star candlesticks that don’t occur at the absolute top
of an uptrend, but in my experience, these signals aren’t strong enough to be consistently
profitable.

If you’re familiar with the standard shooting star trading method, then you can probably already
see why, in most cases, using this filter will change the way you typically trade the shooting star
candlestick pattern.
If you don’t understand it yet, don’t worry. I’ll go over the new entry techniques in detail later in
the article.

Close Relative to Range

Next, you should determine whether or not the confirmation candlestick closes in the lower 1/3rd
of its total range (see the image below).

Note: If the shooting star itself confirms with a lower close (as mentioned in the previous
section), it will also meet this requirement, because a bearish real body shooting star will always
close within the lower 1/3rd of its range.

This filter makes sense because a long lower wick represents a bullish rejection of price. The
odds of a bearish reversal happening at current prices are lower if lower prices have already been
rejected by the market.

Also, a candlestick that closes near the bottom of its range is generally considered to be more
bearish, so a confirmation candlestick that closes in the lower 1/3rd of its range is an indication
that a bearish reversal is more likely to happen.
Relative Size of Pattern
This next filter is probably not new to you if you’ve been trading price action for a while, but it’s
another pretty important one in my experience.

How large or small the signal candlestick (in this case the shooting star) is in comparison to the
previous candlesticks should also be considered (see the image below).

Larger candlesticks are more significant as far as what they can tell us about current market
sentiment. Therefore, a relatively large shooting star candlestick is a more significant bearish
signal than a relatively small one.

The farther back you have to go to find a candlestick of similar size the better.

In the image above, the large shooting star candlestick was larger the all the previous 7
candlesticks shown. However, the small shooting star was one of the smallest candlesticks in the
series.

Note: You don’t have to rule out shooting stars that aren’t relatively large. However, smaller
candlesticks are less significant. If you score your trade setups in your trading journal, you may
want to take a point away for the lower significance of smaller signals.
The idea behind this filter is to avoid taking significantly smaller price action signals. In my
experience, this is especially important when trading the shooting star candlestick pattern.

Trading the Shooting Star Candlestick Pattern

Now it’s time to actually place and manage your trade. As always, be sure to backtest and demo
trade any new techniques before adding them to your live trading repertoire.

Entry
Unlike the bearish engulfing pattern, the standard entries typically will not work if you apply my
proprietary filters to qualify your shooting star setups because the confirmation close filter
changes the way you must take your entries with this particular pattern.

Just in case you’re only interested in the standard shooting star candlestick trading method, we’ll
go over the standard entries too.

Standard Entries

The first standard entry technique for the shooting star candlestick pattern is to simply place a
sell order upon the open of the very next candlestick following the shooting star (see the image
below – left). Of the two standard entries, I prefer this one because it creates a slightly better
reward to risk scenario.

If you use the MetaTrader 4 platform, you can use this candlestick timer to help you time your
entries.
The second standard shooting star entry technique is to enter the trade when the low of the
shooting star is broken (see the image above – right). In the Forex market, you would enter the
trade 1 pip below the low of the shooting star.

Note: Previously, when using the Infinite Prosperity or Top Dog Trading systems, I would use
this second technique to enter trades. That’s because bearish entries are taken when the low of
the signal candlestick is broken in both systems.

However, in recent years, I’ve completely abandonded the standard entries used with the
shooting star candlestick pattern in favor of the confirmation entry discussed below.

Whenever possible, you should use a sell stop order to enter the market with the second standard
entry technique. By using a sell stop, you ensure that you get an accurate entry, and it also keeps
you from being glued to your screen, waiting for a candlestick to break the low.

The Confirmation Entry

I call this next entry for the shooting star candlestick pattern the “confirmation entry” because it
follows a confirmation candlestick. This is the entry method that I prefer and have been using for
the past few years.
As I mentioned earlier, if you’re using the confirmation close filter from above to qualify your
shooting star trades, you will not be able to use the standard entry methods because of the
confirmation candlestick.

That’s because taking the entry on the open of the candlestick following the confirmation
candlestick is likely to create a poor reward to risk scenario. The solution is to wait for a
pullback to the normal entry point (see the image below).

Note: If the shooting star itself also acts as the confirmation candlestick, there is no need to wait
for a pullback to enter the trade. You would simply enter at the open of next candlestick as in the
first standard entry mentioned above.

Of course, using this entry technique means that occasionally you will not get a pullback at all
and the market will simply take off without you. Again, I’m personally not bothered if that
happens as this method has worked out very well for me in the past (quality over quantity).

If you use a stop limit order, you don’t even need to wait at your computer for a pullback. This
also ensures that you get an accurate entry.

Note: Be sure that the pullback happens in about 5 candlesticks or so, starting from the
confirmation candlestick. You don’t want to wait forever.
If the pullback hasn’t happened in about 5 candlesticks, the odds of it happening at all become
lower. This rule applies to the “50% entry” discussed below as well.

The 50% Entry

Just like I mentioned in my article on the bearish engulfing pattern, I also take the entry at 50%
of the total range of the shooting star in certain situations (see the image below).

A very large shooting star candlestick can create a poor reward to risk scenario because some of
the bearish reversal that you are hoping to take advantage of has already been taken up by the
extra large upper wick of the signal, which lowers the odds of you hitting a full take profit.

It also means that you have to risk more (in pips or points) and therefore have to shoot for a
larger take profit (in pips or points), which further decreases the odds of hitting a full take profit.

The solution is to try to get a price improvement on your entry. Basically, if I believe that a
shooting star is so large that taking a regular confirmation entry will lead to a poor reward to risk
scenario, I wait for a pullback all the way to 50% of the total range of the shooting star – not just
to the normal entry point.
Note: Of course, this further decreases your chances of entering the trade (in comparison to the
normal confirmation entry), but the alternative would be to take a trade that typically leaves you
with an unrealistic chance of hitting a full take profit.

That being said, the market has a tendency to retest the price levels rejected during the formation
of a shooting star candlestick, so it’s actually pretty common to get a pullback to the 50% level.

You can use the 50% entry to give yourself improved reward to risk scenarios even if you choose
not to use the confirmation close filter. I traded the shooting star this way for years before
adopting the methods that I use today.

Whenever possible, you should use a stop limit order to take your 50% entries. Again, this will
ensure that you get an accurate entry and prevent you from being stuck at your computer, waiting
for a pullback.

Stop Loss
Next, we need to talk about where to place your stop loss when trading the shooting star
candlestick pattern, moving your stop loss to break even (optional), and when you should do that.

Your stop loss should always be placed at the nearest logical area where, if price reaches that
area, you know that you are wrong about the trade. In the case of the shooting star pattern, you
know you’re wrong if price makes a new high.

In the Forex market, you pay the spread on the exit of a sell trade, so it’s a good idea to leave a
little bit of room above the high of the shooting star to account for the spread. Otherwise, you
may end of being stopped out before price actually breaks the high.

A good rule of thumb is to place your stop loss 5 pips above the high of your signal (see the
image below). This leaves you enough room to account for the spread plus a few extra pips in
case the spread spikes slightly.

Note: I don’t actually measure to get 5 pips exactly on the Daily chart, which makes trading on
the Daily chart slightly easier. I just make sure that there is a visible gap between the high of the
shooting star and my stop loss.

If you can see a gap between the high and your stop loss, the measurement will typically be
about 5 – 10 pips, which is good enough.
Once price has moved in your favor a bit, you can move your stop loss to break even. This step is
optional, but I do it myself and recommend it – especially when trading reversal patterns.

I personally move my stop loss to break even (plus 2 – 3 pips to cover the spread) after price has
reached 60% of my take profit. Since I shoot for 2:1 reward to risk, this means I move my
stop loss to break even a little past the 1:1 mark.

The reason I do this at 60% instead of 50% is that the market often retraces a bit at the 50% (1:1)
mark (see the image above). This happens because some traders take profits at 1:1 and market
makers also know many traders move to break even at 1:1.

So whether it’s sellers taking profits or market makers stop hunting that causes the retracement,
moving to break even at 60% can often keep you in good trades that you would have otherwise
been stopped out of.

Note: This is just one of many interesting insights I picked up from Sterling at Day Trading
Forex Live that has improved my trading. I recommend checking him out if you’re looking for a
profitable trading system.
If you use the free MetaTrader 4 platform, you can use this break even EA to automatically move
your stop loss to break even. In case you haven’t noticed yet, I don’t like to be in front of my
computer more than I already have to be as a trader and website owner.

Take Profit
As with most of the price action patterns that I trade, I target a 2:1 reward to risk ratio when
trading the shooting star candlestick pattern. In other words, if I’m risking 50 pips, I place my
take profit 100 pips below my entry (see the image below).

Note: Depending on how you trade price action patterns, if you don’t use the qualifying filters
that I mentioned above, you might want to experiment with a 3:1 reward to risk ratio when
trading the shooting star.

If I were trading it without my filters today, I would consider a 3:1 reward to risk ratio when
entering on the open of the next candle (standard entry #1) or when using the 50% entry (without
a confirmation candle).

You can also use your reward to risk ratio as a filter. For instance, if you calculate that you
cannot hit your full 2:1 take profit before price moves down into an area that you believe could
possibly be a strong support zone, you may want to skip the trade or only take the trade if you
can get the 50% entry.
One of the nice things about the shooting star candlestick pattern is that it often provides great
entries (fewer pips at risk), which in turn makes it more likely that even a short-lived reversal
will hit your full take profit.

In my experience, I’ve found that I can target a full 2:1 take profit with a qualified shooting star
setup and the market will hit my full take profit consistently enough to be profitable over time.

Note: Some trading systems, like Infinite Prosperity or Top Dog Trading, don’t use fixed profit
targets. Both of those systems use different trailing stop techniques in order to capture large
trends or reversals when they happen.

Bonus: Combining Techniques

Those of you who have been reading my blog for a while probably already know that I don’t
recommend trading naked price action patterns. Instead, I prefer to combine them with another
trading system that is profitable on its own.

If you don’t already have a profitable trading system that works well with candlestick patterns,
the next best thing to do is to combine them with other market indicators.

Resistance Levels

Resistance, like price, is a leading indicator, so that’s a great place to start when trading bearish
candlestick patterns. However, most new traders (and many experienced traders for that matter),
tend to see support and resistance levels everywhere.

Just like price action signals, you need to qualify any support or resistance levels that you are
relying on in order to make trading decisions.

A good resistance level should have a strong price surge into the level, as well as a strong bounce
away from it. It should also be an obvious choice. In other words, there shouldn’t be any other
competing higher highs close by in recent history.
Support and resistance areas tend to act more like zones than exact levels. That being said, I
always draw my support and resistance levels off of the real bodies of the candlesticks – not the
highs or lows.

Note: For more on how to pick significant support and resistance levels like the pros do,
download my free eBook, How to Choose Better Support and Resistance Levels.

Once you’ve established a good resistance level, you can look for bearish candlesticks patterns,
like the shooting star, forming at or near the level. More realistically, if you spot a good shooting
star candlestick pattern, look to the left to see if it formed at or near a good resistance level.

When trading the shooting star signal with resistance levels, I like to see the wick, at least, touch
the resistance level (assuming the level is chosen and drawn correctly).

However, shooting star patterns that pierce a good resistance level and close below it are
typically stronger, because the pierce and return of a significant resistance level is often a sign
that the market makers are performing a stop run at that level.

Bearish Divergence
I’m a divergence trader. I’ve traded many forms of divergence in the past and often combine
divergence of difference indicators. However, I’m especially fond of trading MACD divergence.

Since the shooting star is a bearish reversal pattern, bearish MACD divergence can help you to
further qualify good setups.

Bearish MACD divergence occurs during an uptrend when price is making higher highs while
the MACD line or histogram (pictured below) is making lower highs.

The idea behind divergence trading is that the lower highs on the MACD or another
indicator could be an early sign that momentum is leaving the trend. If momentum is leaving the
trend, the odds of a reversal are increased.

If you combine that with a strong reversal signal, like the shooting star candlestick pattern, the
odds that a reversal will happen at the current price are even higher.

I would never trade divergence alone, and I don’t trade candlestick patterns alone (although I
know some traders that do it successfully), but combining these two methods can be very
powerful and profitable.
When combining bearish divergence and shooting star candlestick patterns, the bearish
divergence is actually the key signal. In such cases, the shooting star is used as the entry trigger
while divergence is the trade setup.

Note: In order to trade MACD divergence correctly, you need to be sure to use a true MACD
indicator. The default indicator in MetaTrader 4, as well as many other platforms, will not work.

You can also combine the shooting star signal with other divergence strategies such as hidden
divergence. If you’re extra conservative and patient, you can even wait for divergence to occur
on multiple indicators at once, which is a really strong reversal signal.

Final Thoughts
As with all price action signals, the context in which they occur is very important. Since it’s a
bearish reversal signal, a true shooting star candlestick pattern can only occur after an uptrend.
Trading it from a consolidating (flat or sideways) market or even a tight range will not work.

Price action patterns that occur on higher time frames are more meaningful. In my experience, I
have not had much luck trading them on time frames lower than the 15 Minute chart. That being
said, I trade them on the 15 Minute chart regularly and successfully.

I don’t like to trade price action signals on their own, although I know of traders that are
successful with that approach. A combination of price action techniques and a good trading
system can help you qualify trades and can be very profitable.

It’s important to backtest and demo trade any new trading techniques that you want to add to
your live trading toolbox. If you don’t thoroughly test new techniques, you won’t have the
confidence to stick with them when you experience losing streaks.

I hope you enjoyed this article on trading the shooting star candlestick pattern (or pinbar). If you
found it useful, please share it with other traders. Have any questions or comments? Please leave
them below. I’m happy to answer them

Trading the Shooting Star Candlestick Pattern

(Pinbar)
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The shooting star candlestick pattern, also known as the pinbar (or bearish pinbar) by some, is
one of the most popular candlestick patterns among price action traders. It was the first
candlestick signal that I relied on, and one that I still use today, although I trade it much
differently than most other price action traders.

I originally wrote this article back in 2012, and the method that I use to trade the shooting star is
much different now. I wanted to update this article for a couple of reasons.

First, I wanted to explain the proprietary techniques that I’ve been using to trade this price action
signal for the past few years, while still including the basic, standard shooting star techniques for
those who aren’t interested in trading it the way I personally do.

Second, I plan to eventually update my entire free price action course. I started with my favorite
price action signal, the bearish engulfing pattern.

I specifically chose to update the shooting star pattern next, because the proprietary filters and
entry that I use are different than most other patterns that I trade.
However, once you know the techniques that I use to trade the bearish engulfing pattern and the
shooting star, you can apply these two different methods to all of the other patterns that I’ve
written about.

The examples used in this article are geared toward the Forex market, but trading the shooting
star is effective in other markets as well.

In this article, I’m going to show you how to correctly identify and trade the shooting star
candlestick pattern, with both my own proprietary techniques and the standard pinbar techniques.

Just in case you’re completely new to the shooting star candlestick signal, we’ll start with the
basics.

What is a Shooting Star Candlestick Pattern?

The shooting star consists of a long upper wick (shadow) that is, at least, twice the size of the
real body. It should have a relatively small lower wick or none at all.

Its real body can be bearish or bullish (see the image below) and is usually relatively small in
comparison to previous candlesticks.
The shooting star candlestick pattern, like all the other candlestick entry signals, must be traded
within the context of the market. In other words, a true shooting star candlestick signal can only
come after an uptrend in price (see the image above).

Note: Never trade a candlestick formation that looks like a shooting star from consolidating price
action or a tight ranging market.

A shooting star candlestick pattern is a strong reversal signal, and unlike most other price action
signals, this one does not need another candle for confirmation, according to the standard trading
technique.

However, the proprietary filters that I personally use to qualify a good shooting star are quite
different, so let’s go over those now.

What Makes a Good Shooting Star (Pinbar)

Pattern?
Some of the filters that I use to qualify a good shooting star make taking the entry completely
different than the standard method. In my experience, these filters have drastically improved my
strike rate with the shooting star candlestick pattern.

The tradeoff is that I get fewer qualified setups. I’m personally okay with that because it’s
always preferable to trade quality over quantity.

If you’re only interested in the standard shooting star trading method, you can skip these filters
(qualifiers) completely.

Confirmation Close
The first filter that I want to talk about is the confirmation close. This is probably the most
important filter that I use on the shooting star, and it’s also the filter that changes the way you
must take your entry with this pattern.

Basically, as a sign that the uptrend is actually ending, after the shooting star signal, you want to
see a bearish candlestick that closes below the real body of the previous candlestick.

The sooner this happens after the shooting star appears the better.
Note: This is important because a bearish reversal has not actually begun until new candlesticks
start to close below the real bodies of previous candlesticks.

This isn’t enough reason to take a trade on its own, but in combination with a strong bearish
reversal signal, all things being equal, the odds of a reversal are higher.

In my bearish engulfing guide, I mentioned that the confirmation close is necessarily met by the
formation of the bearish engulfing pattern itself. With the shooting star candlestick pattern, this
isn’t necessarily true (see the image above).
However, it’s possible for the shooting star candlestick to meet this criterion on its own if a
bearish real body shooting star occurs after a smaller bullish candlestick (above – left) or another
bearish candlestick (above – right).

Note: In the case that a bearish real body shooting star occurs after another bearish candlestick
(above – right), it’s important that the shooting star candlestick makes the overall high (as in the
example).

Some price action traders will trade shooting star candlesticks that don’t occur at the absolute top
of an uptrend, but in my experience, these signals aren’t strong enough to be consistently
profitable.

If you’re familiar with the standard shooting star trading method, then you can probably already
see why, in most cases, using this filter will change the way you typically trade the shooting star
candlestick pattern.

If you don’t understand it yet, don’t worry. I’ll go over the new entry techniques in detail later in
the article.

Close Relative to Range

Next, you should determine whether or not the confirmation candlestick closes in the lower 1/3rd
of its total range (see the image below).

Note: If the shooting star itself confirms with a lower close (as mentioned in the previous
section), it will also meet this requirement, because a bearish real body shooting star will always
close within the lower 1/3rd of its range.

This filter makes sense because a long lower wick represents a bullish rejection of price. The
odds of a bearish reversal happening at current prices are lower if lower prices have already been
rejected by the market.

Also, a candlestick that closes near the bottom of its range is generally considered to be more
bearish, so a confirmation candlestick that closes in the lower 1/3rd of its range is an indication
that a bearish reversal is more likely to happen.

Relative Size of Pattern

This next filter is probably not new to you if you’ve been trading price action for a while, but it’s
another pretty important one in my experience.
How large or small the signal candlestick (in this case the shooting star) is in comparison to the
previous candlesticks should also be considered (see the image below).

Larger candlesticks are more significant as far as what they can tell us about current market
sentiment. Therefore, a relatively large shooting star candlestick is a more significant bearish
signal than a relatively small one.

The farther back you have to go to find a candlestick of similar size the better.

In the image above, the large shooting star candlestick was larger the all the previous 7
candlesticks shown. However, the small shooting star was one of the smallest candlesticks in the
series.

Note: You don’t have to rule out shooting stars that aren’t relatively large. However, smaller
candlesticks are less significant. If you score your trade setups in your trading journal, you may
want to take a point away for the lower significance of smaller signals.

The idea behind this filter is to avoid taking significantly smaller price action signals. In my
experience, this is especially important when trading the shooting star candlestick pattern.

Trading the Shooting Star Candlestick Pattern

Now it’s time to actually place and manage your trade. As always, be sure to backtest and demo
trade any new techniques before adding them to your live trading repertoire.

Entry
Unlike the bearish engulfing pattern, the standard entries typically will not work if you apply my
proprietary filters to qualify your shooting star setups because the confirmation close filter
changes the way you must take your entries with this particular pattern.

Just in case you’re only interested in the standard shooting star candlestick trading method, we’ll
go over the standard entries too.

Standard Entries

The first standard entry technique for the shooting star candlestick pattern is to simply place a
sell order upon the open of the very next candlestick following the shooting star (see the image
below – left). Of the two standard entries, I prefer this one because it creates a slightly better
reward to risk scenario.

If you use the MetaTrader 4 platform, you can use this candlestick timer to help you time your
entries.
The second standard shooting star entry technique is to enter the trade when the low of the
shooting star is broken (see the image above – right). In the Forex market, you would enter the
trade 1 pip below the low of the shooting star.

Note: Previously, when using the Infinite Prosperity or Top Dog Trading systems, I would use
this second technique to enter trades. That’s because bearish entries are taken when the low of
the signal candlestick is broken in both systems.

However, in recent years, I’ve completely abandonded the standard entries used with the
shooting star candlestick pattern in favor of the confirmation entry discussed below.

Whenever possible, you should use a sell stop order to enter the market with the second standard
entry technique. By using a sell stop, you ensure that you get an accurate entry, and it also keeps
you from being glued to your screen, waiting for a candlestick to break the low.

The Confirmation Entry

I call this next entry for the shooting star candlestick pattern the “confirmation entry” because it
follows a confirmation candlestick. This is the entry method that I prefer and have been using for
the past few years.
As I mentioned earlier, if you’re using the confirmation close filter from above to qualify your
shooting star trades, you will not be able to use the standard entry methods because of the
confirmation candlestick.

That’s because taking the entry on the open of the candlestick following the confirmation
candlestick is likely to create a poor reward to risk scenario. The solution is to wait for a
pullback to the normal entry point (see the image below).

Note: If the shooting star itself also acts as the confirmation candlestick, there is no need to wait
for a pullback to enter the trade. You would simply enter at the open of next candlestick as in the
first standard entry mentioned above.

Of course, using this entry technique means that occasionally you will not get a pullback at all
and the market will simply take off without you. Again, I’m personally not bothered if that
happens as this method has worked out very well for me in the past (quality over quantity).

If you use a stop limit order, you don’t even need to wait at your computer for a pullback. This
also ensures that you get an accurate entry.

Note: Be sure that the pullback happens in about 5 candlesticks or so, starting from the
confirmation candlestick. You don’t want to wait forever.
If the pullback hasn’t happened in about 5 candlesticks, the odds of it happening at all become
lower. This rule applies to the “50% entry” discussed below as well.

The 50% Entry

Just like I mentioned in my article on the bearish engulfing pattern, I also take the entry at 50%
of the total range of the shooting star in certain situations (see the image below).

A very large shooting star candlestick can create a poor reward to risk scenario because some of
the bearish reversal that you are hoping to take advantage of has already been taken up by the
extra large upper wick of the signal, which lowers the odds of you hitting a full take profit.

It also means that you have to risk more (in pips or points) and therefore have to shoot for a
larger take profit (in pips or points), which further decreases the odds of hitting a full take profit.

The solution is to try to get a price improvement on your entry. Basically, if I believe that a
shooting star is so large that taking a regular confirmation entry will lead to a poor reward to risk
scenario, I wait for a pullback all the way to 50% of the total range of the shooting star – not just
to the normal entry point.
Note: Of course, this further decreases your chances of entering the trade (in comparison to the
normal confirmation entry), but the alternative would be to take a trade that typically leaves you
with an unrealistic chance of hitting a full take profit.

That being said, the market has a tendency to retest the price levels rejected during the formation
of a shooting star candlestick, so it’s actually pretty common to get a pullback to the 50% level.

You can use the 50% entry to give yourself improved reward to risk scenarios even if you choose
not to use the confirmation close filter. I traded the shooting star this way for years before
adopting the methods that I use today.

Whenever possible, you should use a stop limit order to take your 50% entries. Again, this will
ensure that you get an accurate entry and prevent you from being stuck at your computer, waiting
for a pullback.

Stop Loss
Next, we need to talk about where to place your stop loss when trading the shooting star
candlestick pattern, moving your stop loss to break even (optional), and when you should do that.

Your stop loss should always be placed at the nearest logical area where, if price reaches that
area, you know that you are wrong about the trade. In the case of the shooting star pattern, you
know you’re wrong if price makes a new high.

In the Forex market, you pay the spread on the exit of a sell trade, so it’s a good idea to leave a
little bit of room above the high of the shooting star to account for the spread. Otherwise, you
may end of being stopped out before price actually breaks the high.

A good rule of thumb is to place your stop loss 5 pips above the high of your signal (see the
image below). This leaves you enough room to account for the spread plus a few extra pips in
case the spread spikes slightly.

Note: I don’t actually measure to get 5 pips exactly on the Daily chart, which makes trading on
the Daily chart slightly easier. I just make sure that there is a visible gap between the high of the
shooting star and my stop loss.

If you can see a gap between the high and your stop loss, the measurement will typically be
about 5 – 10 pips, which is good enough.
Once price has moved in your favor a bit, you can move your stop loss to break even. This step is
optional, but I do it myself and recommend it – especially when trading reversal patterns.

I personally move my stop loss to break even (plus 2 – 3 pips to cover the spread) after price has
reached 60% of my take profit. Since I shoot for 2:1 reward to risk, this means I move my
stop loss to break even a little past the 1:1 mark.

The reason I do this at 60% instead of 50% is that the market often retraces a bit at the 50% (1:1)
mark (see the image above). This happens because some traders take profits at 1:1 and market
makers also know many traders move to break even at 1:1.

So whether it’s sellers taking profits or market makers stop hunting that causes the retracement,
moving to break even at 60% can often keep you in good trades that you would have otherwise
been stopped out of.

Note: This is just one of many interesting insights I picked up from Sterling at Day Trading
Forex Live that has improved my trading. I recommend checking him out if you’re looking for a
profitable trading system.
If you use the free MetaTrader 4 platform, you can use this break even EA to automatically move
your stop loss to break even. In case you haven’t noticed yet, I don’t like to be in front of my
computer more than I already have to be as a trader and website owner.

Take Profit
As with most of the price action patterns that I trade, I target a 2:1 reward to risk ratio when
trading the shooting star candlestick pattern. In other words, if I’m risking 50 pips, I place my
take profit 100 pips below my entry (see the image below).

Note: Depending on how you trade price action patterns, if you don’t use the qualifying filters
that I mentioned above, you might want to experiment with a 3:1 reward to risk ratio when
trading the shooting star.

If I were trading it without my filters today, I would consider a 3:1 reward to risk ratio when
entering on the open of the next candle (standard entry #1) or when using the 50% entry (without
a confirmation candle).

You can also use your reward to risk ratio as a filter. For instance, if you calculate that you
cannot hit your full 2:1 take profit before price moves down into an area that you believe could
possibly be a strong support zone, you may want to skip the trade or only take the trade if you
can get the 50% entry.
One of the nice things about the shooting star candlestick pattern is that it often provides great
entries (fewer pips at risk), which in turn makes it more likely that even a short-lived reversal
will hit your full take profit.

In my experience, I’ve found that I can target a full 2:1 take profit with a qualified shooting star
setup and the market will hit my full take profit consistently enough to be profitable over time.

Note: Some trading systems, like Infinite Prosperity or Top Dog Trading, don’t use fixed profit
targets. Both of those systems use different trailing stop techniques in order to capture large
trends or reversals when they happen.

Bonus: Combining Techniques

Those of you who have been reading my blog for a while probably already know that I don’t
recommend trading naked price action patterns. Instead, I prefer to combine them with another
trading system that is profitable on its own.

If you don’t already have a profitable trading system that works well with candlestick patterns,
the next best thing to do is to combine them with other market indicators.

Resistance Levels

Resistance, like price, is a leading indicator, so that’s a great place to start when trading bearish
candlestick patterns. However, most new traders (and many experienced traders for that matter),
tend to see support and resistance levels everywhere.

Just like price action signals, you need to qualify any support or resistance levels that you are
relying on in order to make trading decisions.

A good resistance level should have a strong price surge into the level, as well as a strong bounce
away from it. It should also be an obvious choice. In other words, there shouldn’t be any other
competing higher highs close by in recent history.
Support and resistance areas tend to act more like zones than exact levels. That being said, I
always draw my support and resistance levels off of the real bodies of the candlesticks – not the
highs or lows.

Note: For more on how to pick significant support and resistance levels like the pros do,
download my free eBook, How to Choose Better Support and Resistance Levels.

Once you’ve established a good resistance level, you can look for bearish candlesticks patterns,
like the shooting star, forming at or near the level. More realistically, if you spot a good shooting
star candlestick pattern, look to the left to see if it formed at or near a good resistance level.

When trading the shooting star signal with resistance levels, I like to see the wick, at least, touch
the resistance level (assuming the level is chosen and drawn correctly).

However, shooting star patterns that pierce a good resistance level and close below it are
typically stronger, because the pierce and return of a significant resistance level is often a sign
that the market makers are performing a stop run at that level.

Bearish Divergence
I’m a divergence trader. I’ve traded many forms of divergence in the past and often combine
divergence of difference indicators. However, I’m especially fond of trading MACD divergence.

Since the shooting star is a bearish reversal pattern, bearish MACD divergence can help you to
further qualify good setups.

Bearish MACD divergence occurs during an uptrend when price is making higher highs while
the MACD line or histogram (pictured below) is making lower highs.

The idea behind divergence trading is that the lower highs on the MACD or another
indicator could be an early sign that momentum is leaving the trend. If momentum is leaving the
trend, the odds of a reversal are increased.

If you combine that with a strong reversal signal, like the shooting star candlestick pattern, the
odds that a reversal will happen at the current price are even higher.

I would never trade divergence alone, and I don’t trade candlestick patterns alone (although I
know some traders that do it successfully), but combining these two methods can be very
powerful and profitable.
When combining bearish divergence and shooting star candlestick patterns, the bearish
divergence is actually the key signal. In such cases, the shooting star is used as the entry trigger
while divergence is the trade setup.

Note: In order to trade MACD divergence correctly, you need to be sure to use a true MACD
indicator. The default indicator in MetaTrader 4, as well as many other platforms, will not work.

You can also combine the shooting star signal with other divergence strategies such as hidden
divergence. If you’re extra conservative and patient, you can even wait for divergence to occur
on multiple indicators at once, which is a really strong reversal signal.

Final Thoughts
As with all price action signals, the context in which they occur is very important. Since it’s a
bearish reversal signal, a true shooting star candlestick pattern can only occur after an uptrend.
Trading it from a consolidating (flat or sideways) market or even a tight range will not work.

Price action patterns that occur on higher time frames are more meaningful. In my experience, I
have not had much luck trading them on time frames lower than the 15 Minute chart. That being
said, I trade them on the 15 Minute chart regularly and successfully.

I don’t like to trade price action signals on their own, although I know of traders that are
successful with that approach. A combination of price action techniques and a good trading
system can help you qualify trades and can be very profitable.

It’s important to backtest and demo trade any new trading techniques that you want to add to
your live trading toolbox. If you don’t thoroughly test new techniques, you won’t have the
confidence to stick with them when you experience losing streaks.

I hope you enjoyed this article on trading the shooting star candlestick pattern (or pinbar). If you
found it useful, please share it with other traders. Have any questions or comments? Please leave
them below. I’m happy to answer them.

The Ultimate Bearish Engulfing Candlestick

Pattern Guide
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I’m updating this guide because the bearish engulfing candlestick pattern has become, by far, my
favorite price action signal over the years. I’ve learned a lot about trading it since I first
published this back in 2012, and I wanted to update it to reflect my most current information and
experience.

I first started trading price action patterns in 2011, and like a lot of price action traders, I
immediately gravitated toward the pinbars (hammer and shooting star). In recent years, I’ve
actually found the engulfing patterns to be much more useful for a few reasons.

First, contrary to popular belief, good engulfing patterns are stronger – second only to engulfing
evening star and morning star patterns. Keep in mind that I said, “good engulfing patterns are
stronger.”

I’ll go over what makes a good engulfing pattern later.

Second, good engulfing patterns occur much more often than good pinbars. This is more
important than you might think, especially if you combine price action with other techniques like
I do.
This only matters if the setups are good, but all things being equal, more is better.

Third, one of the proprietary techniques that I use to confirm a good price action pattern (which I
will discuss below) is met by the engulfing pattern itself. Whereas other strong candlestick
patterns don’t necessarily meet this rule on their own.

So why do I prefer the bearish engulfing candlestick pattern? This is a personal preference. I
typically have more success with sell trades, so I always prefer the bearish version of any price
action pattern.

Note: I know this because I keep a trading journal which allows me to analyze my trades at the
end of every month. If you’re serious about your trading, you should do this too.

In this guide, I’m going to show you how to correctly identify and trade the bearish engulfing
candlestick pattern. Some of the techniques that I will discuss below are well known. Others I’m
sure you will not have seen anywhere else.

Most of the examples are based on the Forex market, but these techniques work just as well in
other markets.

Just in case you’re completely new to this pattern, we’ll start with the basics.

What is a Bearish Engulfing Candlestick Pattern?

A standard bearish engulfing candlestick pattern is simply a candlestick that opens at or above
the close of the previous candle (almost guaranteed in Forex) and then closes below the open of
the same (previous) candle.

Notice we’re talking about the real bodies here (see the image below).
Note: Some traders consider a bearish engulfing pattern to be one in which the total range (high
to low) of the bearish candle also engulfs the total range of the previous, bullish candle. Others
don’t consider the real bodies at all.

I haven’t found this to be useful in my own trading. For the purpose of this guide, we will be
discussing the price action of the real bodies (open to close) of the candlesticks involved in
creating this pattern – not the total range of the candles.

If you’re trading this candlestick pattern in any other market than Forex, you will likely be
dealing with gaps from candle to candle. In such cases, the engulfing candlestick should gap up
and then close below as seen in the picture above (under Non-Forex Bearish Engulfing).

Note: Gaps occassionally occur in the Forex market as well. Sometimes a small gap up is
followed by a bearish engulfing candlestick.

As long as all of the other requirements are met, such patterns should be considered valid bearish
engulfing signals. In fact, these rare patterns can be particularly strong due to the added closing
gap technical pattern.

Also, depending on how much gapping occurs in the market (non-Forex) that you’re trading, it’s
possible to see a valid bearish engulfing pattern that consists of two bearish candlesticks – in
which the second bearish candlestick has gapped up and engulfed the first (see the image below).
Lastly, this pattern is considered to be a strong bearish reversal signal. As such, a true bearish
engulfing pattern will only come after a bullish movement in price (consecutive higher highs).
Never trade this pattern in a period of market consolidation (flat/sideways price action).

What Makes a Good Bearish Engulfing Pattern?

Over the years that I’ve been trading this pattern, I’ve picked up or developed a few filters that
help to qualify good bearish engulfing patterns. Like many of the techniques I’m discussing in
this guide, these filters can be applied to other price action patterns as well.

These filters have drastically increased my strike rate with these patterns, but the tradeoff is that
you will get fewer qualified trades (quality over quantity).

Confirmation Close
The first filter is the confirmation close. Earlier, I mentioned that one of my proprietary filters is
necessarily built-in to the bearish engulfing pattern. This is what I was referring to.
The confirmation close is simply one additional clue that the trend is likely to reverse. It occurs,
in the case of a bearish engulfing pattern, when the second candlestick in the pattern closes
below the real body of the first candlestick (see the image above).

Note: This works because the first lower real body in an uptrend is often a signal of an upcoming
retracement or reversal – regardless of whether or not a price action pattern is involved.

As you can see, the engulfing pattern has it’s own confirmation candle built right in. In the case
of the shooting star, I would still be waiting for a confirmation down because it did not close
below the real body of the previous candle.

Close Relative to Range

The next thing you should consider when trading the bearish engulfing candlestick pattern is
whether or not the engulfing candlestick closes within the bottom 1/3rd of its range (see the
image below).
The idea behind this filter is that a long lower wick (sometimes called a shadow) is a technical
indicator that can represent a bullish rejection of price.

The fact that price has already recently been lower but bounced back up, which could mean that
the market is rejecting prices below the close of the pattern, lowers the odds that bearish strength
will follow through driving prices down.

Also, in general, bearish candlesticks that close near the bottom of their range are considered to
be more bearish. The closer the close is to the bottom of the range the better.

Note: When using this filter with other candlestick patterns, remember that it should apply to the
signal candlestick (or the final candlestick in a multi-candlestick pattern) as well as the
confirmation candlestick.

Relative Size of Pattern

The size of the bearish engulfing pattern, relative to the size of the candlesticks that came before
it, is also significant. If you’ve been trading price action for a while, you’ve probably heard
about this filter before.
Basically, larger candlesticks are more significant, so price action patterns composed of larger
candlesticks are more significant.

Also, the further back you have to count to find other candlesticks of similar size, the more
significant the candlestick is. For instance, if your bearish engulfing pattern is larger than the last
twenty candlesticks that came before it, that pattern is more likely to be significant.

Note: You can still trade bearish engulfing patterns that are slightly smaller than previous
candlesticks. However, if you assign scores to your trades in your trading journal, you may want
to take a point away for the lower strength of the pattern.

You basically want to avoid taking price action patterns that are significantly smaller than
previous candlesticks. In such cases, the market is telling you that the pattern doesn’t matter.

The relative size filter applies to both candlesticks in the bearish engulfing pattern as well. In my
experience, when these patterns are formed by engulfing a single candlestick which has a small
real body, they are not significant enough to trade.

Trading the Bearish Engulfing Candlestick Pattern

Assuming your bearish engulfing candlestick pattern has passed all of the filters above, it’s time
to actually place and manage your trade. Of course, you’ll want to backtest and demo trade these
techniques before trying them in your live account.

Entry
The first thing I want to go over is where you should actually place your entry when trading the
bearish engulfing candlestick pattern. There are several techniques that you could use, but I only
recommend using the two standard entries and my 50% entry.

Most of the time, you will want to use one of the standard entries. The 50% entry is used only in
certain situations which I will explain in detail below.

Standard Entries

The first standard entry technique for the bearish engulfing candlestick pattern is to simply place
a sell order at the open of the next candlestick (see the image below – left). Of the two standard
entries, this is my preferred method to use because it creates a more favorable reward to risk
scenario.

If you use the MetaTrader 4 platform, you can use this handy candlestick timer to help you time
your entries with this first method.
The next standard entry method is to wait for a break of the low of the engulfing candlestick. In
the Forex market, your entry would be 1 pip below the low (see the image above – right).

Note: I use this second method when trading the Infinite Prosperity or Top Dog Trading systems
because bearish entries are taken when the low of the signal candle is broken in both of these
trading systems.

Whenever possible, you should use a sell stop order to enter the market while using the second
standard entry. This ensures that you will get an accurate entry, and it keeps you from being
forced to stare at your screen, waiting for a break of the low.

The 50% Entry

This next entry should only be used when the standard entries are likely to result in a poor
reward to risk scenario (which I will go over in more detail later on).

A tall upper wick or a tall engulfing candlestick means you would have a larger than usual risk
(in pips or points).
A larger risk means you are less likely to hit your profit target because some of the reversal that
you were hoping for has already been taken up by the tall wick or candle. It also means that your
reward must be larger (in pips or points), which further decreases the odds of hitting your target.

Basically, both cases create a poor reward to risk scenario.

The solution is to seek a price improvement. I do this with the bearish engulfing candlestick
pattern by waiting for the price to pull back to 50% of the total range of the engulfing candlestick
(see the image above).

If I do get a pullback, I end up with a much better entry, and the odds of hitting my full take
profit go way up.

Note: Occassionaly, when using this method, you will miss some trades because the price will
not always pull back to your entry.

I’m okay with that because I only want to take high quality trades that provide a real edge in the
market (quality over quantity).

Whenever possible, you should use a sell limit order to execute the 50% entry. Again, this will
help you get an accurate entry, and keep you from being forced to stare at your screen waiting
for a pullback.
Stop Loss
Next, we need to talk about where to place your stop loss while trading the bearish engulfing
candlestick pattern, moving your stop loss to a breakeven point (optional), and when you should
do that.

You always want to place your stop loss at the nearest area where you know you’re wrong about
the pattern if the price reaches it. In a bearish pattern, you know you’re wrong if price makes a
new high.

In the Forex market, you pay the spread when exiting a sell trade, so you should add the spread
to your stop loss. If you don’t, you could be stopped out of your trade before price actually
breaks the high.

A good rule of thumb is to place your stop loss 5 pips above the high of your pattern (see the
image below). This allows enough room for your average spread plus a few pips above the high
in case the spread spikes slightly.

Note: On the Daily chart, you should place your stop 5 – 10 pips above the high. Basically, if
you can see a gap between the high and your stop loss, that should be about 5 – 10 pips, which
makes trading on the Daily chart a bit easier.
After price has moved down in your favor a bit, you can move your stop loss to break even on
the trade, just in case it doesn’t follow through all the way to your take profit. This technique is
optional, although I personally use it and recommend it.

I personally move my stop losses to breakeven plus 2 – 3 pips (depending on the pair) to cover
the spread after price reaches 60% of my intended profit target.

In other words, if my profit target is 100 pips, I move my stop loss to breakeven plus 2 – 3 pips
after the trade has gone 60 pips in my favor.

Why 60% and not 50% (or 1:1 reward to risk)? Often price retraces back to the entry or further
once the 50% (or 1:1) target has been reached (see the image above).

Note: The market makers do this to increase their positions before continuing the move down
because they know many traders move their stops to breakeven at 1:1.

This is a technique that I picked up from Sterling at Day Trading Forex Live that has worked
very well for me.
If you use the MetaTrader 4 platform, you can use this break even EA to automatically move
your stop loss for you. That way you don’t have to sit in front of your computer screen waiting.

Take Profit
When trading price action patterns, I occasionally shoot for different profit targets, based on
what kind of pattern I’m trading and the reward to risk scenario it provides. For instance, I
usually target a 3:1 reward to risk ratio when trading the harami patterns.

However, when trading most other price action patterns, including the bearish engulfing
candlestick pattern, I target a 2:1 reward to risk ratio.

What this means is that, if I’m risking 50 pips, I place my take profit 100 pips away from my
entry (see the image above). Over the years, this has worked out very well for me, especially
with the bearish engulfing pattern.

Note: Some trading systems, like the Infinite Prosperity or Top Dog Trading systems, don’t use
set take profit levels. Instead, they use a trailing stop in one form or another in an effort to catch
as much of the trend or reversal as possible.
In my experience, I can target a 2:1 reward to risk ratio with the bearish engulfing pattern and
achieve a high enough strike rate (by combining it with a good trading system or the additional
techniques below) to achieve consistent profits over time.

Bonus: Combining Techniques

Those of you who have read any of the other posts in my free price action course, probably
already know that I don’t trade price action alone. I’ve experienced much better and more
consistent profits by combining price action patterns with other, complimentary trading
strategies.

If you can’t use these price action patterns as entry triggers in an already profitable trading
system, combining them with the techniques below is the next best thing.

Resistance Levels

You’ve probably heard before that combining price action with support and resistance can be
very profitable. This is true, as long as you are choosing good levels to trade from.

When trading the bearish engulfing candlestick pattern, the idea is to look to the left of the chart
for any previous structure that may act as resistance.

In order for a resistance level to be considered good, there should be a nice surge up into the
level, as well as a nice bounce down away from the level. There also shouldn’t be any other
competing higher highs in recent history.
It helps to remember that support and resistance act more like zones than exact price levels. That
being said, you should always draw support and resistance levels off of the real bodies of the
candles – not the wicks (see the image above).

Once you’ve established a good resistance level, keep an eye out for bearish price action signals,
like the bearish engulfing candlestick pattern, forming at or near the level.

I like to see at least a wick, from the candlesticks involved in the pattern, that touches the
resistance level. The best setups, however, occur when the bearish engulfing pattern pierces the
level and then returns because this is often a sign that the market makers are performing a stop
run to set up a reversal (see the image above).

Note: For an in-depth guide on how to choose the best support and resistance levels, download
my free eBook, How to Choose Better Support and Resistance Levels.

Bearish Divergence

I love trading divergence. The first trading system that worked for me used stochastic mini-
divergence for setups, and I still seek out divergence patterns today. I especially love trading
MACD divergence.
Bearish MACD divergence occurs during an uptrend when price is making higher highs while
the MACD line or histogram (pictured below) is making lower highs.

The idea is that the lower highs on the MACD line or histogram could be an early indicator that
momentum is leaving the uptrend, which increases the odds of a reversal. When combined with a
strong bearish reversal signal, like the bearish engulfing candlestick pattern, the odds of a
reversal are even better.

In divergence setups like this, divergence is actually the key signal. The bearish engulfing
candlestick pattern, or another bearish candlestick pattern, is only used to laser target your entry.

Note: In order to properly trade MACD divergence you must make sure you’re using the correct
MACD indicator. The default indicator in MetaTrader 4 and many other platforms will not work.

Divergence trading strategies other than MACD divergence will also work well with most price
action patterns. In fact, as an extra filter, many divergence traders like to wait for divergence to
occur on multiple indicators before entering a trade.
Final Thoughts
Context is everything. A true bearish engulfing candlestick pattern is a strong reversal signal,
which means it should never be traded from a consolidating market (choppy, sideways, or tight
ranging). It should only be trading after an uptrend.

There are a few situations that make this pattern stronger that I didn’t mention in the
guide because they should not make a difference in whether or not you take a trade. As long as
the pattern passes the filters above, especially if you’re combining it with other strategies, you
should be profitable.

The bearish engulfing candlestick pattern is generally considered to be stronger if one or more of
the candlesticks involved in the pattern have tall upper wicks (especially when this creates an
engulfed shooting star). Although the signal may be stronger, this usually creates a poor reward
to risk scenario. However, I showed you how to deal with that.

Occasionally, multiple candlesticks are engulfed in the pattern. In such cases, it’s considered to
be stronger (more candles engulfed = more strength).

Note: I mentioned earlier that bearish engulfing patterns formed by engulfing a single small real
body candlestick have not been strong enough to trade in my experience.

However, patterns in which multiple small real body candlesticks are engulfed are acceptable if
not stronger than usual.

The bearish engulfing pattern is considered to be stronger if the engulfing candlestick is very
large, especially if the candlestick that is engulfed is also large. Again this creates a poor reward
to risk scenario, but you know how to deal with that now.

Finally, when a bearish engulfing candlestick’s total range also engulfs the previous
candlestick’s total range, it’s considered to be stronger than when only the real body is engulfed.

This guide is a product of over 40 hours of work and 5 years of trading experience. Do you agree
that this is the ultimate bearish engulfing candlestick guide? Did you find it useful? Do you think
I left anything out? Please leave your questions or comments below.

How to Trade the Dark Cloud Cover

Candlestick Pattern
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What is a Dark Cloud Cover Candlestick Pattern?
The dark cloud cover pattern is a moderately strong, bearish reversal signal. Like all bearish
reversal signals, a true dark cloud cover pattern only occurs after an uptrend in price. Steve
Nison (the authority on candlesticks) says that a trend in price, as it relates to candlestick trading,
may consist of just a few significant candles in one direction.

This pattern consists of a relatively large bullish candlestick, followed by a bearish candlestick
that closes deep into the real body of the first, bearish candlestick. The second candle in this
pattern should close somewhere lower than the 50% mark of the first, bearish candle’s real body
(see the image below).

A non-Forex dark cloud cover signal is similar. The only difference being that the second,
bearish candlestick needs to open above the close of the first, bullish candlestick; so there should
be, at least, a small gap up before the second candlestick closes deep into the real body of the
first one (see the image above).

In Forex, a gap up to the second candle’s open is not necessary. The extreme liquidity of the
Forex market (especially in the major pairs) ensures that there are rarely gaps in price from one
candle to another.
Note: You may come across a dark cloud cover candlestick pattern that resembles its non-Forex
counterpart (second candle opens above the close of the first candle). Although this is a rare
occurrence, it is usually a very strong bearish signal.

Trading the Dark Cloud Cover Candlestick Pattern

In the image below, you can see a nice dark cloud cover pattern that signaled a major reversal.
This one would have worked out nicely, and you could have made more than five times
your risk.

You might also notice that this reversal was so strong that it blew right past the bullish engulfing
pattern that formed eight candlesticks later. Of course, upon seeing the engulfing pattern, that
would have been a great place to lighten up on your position, even though it was mostly ignored.
In the next example (below), you can see multiple dark cloud cover patterns. The first signal
could have earned you about twice your risk. You can see from this example, however, that
candlestick signals are often very short term indications of where price is headed.

The second signal, although it worked out, wasn’t looking quite as promising upon setup. The
upward price movement that preceded that signal is not significant enough for my comfort; there
were really only two bullish candlesticks making up that trend, including the first candlestick in
the dark cloud cover formation.

Also, the risk to reward ratio on that second signal wasn’t looking too great because of the large
candlesticks that made up the second pattern, along with the tall upper shadow of the first,
bullish candlestick in the pattern. Even though the reversal that followed was much more
significant than the first one, you still would have only made about twice your risk.

Note: Steve Nison recommends not taking trades where the distance to your first support area is
not, at least, twice that of your risk. In the example above, the second signal would not have
qualified, as the first support level is the preceding cycle low in price.
In the next example (below), you will see another dark cloud cover candlestick pattern. The
uptrend that preceded it wasn’t much of a move, but considering that all the candlesticks in that
trend were bullish, and they each made slow but steady progress upward, I would have
considered this move significant enough to count as our qualifying uptrend.

One thing that a discerning price action trader may have considered is that the candles making up
this dark cloud cover aren’t particularly large. They are, however, relatively large when
compared to the candles that make up the preceding uptrend.

The example above is a perfect demonstration of why you should always seek, at least, twice
your risk to the first support level (on bearish trades). As soon as price reached the previous
cycle low (our first support level), it reversed again without much notice from the candlesticks –
other than a couple of long lower shadows.

The traditional confirmation entry happens when price breaks the low of the second candlestick
in our dark cloud cover signal. The only other option is to enter at the open of the new candle.
Your stop loss should be placed above the highest high in the pattern (remember to add the
spread in Forex).
Final Thoughts
As with any bearish reversal signal, a true dark cloud cover candlestick pattern only occurs after
an uptrend in price. Trying to trade these candlestick signals from periods of price consolidation
in the market is never a good idea.

In non-Forex markets, remember that the second candlestick in this pattern needs to gap up
slightly before closing deep into the first candlestick (lower than the 50% mark of the first
candlestick’s real body). Due to the extreme liquidity in the Forex market, a gap up is not likely,
although if it occurs, it is a very strong bearish signal.

One of the beauties of candlestick trading is that it can be added to just about any trading system
that you are currently using for more trading opportunities. Using a reliable, profitable trading
system can help you qualify the best candlestick signals to take.

Trading the dark cloud cover candlestick pattern can be very lucrative, if you know what you’re
doing. Never risk your hard earned money trading these signals live until you’ve become an
expert at trading them with your demo account (or paper trading). With a little practice, you’ll
get a feel for this pattern, and you’ll be trading it like a pro in no time.

How to Trade the Bearish Harami Candlestick

this addition to my price action course, I’m going to teach you how to correctly identify and
trade the bearish harami pattern.

In one of my previous articles, Trading the Bullish Harami Candlestick Pattern, I showed you
how to trade the bullish harami. The bearish harami is a similarly traded pattern, signaling
market psychology that is likely to move price in the opposite direction. In this article, I’ll try to
cover some new ground on trading these two great candlestick patterns.

The bearish harami is a moderately strong bearish signal. This pattern, like the bullish harami, is
not in the same strength category with such patterns as the hammer, morning star, engulfing
pattern, etc.

My preferred method is to trade candlestick signals in addition to my favorite trading system.

Keeping in mind that the harami signals are only moderately strong, I think it is especially
important to consider other technical indicators that may or may not support trading any
particular harami pattern.

Note: I do not recommend pure price action trading with these signals, although some traders are
very successful with this approach.
What is a Bearish Harami Candlestick Pattern?
The traditional bearish harami candlestick pattern starts with a relatively large bullish candle,
followed by a relatively small candlestick that can be bearish or bullish, with a real body that can
open and close anywhere within the range of the previous bullish candle’s real body (see the
image below).

The only stipulation to a traditional harami pattern is that the second candlestick must not be
more than 25% of the preceding candlestick (see the image above). Again, whether or not the
second candlestick is bearish or bullish, or where the second candlestick opens and closes (in
relation to the preceding candlestick), is of little significance in most markets.

This pattern may look slightly different in the Forex market. In the Forex market, the second
candlestick will, almost always, open near the close of the first candlestick.
The second candlestick must also always be a bearish candlestick (see the image on the right).
Obviously, another bullish candlestick would prevent the crucial inside bar of this pattern from
developing.

Finally, I must mention that a true bearish harami candlestick pattern can only develop after an
uptrend in price. The context in which you trade these, or any, price action signals is crucially
important.

Note: Never trade the harami patterns, or any price action signal, from an area of price
consolidation (flat or sideways markets).

Trading the Bearish Harami Candlestick Pattern

In the image below, you can see a bearish harami candlestick pattern followed by a short dip in
price. I chose this particular instance of the pattern for 2 reasons:

1. This pattern shows that, although price action signals (when used correctly) have a high
probability of indicating the immediate direction of the next price movement, there is never any
guarantee on how long this movement with last. You must be prepared to take profits early in
some cases. This is true for all price action patterns.

2. Although the bearish price movement was short-lived, in this case, you could have still made a
nice profit on this trade due to the high risk to reward ratios that the harami patterns typically
offer. This is because your entry point would have been 1 pip below the bottom wick of the
smaller, second candle of the pattern.
Even though the dip in price in the example above was short-lived, you still could have made, at
least, twice what you would have risked on that trade. Imagine the kind of risk to reward
scenarios you could achieve when the bearish harami pattern is followed by a full reversal with
some conviction. It’s not uncommon to achieve 5 times your risk when these trades work out
nicely.

The downside to this candlestick pattern is that it is only a moderately strong reversal signal. As I
mentioned earlier, it is not to be treated in the same respect as a strong reversal signal, such as
a hammer, morning star, engulfing pattern, etc. In fact, some traders, including Steve Nison,
trade this pattern as they would trade a doji.

Don’t give up on the harami patterns just yet, though. The favorable risk to reward scenarios can
make up for many losses. Even small corrections in price (like in the example above) can make
up for 2 or more losses. Of course combining these harami signals, or any price action pattern,
with a good trading system will help to qualify the best trades to take. At the very least, you can
use these signals as an indicator of when to take profits on trades that you are already in.

Example: You are in a bullish trade, riding the price action steeply upward (as in the example
above). Next, you see the bearish harami develop. As this is a bearish indicator, you would use
this signal as a place to either close or partially close your trade.
I included the example above because the context in which you take any price action signal is the
first and most important thing to consider. Earlier, I mentioned that a true bearish harami
candlestick pattern only occurs after an uptrend in price. The example above shows an uptrend
with a small retracement in price that occurs before our candlestick signal.

This small retracement may have led a less experienced trader to disqualify the harami pattern
that occurred afterward. However, this is still an example of an uptrend until after our pattern. I
wouldn’t consider any downward movement during an uptrend to be more than a retracement
unless it consists of 3 or 4 strong bearish candlesticks (or perhaps 2 very large candlesticks) or a
series of lower highs and lower lows (which occurred after our pattern).
The bearish harami candlestick pattern pictured above is an example of this particular
candlestick signal that would have worked out very well. You could have made twice what you
were risking on this trade before the first candlestick closed. Obviously, the trend continued
downward from there.

The trigger to jump into a properly qualified bearish harami is when price breaks (1 pip) below
the low of the smaller, second candlestick in the pattern (see the image above). You would place
your stop loss (1 pip) above the highest high in the series of candlesticks that formed your
harami pattern (see the image above).

Note: If another candlestick pattern or other relevant resistance level is slightly above your
candlestick pattern, always place your stop loss (1 pip) above the higher resistance level. In the
example above, the first candlestick in the pattern made the highest high, and there were no other
relevant resistance levels nearby, so this rule did not come into play.

Another thing to note is the size of the first candlestick of the pattern in relation to the other
nearby candlesticks. In the example above, the first candlestick is much larger than the previous
12 candlesticks pictured. Psychologically, this gives more relevance to the pattern. It signifies
that, even after a confident rally by the bulls, the overall market is not quit sure that upward price
movement is the right direction at this time.
Final Thoughts
All candlestick patterns are great short term signals, but there is never a guarantee that the new
direction of price will follow through with any conviction. Sometimes candlestick patterns signal
small retracements in price. The harami patterns excel in these situations, because of the
favorable risk to reward scenarios that they typically present.

Remember that a true bearish harami only occurs after an uptrend in price. The stronger the
uptrend, the more relevant the signal in most cases. Never trade any candlestick patterns during
periods of price consolidations (sideways markets).

Choosing only the best entries and using wise money management skills will go a long way to
preserve your capital and ensure your continued success while trading these candlestick signals.
As always, be sure to demo trade these signals until you are consistently profitable before risking
your hard earned money.

Steve Nison recommends combining Japanese candlestick trading with western technical
indicators to qualify the best trades. I personally use Nison’s candlestick techniques in
combination with another profitable trading system, which has worked out well for me.

The bearish harami candlestick pattern is often overlooked by price action traders, because it’s
only a moderately strong signal. However, the favorable risk to reward scenarios that harami
signals present should encourage you to pursue and master them. Have fun learning and happy
trading!

Trading the Dragonfly Doji and Gravestone

Doji
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So you’ve heard of the doji, but what about the dragonfly and gravestone dojis? In this addition
to my free price action course, my goal is to help you correctly identify and start trading the
dragonfly doji and gravestone doji.

These patterns are considered to be weak reversal signals (varying degrees of strength) or
indecision signals. I don’t recommend pure candlestick trading with these signals, but they can
be useful in addition to a profitable trading system that works well with candlestick signals.
The dragonfly and gravestone dojis can also be used as entry triggers on their own, although this
is not typically done. However, if that is what you would like to do, there is a higher-probability
method for trading these signals on their own, which I will teach you in this article.

What is a Dragonfly Doji or Gravestone Doji?

In the image below, you will see a dragonfly doji and a gravestone doji. Starting with the
dragonfly doji, it consists of a relatively long lower wick, no real body, and no upper wick. In the
Forex market, a real body or upper wick that are only a few fractions of a pip is acceptable.

The gravestone doji is the opposite of the dragonfly doji. It has a relatively long upper wick, no
real body, and no lower wick. Similar to the dragonfly doji, a gravestone doji can have a very
small real body or lower wick.

Unlike many of the other candlestick signals that we have learned about, the dragonfly and
gravestone dojis can have varying degrees of significance, depending on where they appear in
the overall price action of the market.

For instance, a dragonfly doji that appears after a downtrend (as shown above) is bullish. It
would be similar to a hammer signal, but not nearly as strong. That same dragonfly doji, if it
appears after an uptrend, becomes a slightly bearish or indecisive signal. In this case, it would be
similar to a hanging man signal, but not as strong.

Similarly, when a gravestone doji appears after an uptrend (as shown above), it is bearish. It
would be like trading a shooting star signal, but not nearly as strong. However, if that same
gravestone doji appears after a downtrend, it becomes slightly bullish or indecisive. In this case,
it would be like trading an inverted hammer signal, only it’s not as strong.

Both of these candlestick formations often appear in sideways or choppy markets as well.
However, to be useful to our trading, we would only consider them after uptrends or downtrends.
Never trade any candlestick signals during periods of consolidation/accumulation (sideways,
choppy, low liquidity, etc…) in the market.

Trading the Dragonfly Doji and Gravestone Doji

In the image below, you can see a gravestone doji and a dragonfly doji that appeared in a
choppy, (mostly) sideways period. These two candlestick signals only show indecision. They are
not very useful to us because of the context in which they occur.

Near the center of the image, you will see a long-tailed doji (or long-tailed spinning top). I do not
consider this formation to be a dragonfly doji, because the upper wick is a bit too long.

The long-tailed doji is, however, a bullish signal for a couple of reasons: 1, the long lower wick
is bullish; and 2, the size of this candle is very large relative to any other candlestick in the
image. Since it showed a rejection of lower price and was much larger than the other
candlesticks in the area, I would consider this to be a pretty strong bullish indication – even
though it occurred from sideways price action.
Note: We’re not taking the long-tailed doji as an entry signal. Normally, we would never
consider its significance at all, because it occurred in a sideways market. Its size is the trumping
factor here.
Also keep in mind that if a large candlestick occurs during periods of low liquidity in the market
(such as the end of the New York session, or during the Asian session), the significance of the
candlestick is nullified, because it’s much easier for fewer traders to move the market during
such periods.

Lastly, on the right side of the image above, you can see a dragonfly doji that appears after a
small downtrend in price. This occurrence of the dragonfly doji is actually useful to us. In this
case, the dragonfly doji is a bullish signal. Combine that with the long-tailed doji from earlier on
the chart and you could make a pretty good case for the market trending upward in the near
future.

The image above is an example of how to take the gravestone doji as an entry trigger. As I
mentioned earlier, I don’t recommend doing this, unless the trade is supported by a profitable
trading method that works wells with candlestick trading; however, if you do want to trade these
dojis as entry triggers, this is the way that I recommend doing it.

Instead of jumping into the market right away, when the gravestone doji first appeared, you
would wait for a bearish confirming candle. To be a bearish confirming candle, it needs to close
below the previous candle.

It should also close near the bottom of its total range. To put it another way, if the confirming
candlestick in question has a long lower wick, that is not a bearish signal. I like the confirming
candle to close in the bottom 1/3rd of its range for bearish confirmation (as in our example), or in
the upper 1/3rd of its range for a bullish confirmation candle.
In the example above, you can see a gravestone doji, followed by a bearish confirmation candle.
In this case, the bearish confirmation candle occurred on the very next candlestick, which is good
for reward to risk ratios.

Your stop loss would have been placed 1 pip (plus the spread) above the high, which was our
gravestone doji. The entry could have been taken at the open of the next candlestick after the
bearish confirmation candlestick closed, if you wanted to be more aggressive and improve your
chances of a good risk to reward ratio; or you could have taken the trade once price broke 1 pip
below the low of the confirmation, as I’ve shown in the example above.

To trade the dragonfly doji as an entry trigger, you would go through the same steps, except you
would wait for a dragonfly doji to appear after a downtrend, and you would wait for a bullish
confirming candlestick. Also, the stop loss would be placed only 1 pip below the low of the
downtrend (no need to account for spread). That’s because the spread is paid on entry during buy
plays, and it’s paid on exit during sell trades.

In the image above, you will see a failed gravestone doji setup, as well as a dragonfly doji
showing indecision in the market (because it occurred after an uptrend). The dragonfly doji could
be considered slightly bearish if it had been followed by a bearish confirming candle, but you
would never use this as an entry trigger either way.

Going back to the failed gravestone doji setup, you can see that it does meet the minimum
requirements of a traditional gravestone doji. Although it does occur after an uptrend, it occurred
after the uptrend had retraced slightly. In this context, it’s more of a sign of indecision than a
bearish signal.
Also, no bearish confirmation candle occurred to support the gravestone doji as an entry signal.
There was a bearish candlestick (second candle after the gravestone doji). It did close below the
low of the previous candlestick, and it even engulfed the real bodies of the previous two
candlesticks; however, looking at its lower wick, you can see that it did not close within the
lower 1/3rd of its range.

This is a great example of an entry that you should skip. If you were already in a buy trade, this
signal would not have been a good indication to exit your trade early either. The same goes for
the dragonfly doji that appeared later in the trend, but just look at that beautiful bearish engulfing
pattern at the very top of the uptrend.

Final Thoughts
Japanese candlesticks are a great way to predict short-term trends and trend reversals;
however, without a confluence of supporting market factors, it can be hard to predict which
trends or reversals will continue with enough follow through to hit your take profits.

Combining price action trading with a trading system that works well with candlestick trading
signals, like the Infinite Prosperity system, is a great way to qualify these candlesticks trades. I
do not recommend pure price action trading.

Note: Check out my recent article about trading MACD divergence with price action signals, or
learn how to trade divergence between price and other indicators.

Never take any candlestick signals out of context. It is important that you understand where these
candlestick signals are useful and where they are not. The dragonfly doji is only really useful to
us when it appears after a downtrend, and the gravestone doji is only really useful to us when it
appears after an uptrend. Other occurrences of these two candlestick just signal indecision.

Trading the dragonfly doji and gravestone doji can be profitable, if you do it the right way. Most
price action traders overlook these candlestick formations, because they are weak reversal
signals. Under the right circumstances, though, they can be very useful as early exit signals or
even entry triggers. As always, be sure to and demo trade these candlestick signals until you’re
consistently profitable with them, and have fun trading!