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The Study Of Stock Market Through Technical Analysis

Lesson -> The Multiple Candlestick Pattern(Final)-section 3

  1. Background Of Technical Analysis
  2. The Technical Analysis Intro
  3. The Different Types of Charts
  4. The Candlesticks - Basics
  5. The Single candlestick Pattern - Section 1
  6. The Single Candlestick Pattern - Section 2
  7. The Single Candlestick Pattern - section 3
  8. The Multiple Candlestick Patterns(Beginning)-Section 1
  9. The Multiple Candlestick Pattern(Harami) -Section 2
  10. The Multiple Candlestick Pattern(Final)-section 3
  11. A guide to Support And Resistance (S&R)
  12. The concept of VOLUME
  13. The Concept of Moving Averages
  14. Indicators -Basic understanding
  15. Indicators - A Broad Understanding
  16. An Introduction to Fibonacci Retracements
  17. The Dow Theory- A Basic Understanding
  18. The Dow Theory through Trading Range
  19. The conclusion - To start the trade journey
  20. A Supportive note
  21. The Trading view's Amazing Features
  22. Let's conclude with the Central Pivot Range

We will only be looking at the morning star and evening star candlestick patterns.

Before we can understand the morning star pattern we must first understand two common price behavior - gap up opening and gap down closing. Gaps, which can be used to refer to both gaps up or down, are a common price behavior. Daily chart gaps occur when the stock closes at a certain price and opens the next day at a different one.

10.1 -What are The Gaps?

Gap -An open gap indicates buyer Excitement. Buyers will buy stocks at a higher price than the closing day. The stock (or index) will open at a higher price than the previous day because of the optimistic buyer's outlook. Consider, for example, that the closing price at ABC Ltd on Monday was Rs.100. Assume ABC Ltd will announce their quarterly results after the market closes Monday. The numbers are so impressive that buyers will buy stock at any price Tuesday morning. The stock price would rise to Rs.104 immediately due to this enthusiasm. The stock price jumped to Rs.104 despite there being no trading activity between Rs.100 & Rs.104. This is known as a gap-up opening. This is bullish sentiment.
Gap down openingA gap down opening is similar to a gap up opening. It shows the bears' enthusiasm. Because bears want to sell, they will sell at a lower price than the closing price of the previous day. If the quarterly results are poor, sellers will want to sell the stock. Therefore, Tuesday's market could open at Rs.95 rather than Rs.100. The stock plunged to Rs.95 even though there wasn't any trading activity between Rs.100 & Rs.95 in this instance. A gap down opening is a sign of bearish sentiment.
 

10.2 - The Morning Star- Intro & Formation 

The first thing is the Morning star underlies within the bullish candlestick pattern and It is a downtrend reverse pattern. This pattern is created by combing 3 consecutive candlesticks. The bottom of a downtrend's downward trend is where the morning star appears.
 

Three candlesticks are used to create the morning star pattern. They are arranged in a specific order. The chart below shows the pattern. Here's how the morning star was created:

  1. The market is currently in a downtrend, which puts the bears in complete control. During this time, the market has made new lows.
  2. As expected, on day 1 (P1) the market forms a long red candle. This large red candle indicates selling acceleration.
  3. Day 2 (P2): The bears are dominant with a gap opening. This confirms the position and dominance of the bears.
  4. A doji or spinning top happens during the day(P2)after the opening of the gap down. Indecision in the market is the result of doji/spinning presence, noted.
  5. A doji/spinning causes a little restlessness in bears as they might have expected another day of downs, especially with the promise of a gap down opening.
  6. The blue candle that closes above the opening of P1's red candle follows the stock/market open with a gap on the third day.
  7. It would have looked as if P1 and 3 formed a bullish engulfing arrangement, even without P2's spinning top/doji.
  8. All the action takes place in P3. The bears might have been a little nervous about the gap opening. The gap up opening encourages buying that persists throughout the day. It even manages to recover all of its losses from P1.
  9. It is expected that P3 will continue to be bullish over the next few trading session. Therefore, it is worth looking at buying opportunities in this market.

Both the risk-averse and risk-taker traders can open trades on P3, unlike the single or two candlestick patterns. Trading based on a morning Star pattern may not require waiting for confirmation on the fourth th day.

This is the long trade setup for a morningstar:

  1. After ensuring that P1,P2, and P3 are all together, initiate a long trade.
  2. These conditions must be met in order to validate the formation a morning star using P3.
    1. P1 should have a red candle
    2. P2 should have a gap opening and be either a doji (or a spinning top).
    3. The gap between P3 and P1 should be large.
  3. Stop loss would be the lowest low in the pattern

10.3 - The evening star-Intro & Formation

The evening star is one of the last candlestick patterns we will learn in this module.

The evening star, which is the bearish equivalent to the morning star, is also known as the evening star. The evening star is at the top of an uptrend. The evening star, like the morning star and the three-leaf formation of the morning star, evolves over three trading sessions.
 

These are the reasons you should not go for an evening star:

  1. Bulls are in complete control of the market's uptrend.
  2. Stocks and the market can make new highs during an uptrend
  3. As expected, on the first day (P1) the market opens high and makes a new high before closing at the day's highest point. The buying acceleration shown by the long blue candle that formed on day one (P1) is evident.
  4. The market opens on the 2 nd day (P2) with a gap that confirms the bullish stance. The market/stock doesn't move after the positive open and forms a doji/spinning high. Bulls feel a little panicked after the closing of P2.
  5. The market closes the gap and turns into a red candle on the 3 rd pattern day (P3). The sellers have taken control of the market by forming a long red candle. The bulls panic when P3 prices drop.
  6. It is expected that bulls will continue panicking, which will lead to bearishness over the next few trading sessions. You should therefore look for shorting opportunities

This is the trade setup for an evening star:

  1. After validating that P1 and P3 are evening stars, shorten the stock on P3, at 3:20 pm
  2. The following are required to validate the formation of the evening stars on day 3.
    1. P1 should have a blue candle
    2. P2 should look like a doji, a spinning top, with a gap-up opening
    3. The current market price of P3 should be a red candle, with a gap opening. The market price for P3 at 3:20 PM should be lower that the opening price for P1.
  3. Trades on P3 can be initiated by both risk-averse and risk-taker.
  4. The highest possible stop loss will be P1, P2, or P3.

10.4 -Candlestick Pattern - Entry & Exit 

Let's briefly summarize the entry/stop loss rules for short and long trades before we close this chapter. We have not yet covered the trade exit (aka targets) in the candlesticks study. In the next chapter, we will.

Risk-taker – The trader who takes a risk is the one who enters on the last day in the pattern formation at the closing price. If the pattern rules are valid, then the trade qualifies.

Ridiculous - A risk-averse trader will open the trade once he has received confirmation the next day. The candle's color should be either blue or red for long trades.

It is a good rule of thumb to start a trade the same day as the pattern has been in existence for a greater number of days.

A long trade has a stoploss that is equal to the pattern's lowest low. A short trade has the highest stoploss.

10.5 -Anything Left?

We've looked at 16 candlestick designs.

Non, really. There are many candlestick patterns. I could explain them all, but that would be defeating the ultimate goal.

Understanding and recognizing that candlesticks can be used to think about markets is the ultimate goal. It is not necessary to be able to recognize all patterns.

Consider car driving. Once you are able to drive a car, you don't need another car. Driving a Honda is the same thing as driving a Hyundai, Ford or other car. No matter what car you drive, driving is easy. It doesn't matter what car you drive. Your mind will learn to interpret the thought process behind a candlestick. Based on what chart you see, you will be able to identify how to react and place trades. You will need to learn and trade the standard patterns to get to this stage.

My advice is to learn the patterns we have discussed. These are the most profitable and frequent patterns that you can trade on the Indian market. You can start to develop trades that are based on the thinking behind the bears' and bulls' actions. This is the best way to learn candlesticks.

Keypoints

  1. Three trading sessions are required for star formation. P2's candle is often a doji, or a spinning top.
  2. A doji on P2 that is in a star-shaped pattern is called a "doji star" (morning or evening doji stars), but it can also be called the star-shaped pattern (morning star, night star).
  3. Morning star is a bullish trend pattern that occurs at the bottom of the trend. It is possible to trade long on P3, with the lowest low pattern as the stop loss.
  4. The evening star is a bearish signal that occurs at the top of an uptrend. It is possible to shorten P3, with the highest patterns acting as a stop-loss.
  5. Over a period of 3 days, the star formation develops. Both risk-averse and risk-taker should initiate trades on P3.
  6. The traders' thought process is represented by candlesticks. This thought process should be nurtured as one delves deeper into candlestick study.