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Part V. Double Deuce – dual candlestick patterns

Dual candlestick patterns - Forex School

Commander in Pips:
 Let’s continue with patterns, so today we will study candlestick patterns that come from two candles. We will talk only about the major patterns. The minor patterns are not so important, so you can study them by yourself in Steve Nison’s books “Japanese candlesticks” and “Beyond Candlesticks”.

Pipruit: Yes, I think that we can shift to them, besides, single-candle models were not as complicated as I thought initially.​

Commander in Pips: The first model is “Dark Cloud Cover”.

Dark Clout Cover - Forex School

Here is what it looks like:

Look of darl cloud cover - Forex School
Dark Cloud Cover consists of two candles. The first one should represent good strong up candle with small shadows (even without them) – this should be just a strong up candle with obvious price increasing price action. Due to market upside momentum, the next trading period (black candle) opens above the highs of the white candle. But then, bearish pressure totally overcomes the bullish move and negates all the Bull’s work to push prices higher. The perfect Dark Cloud Cover assumes that the closing price of the black candle should be below the middle of the white candle. The open price of the black candle should be above the highs of white candle, as on the picture.

This is a bearish reversal pattern and usually it appears after some upside move, on tops or under resistance levels. It gives us early notification that market has reached some resistance and could bounce to the downside or even reverse for the long-term.

Although we’ve described the perfect pattern, some easier conditions could be applied, especially at liquid markets (such as Forex). So, this is normal, if the black candle shows open price just above the closing price of the white candle rather than above the high. Also, the close of black candle could be not so deep, as on the picture, But the deeper the close of the black candle penetrates the white one, all the better. If the close of the black candle does not even reach the middle of the white candle, then this pattern is treated as not sufficient (this is one of minor patterns) and demands additional confirmation from future price action – for example, solid continuation of a down move after the pattern has been formed.

Pipruit: Excellent pattern, Commander. But what does word “Equals” mean here in the diagram?​

Commander in Pips: You can easily understand the market mechanics of this pattern by combining two candles into just one. To create so called consolidated candle. It will looks like a Shooting star pattern. Just imagine that this price action has happened not during two trading periods but during just one. In this case the consolidated candle will have an opening price of the first white candle, low price of a lowest of both candles, similar for the higg – highest price of both candles, and close from the second candle. This is precisely what I drew here. And it looks like a Shooting Star. Also this pattern has all the same properties, I mean how to trade it, at what circumstances it should be treated as failing – just reread the previous lesson.

Pipruit: You mean that this pattern is triggered, when the market shows close below the low of this pattern, and treated as failing if market will close above the high of the pattern?​

Commander in Pips: Yes, that’s it. But not only these movements – anything, how to view the appearance of any patterns, do not trade them blindly etc. In other words – all that we’ve said in previous lessons about patterns should be applied to all the following parts and patterns.

Piercing Pattern

The bullish analog of Dark Clouds is the Piercing Pattern. Piercing Pattern appears after solid move down and could mark a bottom or appear at support level. Appearing of this pattern could give us early warning about possible upward retracement or even a bullish turnaround. Here is what it looks like:

Piercing pattern - Forex School
Now, tell me what the consolidated candle of Piercing pattern will be?

Pipruit: Let’s see… First, as the open price of consolidated candle we have to use the opening price of the first black candle. The close price of the consolidated candle will be the close price of the white candle. Oh! It seems that consolidated candle has small black body. Then the consolidated high price will be the highest price of two candles so as a low – the lowest one the whole pattern… right. Well, Commander, I may be wrong but the consolidated candle should be a Hammer pattern with black body. Like here:​

Hammer pattern with black body - Forex School
Commander in Pips: Well done, my boy! I suppose now you can easily describe the market mechanics of this pattern, because it will be quite the same as Hammer one.

Pipruit: Sure, besides, creating the consolidated candle strongly simplified my understanding.​

Commander in Pips: Now tell me, basic features of this pattern, as we’ve done for Dark Cloud.

Pipruit: The Piercing Pattern consists of two candles. The first one should represent a good strong down candle with small shadows (or even without them) – this should be just a strong down candle with obvious price decreasing price action. Due to market downside momentum, the next trading period (white candle) opens below the lows of black candle. But then, bullish pressure totally overpowers the seller’s move and negates all the bears’ work to push prices lower. The perfect Piercing Pattern assumes that the closing price of the white candle should be above the middle of the black candle. The opening price of the white candle should be below the lows of the black candle, as on the picture.

This is bullish reversal pattern and usually it appears after some downside move, on bottoms or above support levels. It gives us early notification that the market has reached some support and could bounce to the upside or even reverse for the long-term.

Although we’ve described the perfect pattern, some easier conditions could be applied, especially in liquid markets (so as Forex). So, this is normal, if the white candle shows an opening price just below the close price of the black candle rather than below the low. Also, the closing of the white candle could be not so deep, as on the picture, but the deeper the close of the white candle penetrates the black one, all the better. If the close of the white candle does not even reach the middle of the black candle, then this pattern is treated as not sufficient (this is one of minor patterns) and demands additional confirmation from future price action – for example, solid continuation of an up move after pattern has been formed.​

Commander in Pips: Ok, so as you start to understand opposite (mirror) patterns correctly, based on the initial pattern, later we will talk in details about just one of them, and much less about it’s mirror, if you don’t mind of course...

Pipruit: Not at all.​

Engulfing Patterns

Commander in Pips: Ok, the next one is engulfing patterns. Let’s take a close look, say, on Bullish engulfing. The mirror pattern is Bearish engulfing. So, they are quite similar as Piercing and Dark Cloud Cover correspondingly. In fact, they are quite the same, but even stronger, because Engulfing patterns suggest that the body of second candle not just close after the middle of the first one, but totally engulfs it. Look at this:

Engulfing Patterns - Forex School
This pattern visually shows total conquest of the bears by bullish price action. While during a Piercing pattern the bulls have the power to return the bears into the body of the previous black candle, here we see that bears have been pushed out even outside of previous black candle. The sense of Engulfing pattern the same as Piercing, the difference is only that Engulfing pattern is more powerful.

Criteria of Bullish Engulfing pattern


- The less the first candle and the greater the second one – the more powerful the Engulfing pattern;

- Perfect Engulfing pattern assumes that the body of second candle should totally overcover the first one, including the shadows of the first candle. This condition also assumes that market should create lower low and higher high with second candle;

- At the same time, it’s allowably that the body of second candle engulfs only the body (without shadows) of the first candle. But still, the trading range (High-Low) of the second candle should be greater, or at least no less than the first candle. This is the kind of pattern you can see most of times;

- If the bodies of both candles are almost equal, then Engulfing pattern is weaker and could lead to sideways price action and not to reversal.

- If the market will close above the high of a Bearish engulfing or below the low of a Bullish engulfing then this pattern is treated as failed one;

- Pattern is treated as a triggered one, when the market will show close below the low of a Bearish engulfing and above the high of a Bullish engulfing.

- If Engulfing pattern appears after a Doji, this makes it even stronger.

Here is how Bearish engulfing looks:

Bearish engulfing - Forex School
This pattern equals to black Shooting Star in terms of consolidated candle.

Commander in Pips: The next sweaty couple is our Last Engulfing Top/Bottom pattern.

#1 Examples of Piercing Pattern, Bullish Engulfing after Doji and “Not Sufficient” Dark Clouds Cover with following confirmation:
Last Engulfing Top/Bottom

These patterns look absolutely the same as Engulfing ones, but appears at opposite places. For instance, Last Engulfing Top looks like Bearish Engulfing, but appears on tops, after some up move on market. Last Engulfing Bottom, in turn, looks like Bullish Engulfing, but appears on bottoms.

Just as with Hammer and Inverted Hammer, that could both appear on bottoms, so as with Bearish Engulfing and Last Engulfing Bottom patterns.

The consolidated candle of Last Engulfing Top equals to a Hanging Man, while Last Engulfing Bottom – to an Inverted Hammer. So, the market mechanics are the same as with the mentioned single-candlestick patterns.

Here is the chart, just to clarify this:

#2 Examples of Bearish Engulfing and Last Engulfing Top – looks identically, but appears in different place.

Bearish Engulfing and Last Engulfing Top - Forex School
Pipruit: Oh, it’s much simpler to understand with the chart, thank you. Commander, I have the feeling that all these patterns are just variations of our four single candlestick patterns. Because, if we will build the consolidated candle of any of them, we will get Hammer, Inverted Hammer, Shooting Star or Hanging Man…​

Commander in Pips: In general, you’re absolutely right. But nevertheless, we have to study all the major patterns, because you have to know how they could look like and how to treat them in practice. If we didn’t talk about it, I think you will not be able to recognize them and what to expect, say, from Dark Cloud Cover.

Pipruit: Definitely, Sir.​

Commander in Pips: So, let’s pass to next variation of two candlestick pattern – Harami.

HARAMI

The Harami pattern in opposite to Engulfing has the big first candle and small second candle. Like on the picture:

Harami pattern - Forex School
The small candle also can be a Doji – in this case pattern calls “Harami cross”

Appearing of a Harami tells us that the previous tendency of the market becomes weaker. Partially, this pattern recalls “Indecision” condition, so that the market can either continue the previous tendency or reverse, at least temporary. Harami can appear as on tops as on bottoms.

Recognition and properties of Harami:

- If both candles of the Harami are white (so called White-white Harami), then the Harami has a stronger bullish character and its appearance on a bottom increases the probability of reversal. A white-black Harami is more bullish than a black-white or a black-black. The same is true for black-black Harami on top – it’s more bearish than black-white, and even more bearish than white-black and white-white;

- Theoretically Harami should have the second candle in the middle of the first one. But also it could happen that the small candle closer to upper (So called “high-price Harami”) or lower (“low price Harami”) border of the first long candle. It makes a lot of sense. If, for example, if a high-price Harami appears on bottom – this is a more bullish sign, than a normal or low-price Harami. It will be even more bullish, if this will be white-white High price Harami. The same is true for black-black low-price Harami on tops;

- If the total range (from low till high) of the second candle stands inside of the body of the first one, the Harami is more reliable and has more probability to reverse the previous tendency;

- The smaller the shadows and body of the second candle – the more reliable Harami pattern;

- The Harami Cross pattern has greater probability to stop a previous tendency (at least temporary), than ordinary Harami;

- There is no such term as “failed Harami”, because Harami is not a purely reversal pattern. If market will close above the high of Harami and previous price action was up, then we should expect continuation of up move; the same is true for market close below the low of Harami after previous down move.

Here is an example of Harami cross, by the way:

Harami cross - Forex School
Commander in Pips: Ok, and the last pattern for today – Tweezer Tops and Bottoms.

Tweezer Tops/Bottoms

Although we’ve talked about the Tweezers already – they were a single-candle pattern and treated as market “indecision”. But now we will take a look at reversal pattern that consists of two (or more) Tweezers of different colors and shadows. In fact, the major condition of tweezers is to have the same highs or lows by candles that are forming the Tweezers. But it does not matter – by what the highs and lows have been formed – body or shadow. For example, if we have bottom Harami pattern and both of candles have the same low, while the first candle has no lower shadow and second candle has a long lower shadow – this still treated as a Tweezer bottom. Or, if market has formed Hammer and Inverted Hammer side by side and both candles have the same low – they are also Tweezer Bottoms. This pattern can include not only two, but three or more candles. The major condition is – the same highs or lows of these candles. Here is how it looks:

Tweezer Tops/Bottoms - Forex School

As I’ve said this is a reversal pattern, and usually could be seen after solid uptrend (Tweezer Tops) or downtrend (Tweezer Bottoms), although it’s not so strong, as, say Engulfing models.

Recognition and properties of Tweezers Tops/Bottoms:

- It’s better if the first candle should be the same as previous tendency – white, if there was an uptrend and black, if downtrend. But this is not absolutely necessary.

- Perfectly if the second candle is opposite to previous trend and, hence to previous one – but again not necessary;

- Perfectly, if size, shadows and tops/bottoms should be very close to each other. If they are equal – much better. In fact these candles should be like twins with only difference is color.

- Still any two candles can form Tweezer tops/bottoms. They just have to have the same high/low.

Pure Tweezer Tops/Bottoms, like on the picture, relatively rare pattern, so you will not meet it very often. But candles with the same highs/lows are often could be met.

Pipruit: Oh, finally, the last pattern…​

Commander in Pips: On the next lesson we will talk about triple candle patterns…

Pipruit: Oh, no – please just shoot me, Commander.​

Commander in Pips: Take it easy, son. Yes, they are many, but they are amazing and not so complicated, besides, we are close to the finish of candlestick patterns – just bit of patience, ok?

Pipruit: I’ll try.​

Comments

Josh
7 years ago,
Registered user
Old School is not always best

I was looking at these candle patterns and the definitions that you are using to identify them and they seem very old school. This is confirmed when you look at the age of the data in the charts.

The definitions seem to be based on the idea of individual trading sessions, thereby giving the market regular opportunity to have opens that open above the last high (for a true DCC / engulfing pattern). Because NY market data back in 95, 90 and 79 might not of had the data of Tokyo and London trading or vice versa.

However, is there a possibility of newer definitions with the now perpetual 24 hour market data, because the opens in the current day market rarely have the opportunity to gap to form the above powerful patterns?

Thanks
Sive Morten
7 years ago,
Registered user
> I was looking at these candle patterns and the definitions that you are using to identify them and they seem very old school. This is confirmed when you look at the age of the data in the charts.

T..

Hi Josh,
that is true only for intraday and daily charts. On monthly and weekly there still could be gaps. Even on daily, when new week starts.
Still, the description will not change drastically, if we eliminate gaps off. For, instance you oftener will see engulfing, then clouds, harami will have second candle near the top/bottom and not in the middle etc.
Hamza Samiullah
2 years ago,
Registered user
Nice work

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