Candlestick patterns are part of the Master Trader method of investing and trading technical approach to the markets.

Candlesticks patterns are used by the majority of technical traders for their “visual advantage” over bar charts.

While we could use bar charts for making our trading decisions, candlesticks offer us a clear visual representation of the price action that is either trending or reversing in the blink of an eye.

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The majorities using candlesticks spend too much time remembering names of the various candlestick patterns.

Unnecessary, because we are only interested in the message of an individual candle or combination of candles creating a “picture" that signals continuation or reversal.

That candle pattern is one technical concept, which alone can be misleading. 

For example, a Bottoming Tail (BT) that is a reversal signal that forms after an initial breakdown will not be very reliable as a significant reversal signal.

Whereas, a BT that forms after prices have been trending down toward an area of Major Support (MS) will be much more reliable as a signal of a reversal.

Besides, BT that forms at MS within the context of an uptrend will add to the reliability of that reversal signal.

What I’m explaining to you will be realized as being common sense once you’ve studied a few charts with these concepts. Let’s take a look at one.

When a candle or a group of candles form, our main attention points are, where it formed -- the location, and whether the trend is up down or sideways.

The name of that candle or group of candles is irrelevant to us.

At Master Trader, we use the concept that we call Bar by Bar analysis.

By reading each candle in combination with the candles that preceded it in the trend, the message will always be clear.

Generally, what would be considered a bearish candle will have significantly less weight as being bearish when prices are in an uptrend. The same for bullish candles forming in a downtrend, they will have significantly less weight as bullish.

In the chart above, the first candle is a red one with a small tail on the top. Notice that prices had just moved up from where the moving averages (20-SMA blue, 50-SMA green, and 200-SMA red) were converging.

Also notice that the 20 and the 50 were below the 200, so prices had to of been correcting and then sideways. Then they rallied above those moving averages.

In other words, the move was beginning. That suggests to us to discount that red candle, which should have no follow-through -- if buyers are truly in control.

That’s a fact, but we cannot be sure that it will be.

Once we see that it has been and it was, we know that the analysis is coming together as it has in the past.

On the second red arrow, we see that a red candle followed the green candlestick that started with a gap lower.

This reversal is a bit far from the 20-MA, so prices have room to pull back a bit.

But this is not a reason to exit a long position, and it is not a pattern that we would short since prices are in an uptrend.

While we can’t know for sure how far prices might pull back, in an uptrend where demand is high prices should not pull back that far.

Again, the confirmation of what “should be” a shallow pullback occurred, and we have another confirmation that the analysis is working.

The third red arrow, here we have a small Topping Tail (TT) that was close to the prior TT that was red. The trend is still up, but the retest is a minor concern.

The pattern did not suggest the depth of the pullback that occurred from that pattern. Why did it happen?

It could have happened caused there was price resistance to the left, which we cannot see in this chart or even a market correction at the time.

The first green arrow is pointing to a bullish reversal candle that had initially move down to the prior candle that gapped lower (green line below it) and then reversed sharply higher — a combination of bullish candlesticks.

This bullish candlestick price action was occurring at the widely followed 200-SMA after an extended move lower in a sign of a possible bottom starting to form.

The next red arrow points to a red TT bar. That candlestick suggests that sellers took control and that prices are likely to go lower. But lower to where?

Those prior bottoming candles should provide a significant point of price support where buyers that stepped up before should want to step up again.

And they did -- slowly, which was followed by a gap higher and strong close near the high of the day and the next green arrow points to that candle.

Confirmation that the analysis is working as it should base on the prior pattern.

Can you see how it does not matter what the name of the candles is?

I’m hoping so at this point and that you’re starting to get the feel of the Bar by Bar analysis.

While I can’t cover every candle within the pattern with you, continue the Bar by Bar analysis on your own, and it will guide you -- remember trend and location.

The red arrow in the middle of the chart is pointing to a red reversal candlestick that engulfs the prior green candle that had gapped higher.

While prices are in an uptrend, the immediate reversal of the green candle will be a “shock bar” to buyers.

This stock will create some uncertainty and potentially bring in some sellers.

This shock will create some uncertainty and potentially bring in some sellers.

Master Trader Tip; chart patterns are pictures of beliefs and expectations that created with money. Forget the names; the picture tells the story Bar by Bar.

The retracement from that red reversal candle was shallow, and prices continued higher, so we know demand is still strong, and buyers are in control.

Don’t sell-short markets or stocks in strong up trends because they are short-term extended. What has become extended -- often becomes more extended.

Our second to last green arrow has prices pulling back to where the prior advance started – a deep retracement.

Deep retracements like this are a concern because when demand is high prices don’t pull back to where they started the advance. Common-sense.

The retracement of that deep will bring in sellers because of the deep pullback.

We don’t know how many sellers, and we don’t have to. We are not going to short the retest of that high with the limited information that we have here.

From that high, prices moved below that turning point marked by the prior green arrow. That move down has violated the uptrend.

Our last green arrow points to a Bottoming Tail (BT) that tells us on that particular day that while prices traded below the prior two candles lows, buyers took control and rallied prices back to the high of that day. That is a bullish candle.

This BT is forming after the violation of the uptrend; however, prices are not in a downtrend yet. A BT that forms after the violation of a trend is going to get less “respect” than a BT within an uptrend. Common sense, right?

Now we are at the “hard right edge” of the chart. Meaning, we cannot know with ultimate certainty what’s going to happen next.

We have a candle that suggests that prices can move up against the breakdown that just occurred. That bullish candle forming after a break down is not a high probability swing-trading pattern to buy.

However, that does not mean that prices cannot retrace a relatively small amount against the breakdown. The question becomes, do we want to trade on the long side against the pattern that has broken its uptrend?

Of course, that’s up to each individual.

If you’re nimble, it is possible to profit from what theoretically should be a small move higher before the selling begins again.

Such setups are best for day-traders that want to trade these patterns from intraday charts during the trading day with shorter-time frames in an uptrend.

The goal of every Master Trader lesson is to help you remove the indicator-based mythology, and simplify the analysis objectively so you can profit.

When you remove the indicators, trendlines, Fibonacci lines, extensions, channels, and the more esoteric types of analysis, clarity will come.

And with experience, patience, and discipline -- profits will follow you as a Master Trader.

Invest in a Master Trader education today.

The Swing Trading course will pay you many times over the years ahead.

Greg Capra
Managing Director of Master Trader

Dan Gibby
Chief Options Strategist