Chapter 4: Advanced Candlestick Patterns & Combinations

Forex University – Intermediate Technical Analysis Mastery Chapter 4: Advanced Candlestick Patterns & Combinations

Module 1: Technical Analysis Foundations

Chapter 4: Advanced Candlestick Patterns & Combinations

Introduction

Welcome to Chapter 4 of our technical analysisA method of forecasting future price movements based on the study of historical price data, charts, and indicators. journey! In this chapter, we will dive deeper into the world of candlestick patterns, exploring advanced formations and combinations that can significantly enhance your trading precision.

While you may already be familiar with basic candlestick patterns from the previous chapter, advanced patterns and combinations offer even more powerful insights into market psychology and potential price movements. These formations often provide earlier signals, more reliable confirmations, and better risk-reward opportunities than basic patterns alone.

By the end of this chapter, you will understand multi-candlestick patterns, advanced reversal formations, candlestick combinations with technical structures, volume-enhanced candlestick analysis, failure patterns, and contextual interpretation techniques. This knowledge will allow you to read price action with greater accuracy and confidence.

Multi-Candlestick Patterns

Multi-candlestick patterns involve three or more candlesticks that form recognizable formations. These patterns often provide stronger signals than single or dual candlestick patterns because they develop over a longer period, reflecting a more significant shift in market sentiment.

Three White Soldiers and Three Black Crows

These powerful reversal patterns consist of three consecutive candlesticks moving strongly in the same direction.

Three White Soldiers:

Appears at the bottom of a downtrend
Three consecutive bullish (white/green) candlesticks
Each candlestick opens within the previous candle’s body
Each candlestick closes higher than the previous candle
Each candlestick has small or no upper shadows
Indicates strong buying pressure and potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). reversal

Three Black Crows:

Appears at the top of an uptrend
Three consecutive bearish (black/red) candlesticks
Each candlestick opens within the previous candle’s body
Each candlestick closes lower than the previous candle
Each candlestick has small or no lower shadows
Indicates strong selling pressure and potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). reversal

Trading considerations:

The pattern is stronger when all three candles are of similar size
Look for confirmation in the form of increased volume
More reliable when appearing after an extended trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
Place stops beyond the start of the pattern

Morning Star and Evening Star Formations

These three-candlestick reversal patterns signal potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). changes and are considered among the most reliable candlestick formations.

Morning Star:

Appears at the bottom of a downtrend
First candle: Large bearish candle showing downtrend continuation
Second candle: Small-bodied candle (often a doji or spinning top) showing indecision
Third candle: Large bullish candle showing reversal
The middle candle often gaps down from the first and gaps up into the third
Represents a shift from bearish to bullish sentiment

Evening Star:

Appears at the top of an uptrend
First candle: Large bullish candle showing uptrend continuation
Second candle: Small-bodied candle (often a doji or spinning top) showing indecision
Third candle: Large bearish candle showing reversal
The middle candle often gaps up from the first and gaps down into the third
Represents a shift from bullish to bearish sentiment

Variations:

Morning/Evening Doji Star: When the middle candle is specifically a doji (considered stronger)
Abandoned Baby: When the middle candle gaps away from both the first and third candles (very rare but extremely powerful)

Trading considerations:

The larger the first and third candles, the more significant the pattern
The pattern is stronger when the third candle retraces deeply into the first candle
Look for confirmation from the fourth candle continuing in the new direction
Place stops beyond the middle candle

Advanced Harami Patterns

The Harami pattern (covered in the previous chapter) has several advanced variations that provide additional insights.

Harami Cross:

Similar to a regular Harami but the second candle is specifically a doji
Indicates stronger indecision than a regular Harami
Often signals a more powerful reversal potential

Bullish/Bearish Harami with Confirmation:

A regular Harami followed by a third candle in the direction of the potential reversal
The confirmation candle significantly increases the pattern’s reliability
Often provides a better risk-reward entry point than waiting for the Harami alone

Multiple Harami:

Two or more consecutive Harami patterns
Indicates persistent indecision and often precedes a strong move
The direction of the breakout from this formation is often significant

Trading considerations:

The contrast in size between the first and second candles is important (larger difference = stronger signal)
Look for the Harami to form at key supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels
Volume often decreases during the Harami formation and increases on the breakout
Consider waiting for confirmation before entering trades based on Harami patterns

Candlestick Combinations with Technical Structures

Candlestick patterns become even more powerful when they align with key technical structures. These combinations provide higher-probability trading opportunities by combining multiple forms of confirmation.

Candlesticks at Trendlines

When specific candlestick patterns form at trendlines, they can provide strong signals:

Bullish patterns at uptrend lines:

Hammer or bullish engulfing at an uptrend line
Indicates successful test of the trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). and likely continuation
Often forms after a pullback to the trendline

Bearish patterns at downtrend lines:

Shooting star or bearish engulfing at a downtrend line
Indicates successful rejection at the trendline and likely continuation
Often forms after a rally to the trendline

Reversal patterns at trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). extremes:

Evening star at the break of an uptrend line
Morning star at the break of a downtrend line
Signals potential trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). reversal with multiple confirmations

Trading considerations:

The more touches a trendline has had previously, the more significant the pattern
Look for volume confirmation (higher volume on the signal candle)
Consider the angle of the trendline (steeper trendlines often lead to stronger reactions)
Wait for the candlestick pattern to complete before entering

Candlesticks at Support and Resistance

Candlestick patterns at horizontal supportA price level where buying interest is strong enough to prevent the price from falling further. and resistanceA price level where selling pressure is strong enough to prevent the price from rising further. levels provide particularly strong signals:

Bullish patterns at supportA price level where buying interest is strong enough to prevent the price from falling further.:

Hammer, bullish engulfing, or morning star at supportA price level where buying interest is strong enough to prevent the price from falling further.
Indicates rejection of lower prices and potential upward movement
More significant if the supportA price level where buying interest is strong enough to prevent the price from falling further. level has been tested multiple times

Bearish patterns at resistanceA price level where selling pressure is strong enough to prevent the price from rising further.:

Shooting star, bearish engulfing, or evening star at resistanceA price level where selling pressure is strong enough to prevent the price from rising further.
Indicates rejection of higher prices and potential downward movement
More significant if the resistanceA price level where selling pressure is strong enough to prevent the price from rising further. level has been tested multiple times

Candlesticks at previous swing points:

Reversal patterns at previous swing highs or lows
Often indicate the start of a new trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). or continuation of the primary trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
Particularly powerful when aligned with higher timeframe levels

Trading considerations:

The strength of the supportA price level where buying interest is strong enough to prevent the price from falling further./resistance level affects the reliability of the pattern
Round numbers often act as psychological supportA price level where buying interest is strong enough to prevent the price from falling further./resistance and enhance pattern significance
Look for rejection wicks (long shadows) showing strong reaction to the level
Consider multiple timeframe confirmation of the level

Candlesticks at Chart Patterns

When candlestick patterns form at key points in larger chart patterns, they can provide precise entry signals:

Candlesticks at pattern breakouts:

Bullish engulfing or three white soldiers at triangle or flag breakouts
Bearish engulfing or three black crows at head and shoulders neckline breaks
Provides confirmation of the larger pattern breakout

Candlesticks at pattern retests:

Bullish patterns at retests of broken resistanceA price level where selling pressure is strong enough to prevent the price from rising further. (now supportA price level where buying interest is strong enough to prevent the price from falling further.)
Bearish patterns at retests of broken supportA price level where buying interest is strong enough to prevent the price from falling further. (now resistanceA price level where selling pressure is strong enough to prevent the price from rising further.)
Often provides optimal risk-reward entry points

Candlesticks at pattern failure points:

Reversal candlestick patterns when a chart pattern fails to complete
Often leads to strong moves in the opposite direction
Example: Bearish engulfing at a double top that fails to break supportA price level where buying interest is strong enough to prevent the price from falling further.

Trading considerations:

The larger chart pattern provides context for the candlestick pattern
Consider the maturity of the chart pattern (mature patterns with candlestick confirmation are stronger)
Volume should align with both the candlestick and chart pattern expectations
Use the structure of the chart pattern for stop placement

Candlestick Volume Analysis

While candlestick patterns themselves provide valuable information, combining them with volume analysis significantly enhances their reliability. Volume confirms the conviction behind the price movement represented by the candlesticks.

Volume-Confirmed Reversal Patterns

Volume can transform moderate reversal signals into high-probability trading opportunities:

High-volume bullish engulfing:

Bullish engulfing pattern with volume significantly higher than recent average
Indicates strong buying pressure overcoming previous selling
More reliable than engulfing patterns with average or low volume

High-volume bearish engulfing:

Bearish engulfing pattern with volume significantly higher than recent average
Indicates strong selling pressure overcoming previous buying
More reliable than engulfing patterns with average or low volume

Volume climax with reversal candles:

Extremely high volume (often 2-3 times average) with reversal candlestick patterns
Often indicates exhaustion of the previous trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
Commonly seen at major market bottoms (capitulation) or tops (euphoria)

Trading considerations:

Compare the pattern’s volume to the average volume of the previous 5-10 candles
The greater the volume increase, the more significant the signal
Look for follow-through volume in subsequent candles
Be cautious of reversal patterns with below-average volume

Volume Divergence with Candlesticks

Volume divergence occurs when volume behavior contradicts price action, often signaling potential reversals:

Rising price with declining volume:

Series of bullish candles with progressively lower volume
Indicates weakening buying pressure despite rising prices
Often precedes a reversal or consolidation

Falling price with declining volume:

Series of bearish candles with progressively lower volume
Indicates weakening selling pressure despite falling prices
Often precedes a reversal or consolidation

Doji or spinning top with extremely high volume:

Indecision candles with unusually high volume
Indicates significant conflict between buyers and sellers
Often precedes a strong move in either direction

Trading considerations:

Look for at least three candles to establish a volume trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
The longer the divergence persists, the more significant the potential reversal
Use oscillators to confirm momentum divergence alongside volume divergence
Be patient for confirmation before trading based on divergence alone

Volume Profile Analysis with Candlesticks

Volume profile analysis examines the distribution of volume across price levels, providing context for candlestick patterns:

Candlestick reversals at high-volume nodes:

Reversal patterns at price levels with historically high trading volume
These levels often act as strong supportA price level where buying interest is strong enough to prevent the price from falling further./resistance
Provides multiple forms of confirmation

Breakout candlesticks through low-volume nodes:

Strong momentum candles breaking through areas of historically low volume
These areas often have little supportA price level where buying interest is strong enough to prevent the price from falling further./resistance and lead to quick price movement
Look for increased volume on the breakout candle

Rejection candlesticks at volume profile extremes:

Candles with long wicks at the upper or lower extremes of the volume profile
Indicates rejection from areas with little historical trading activity
Often leads to moves back toward high-volume nodes

Trading considerations:

Use volume profile over a relevant time period (recent for short-term trades, longer for swing trades)
Pay attention to the shape of the volume profile (multiple peaks often indicate range-bound conditions)
Look for “thin” areas in the volume profile that price might move through quickly
Combine with price action for optimal entry timing

Candlestick Failure Patterns

While candlestick patterns are powerful tools, they sometimes fail to produce the expected outcome. Understanding these failure patterns can help you avoid false signals and even find trading opportunities when other traders are caught on the wrong side.

Failed Bullish Patterns

When bullish patterns fail, they often lead to strong downward moves:

Failed hammer:

A hammer forms at supportA price level where buying interest is strong enough to prevent the price from falling further. but price fails to move higher on the next candle
Instead, price breaks below the hammer’s low
Often leads to accelerated downward movement as buyers are trapped

Failed bullish engulfing:

A bullish engulfing pattern forms but price fails to continue higher
Price breaks below the low of the engulfing pattern
Often leads to a strong downward move as buyers are forced to exit

Failed morning star:

A morning star pattern forms but price fails to continue higher after the third candle
Price breaks below the low of the pattern
Particularly significant failure due to the pattern’s usual reliability

Trading considerations:

Failed patterns often lead to stronger moves than successful patterns
The more reliable the original pattern, the more significant its failure
Look for divergence or non-confirmation from indicators as warning signs
Consider entering in the opposite direction when patterns fail

Failed Bearish Patterns

When bearish patterns fail, they often lead to strong upward moves:

Failed shooting star:

A shooting star forms at resistanceA price level where selling pressure is strong enough to prevent the price from rising further. but price fails to move lower on the next candle
Instead, price breaks above the shooting star’s high
Often leads to accelerated upward movement as sellers are trapped

Failed bearish engulfing:

A bearish engulfing pattern forms but price fails to continue lower
Price breaks above the high of the engulfing pattern
Often leads to a strong upward move as sellers are forced to exit

Failed evening star:

An evening star pattern forms but price fails to continue lower after the third candle
Price breaks above the high of the pattern
Particularly significant failure due to the pattern’s usual reliability

Trading considerations:

Failed bearish patterns at new highs are especially significant
Look for volume clues (low volume on the bearish pattern, high volume on the failure)
Consider the broader context (trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend)., supportA price level where buying interest is strong enough to prevent the price from falling further./resistance, etc.)
Use tight stops when trading failed patterns due to their explosive potential

Pattern Failure Warning Signs

Several warning signs can help you identify potential pattern failures before they occur:

Lack of volume confirmation:

The pattern forms with unusually low volume
Subsequent confirming candles also show low volume
Indicates lack of conviction in the pattern’s direction

Hesitation candles:

Small-bodied candles following the pattern
Indicates uncertainty after the pattern formation
Often precedes a move against the expected direction

Opposing candlestick patterns:

A contradictory pattern forms shortly after the initial pattern
For example, a bearish engulfing after a morning star
Creates confusion and often leads to choppy price action

Divergence with indicators:

The pattern suggests one direction but indicators suggest another
For example, a bullish pattern with bearish RSI divergence
Often indicates the pattern may fail

Trading considerations:

Be especially cautious of patterns that form in the middle of ranges
Consider waiting for additional confirmation when warning signs are present
Reduce position size when warning signs exist but other factors are positive
Be prepared to exit quickly if the pattern shows signs of failing

Contextual Candlestick Analysis

The context in which candlestick patterns appear significantly affects their reliability and potential outcomes. Advanced traders understand that the same pattern can have different implications depending on various contextual factors.

Market Structure Context

The position of a candlestick pattern within the larger market structure is crucial for interpretation:

Patterns at structure breaks:

Reversal patterns that coincide with breaks in market structure
For example, a bearish engulfing that creates the first lower high in an uptrend
Often signals the beginning of a new trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).

Patterns within ranges:

Patterns that form within established trading ranges
Often less reliable unless they appear at range boundaries
May indicate range continuation rather than true reversal

Patterns after extended moves:

Reversal patterns after a series of strong directional candles
Often indicate exhaustion and potential reversal
More reliable when accompanied by divergence in momentum

Patterns at retracement levels:

Candlestick patterns at Fibonacci retracement levels
Combines mathematical supportA price level where buying interest is strong enough to prevent the price from falling further./resistance with price action confirmation
Often provides high-probability entry points in the trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction

Trading considerations:

Always identify the current market structure before interpreting candlestick patterns
Give more weight to patterns that align with potential structure changes
Be cautious of counter-trend patterns unless they coincide with structure breaks
Use multiple timeframe analysis to understand the pattern’s structural context

Volatility Context

Market volatilityThe degree of price fluctuations in a market or currency pair over a period of time. significantly affects how candlestick patterns should be interpreted:

Patterns in high volatilityThe degree of price fluctuations in a market or currency pair over a period of time.:

Candlestick patterns during periods of high volatilityThe degree of price fluctuations in a market or currency pair over a period of time. (large ATR)
Often require wider stops due to larger price swings
May resolve more quickly and violently than in normal conditions

Patterns in low volatilityThe degree of price fluctuations in a market or currency pair over a period of time.:

Candlestick patterns during periods of low volatilityThe degree of price fluctuations in a market or currency pair over a period of time. (small ATR)
Often precede volatilityThe degree of price fluctuations in a market or currency pair over a period of time. expansion (especially reversal patterns)
May take longer to develop but can lead to significant moves

VolatilityThe degree of price fluctuations in a market or currency pair over a period of time. contraction patterns:

Series of narrowing range candles culminating in a reversal pattern
Often indicates energy building for a strong move
The longer the contraction, the more powerful the potential breakout

VolatilityThe degree of price fluctuations in a market or currency pair over a period of time. expansion with pattern confirmation:

Sudden increase in candle size coinciding with a candlestick pattern
Indicates strong conviction in the pattern’s direction
Often leads to sustained moves in the breakout direction

Trading considerations:

Use Average True Range (ATR) to measure current volatilityThe degree of price fluctuations in a market or currency pair over a period of time.
Adjust stop distances based on current volatilityThe degree of price fluctuations in a market or currency pair over a period of time. conditions
Be cautious of reversal patterns during extreme volatilityThe degree of price fluctuations in a market or currency pair over a period of time. spikes
Look for volatilityThe degree of price fluctuations in a market or currency pair over a period of time. contraction before major market moves

Seasonal and Time-Based Context

Certain time periods can affect the reliability of candlestick patterns:

Patterns at session opens/closes:

Candlestick patterns at the open or close of major trading sessions
Often influenced by institutional positioning and liquidity changes
Can have different implications than the same patterns mid-session

Patterns before major news events:

Candlestick patterns forming just before high-impact news
Often reflect positioning rather than true sentiment
Generally less reliable due to pre-news uncertainty

Patterns during holiday periods:

Candlestick patterns during reduced liquidity holiday periods
May be created by lower volume and fewer participants
Often less reliable than patterns during normal trading periods

Patterns at weekly/monthly transitions:

Candlestick patterns that form at the end of weeks or months
Often influenced by portfolio rebalancing and position squaring
Weekly and monthly candlestick patterns generally more significant than daily

Trading considerations:

Be aware of the trading calendar when interpreting patterns
Consider reducing position size for patterns during abnormal periods
Give more weight to patterns that align with natural market cycles
Be especially cautious of patterns during extremely low liquidity periods

Advanced Candlestick Combinations

Some of the most powerful signals come from specific combinations of candlestick patterns and other technical elements. These combinations often provide earlier signals with better risk-reward profiles than individual patterns.

The Three-Drive Pattern

This pattern combines multiple candlestick signals to identify potential reversals:

Bullish Three-Drive:

Three consecutive pushes down (drives) with progressively lower lows
Each drive ends with a bullish reversal candlestick (hammer, bullish engulfing, etc.)
Each drive shows weaker momentum (smaller candles or bullish divergence)
Final drive often reaches a key supportA price level where buying interest is strong enough to prevent the price from falling further. level
Signals potential upward reversal

Bearish Three-Drive:

Three consecutive pushes up (drives) with progressively higher highs
Each drive ends with a bearish reversal candlestick (shooting star, bearish engulfing, etc.)
Each drive shows weaker momentum (smaller candles or bearish divergence)
Final drive often reaches a key resistanceA price level where selling pressure is strong enough to prevent the price from rising further. level
Signals potential downward reversal

Trading considerations:

Look for the drives to have roughly similar length and time duration
The pattern is stronger when the final drive shows clear exhaustion
Enter after confirmation following the third drive
Place stops beyond the extreme of the final drive

The 2B Pattern

This pattern combines candlestick analysis with market structure to identify false breakouts:

Bullish 2B:

Price makes a new low below a previous significant low
The candlestick shows rejection from the new low (long lower wick)
Price quickly returns above the previous low
Often forms a bullish engulfing or hammer in the process
Signals potential upward reversal

Bearish 2B:

Price makes a new high above a previous significant high
The candlestick shows rejection from the new high (long upper wick)
Price quickly returns below the previous high
Often forms a bearish engulfing or shooting star in the process
Signals potential downward reversal

Trading considerations:

The pattern is stronger when the false break is quickly rejected
Look for volume spike on the false breakout candle
More significant when it occurs at major supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels
Use the previous extreme as a reference for stop placement

The Hikkake Pattern

This pattern uses candlestick analysis to identify trapped traders:

Bullish Hikkake:

An inside bar (range within previous bar)
Followed by a break below the inside bar’s low
Then a strong move back above the inside bar’s high
Often forms a bullish engulfing in the process
Signals potential upward movement as shorts are trapped

Bearish Hikkake:

An inside bar (range within previous bar)
Followed by a break above the inside bar’s high
Then a strong move back below the inside bar’s low
Often forms a bearish engulfing in the process
Signals potential downward movement as longs are trapped

Trading considerations:

The pattern works best in volatile market conditions
Look for the false break to occur on lower volume
The reversal should occur on higher volume
More reliable when aligned with the larger trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).

The Island Reversal

This dramatic pattern combines gaps with candlestick analysis:

Bullish Island Reversal:

A gap down after a downtrend
One or more candles isolated by the gap
Then a gap up leaving the candles “stranded” like an island
The island often contains reversal candlestick patterns
Signals potential upward reversal

Bearish Island Reversal:

A gap up after an uptrend
One or more candles isolated by the gap
Then a gap down leaving the candles “stranded” like an island
The island often contains reversal candlestick patterns
Signals potential downward reversal

Trading considerations:

Rare in forex but more common in stocks and indices
More significant when the island contains multiple candles
The pattern is stronger when the island shows clear exhaustion
Gaps must be clear and significant to form a valid island

Practical Application: Advanced Candlestick Trading Strategies

Now let’s explore some practical trading strategies that leverageThe ability to control a large amount of money in the Forex market with a smaller amount of capital. Expressed as a ratio (e.g., 50:1). advanced candlestick patterns and combinations.

The Momentum Reversal Strategy

This strategy focuses on identifying exhaustion at the end of strong trends:

Identify an extended trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).

Look for a series of strong directional candles (at least 5-7)
Confirm with indicators showing overbought/oversold conditions

Look for reversal candlestick patterns

In uptrends: Shooting star, bearish engulfing, evening star
In downtrends: Hammer, bullish engulfing, morning star

Confirm with volume and structure

Reversal candle should show higher than average volume
Pattern should coincide with a break in market structure

Enter with tight risk managementStrategies and techniques used to limit potential losses in trading.

Enter after confirmation of the reversal pattern
Place stop beyond the extreme of the pattern
Target the next significant supportA price level where buying interest is strong enough to prevent the price from falling further./resistance level

Example scenario:

EUR/USD has rallied strongly for 8 consecutive days
RSI shows overbought conditions above 70
An evening star pattern forms at a previous resistanceA price level where selling pressure is strong enough to prevent the price from rising further. level
Volume spikes on the third (bearish) candle of the evening star
Enter short after confirmation with stop above the pattern high

The Failed Pattern Breakout Strategy

This strategy capitalizes on the strong moves that often follow pattern failures:

Identify a clear candlestick pattern

Look for well-formed, recognizable patterns
Preferably at key supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels

Wait for initial confirmation

Price begins to move in the expected direction
Early traders enter based on the pattern

Look for failure signals

Price stalls after minimal movement in the expected direction
Small-bodied indecision candles form
Volume decreases on the follow-through

Enter when the pattern fails

Enter in the opposite direction when price breaks beyond the pattern’s boundary
Place tight stop beyond the recent extreme
Target the next significant level in the new direction

Example scenario:

USD/JPY forms a bullish engulfing pattern at supportA price level where buying interest is strong enough to prevent the price from falling further.
Price moves slightly higher for 1-2 candles but with small bodies
Volume is below average on the follow-through candles
Price then breaks below the low of the engulfing pattern
Enter short with stop above the recent high

The Multi-Timeframe Confirmation Strategy

This strategy uses candlestick patterns across multiple timeframes for high-probability entries:

Identify the trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). on a higher timeframe

Determine the primary trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend). direction on a higher timeframe (e.g., daily)
Identify key supportA price level where buying interest is strong enough to prevent the price from falling further./resistance levels on this timeframe

Look for pullback on an intermediate timeframe

On a medium timeframe (e.g., 4-hour), identify a pullback against the main trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).
Wait for signs of the pullback ending

Find candlestick entry signals on a lower timeframe

On a lower timeframe (e.g., 1-hour), look for reversal candlestick patterns
These should suggest resumption of the higher timeframe trendThe general direction in which a market is moving (uptrend, downtrend, sideways trend).

Enter with confluence confirmation

Enter when patterns align across timeframes
Place stop beyond the relevant swing point on the entry timeframe
Target the next significant level on the higher timeframe

Example scenario:

Daily chart of GBP/USD shows a clear uptrend
4-hour chart shows a pullback to the 38.2% Fibonacci retracement level
1-hour chart forms a morning star pattern at this retracement level
Enter long after confirmation of the morning star
Target the previous high on the daily chart

The Candlestick Divergence Strategy

This strategy combines candlestick patterns with indicator divergence for powerful reversal signals:

Identify potential reversal zones

Look for price approaching significant supportA price level where buying interest is strong enough to prevent the price from falling further./resistance
Confirm with overbought/oversold indicator readings

Look for divergence

Price makes a new extreme but the indicator doesn’t confirm
For example, price makes a new low but RSI makes a higher low

Wait for candlestick confirmation

Look for reversal candlestick patterns in the divergence area
The stronger the pattern, the more significant the signal

Enter with appropriate risk managementStrategies and techniques used to limit potential losses in trading.

Enter after confirmation of both divergence and candlestick pattern
Place stop beyond the recent extreme
Target the next significant level in the new direction

Example scenario:

AUD/USD makes a new low but RSI shows bullish divergence
A bullish engulfing pattern forms at this new low
Volume increases on the bullish engulfing candle
Enter long after confirmation with stop below the pattern low

Conclusion

Advanced candlestick patterns and combinations provide a deeper level of insight into market psychology and potential price movements. By understanding multi-candlestick patterns, advanced reversal formations, candlestick combinations with technical structures, volume-enhanced candlestick analysis, failure patterns, and contextual interpretation techniques, you have significantly expanded your price action trading toolkit.

Remember that candlestick analysis is both a science and an art. The patterns and combinations we’ve discussed provide a framework, but successful application requires practice, experience, and an understanding of the broader market context. No pattern works 100% of the time, but by focusing on high-probability setups with favorable risk-reward profiles, you can develop a consistent edge in the market.

In the next module, we’ll explore Advanced Chart Analysis, building upon the foundation of technical analysisA method of forecasting future price movements based on the study of historical price data, charts, and indicators. and candlestick patterns you’ve learned so far.

Key Terms

Multi-Candlestick Pattern: A formation consisting of three or more candlesticks that provides insight into market psychology and potential price direction.
Three White Soldiers: A bullish reversal pattern consisting of three consecutive bullish candlesticks, each closing higher than the previous.
Three Black Crows: A bearish reversal pattern consisting of three consecutive bearish candlesticks, each closing lower than the previous.
Morning Star: A bullish reversal pattern consisting of a large bearish candle, a small-bodied candle, and a large bullish candle.
Evening Star: A bearish reversal pattern consisting of a large bullish candle, a small-bodied candle, and a large bearish candle.
Harami Cross: A variation of the Harami pattern where the second candle is specifically a doji, indicating stronger indecision.
Failed Pattern: A candlestick pattern that initially forms but then fails to produce the expected price movement, often leading to a strong move in the opposite direction.
Contextual Analysis: The practice of interpreting candlestick patterns based on their context, including market structure, volatilityThe degree of price fluctuations in a market or currency pair over a period of time., and seasonal factors.

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Chapter 4: Advanced Candlestick Patterns & Combinations (Audio)

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