Top 10 Continuation Candlesticks

The information on this page is derived from my book, Encyclopedia of Candlestick Charts, pictured on the right. Once you click on a link, you will be taken to a page describing the candlestick. The glossary defines the terms used on the individual candlestick pages, but the black arrow on the figure shows which way price usually moves after the candlestick pattern ends. Shown are the top ten performing candlestick patterns, based on performance of those that act as continuations of the prevailing price trend in a bull market. -- Thomas Bulkowski

10 Performing Candlesticks

The information on this page is derived from my book, Encyclopedia of Candlestick Charts, pictured on the right. Once you click on a link, you will be taken to a page describing the candlestick. The glossary defines the terms used on the individual candlestick pages, but the black arrow on the figure shows which way price usually moves after the candlestick pattern ends. The top 10 performing candlesticks appear below, based on their overall performance rank in both bull and bear markets. -- Thomas Bulkowski

Trendline (26th March 2018)

LT

Raymond

Wockpharma

PINOCCHIO BAR TRADE SETUP (PIN BAR)

The Pinocchio bar (pin bar) is a very popular price pattern among active traders. In Martin Pring’s “Technical Analysis Explained”, he called the pattern Pinocchio because it lies.

It lies about the market direction. And its long nose exposes the lie.

So we expose the pin bar below.

The concept behind pin bars explains its efficacy. Traders place their entry orders and stop orders at support and resistance levels. Pin bars, by making a short-lived break of the levels, give false hope to traders in the wrong direction. As the pin bar closes back within the support or resistance, prices make a run for the other direction.

RULES FOR LONG

1. Bar opens above support
2. Bar trades below support for most of the range of the bar
3. Bar closes above support

RULES FOR SHORT

1. Bar opens below resistance
2. Bar trades above resistance for most of the range of the bar
3. Bar closes below support

WINNING TRADE

This daily chart of AT&T shows a pin bar that began a swift down trend.

1. There was an existing up trend followed by a cup and handle pattern that signaled the bull trend to continue.
2. However, the cup and handle formation failed quickly with a pin bar that poked above the “cup rim” before closing below the resistance.
3. After the pin bar triggered a short entry, prices tried to move up but could not gain momentum despite several tries. In fact, it was better to wait and enter after the failed attempts to move up.

LOSING TRADE

This is a 5-minute chart of E-mini futures on NASDAQ 100. We included part of the previous and next trading sessions to highlight the context of the trade.

1. After a prolong congestion, prices broke down strongly and stopped at yesterday’s low with a two-bar reversal pattern.
2. The pin bar was the second test of the low of yesterday’s session. Given that it was the second test of yesterday’s low, it was a good trade. However, we got stopped out quickly.
3. After a final thrust down, prices drifted up and gapped up the next day to continue its way up. Indeed, there was buying pressure below the support tested by the pin bar. However, the pin bar was not the ideal entry point in this case.

REVIEW – PINOCCHIO BAR TRADE SETUP (PIN BAR)

A pin bar is a unique price pattern because it is not defined by one, two, or even three bars. It is defined by the entire market structure.

We can only label a pin bar after looking at support or resistance levels that it penetrated.

Given the right context, the pin bar offers a reliable point of entry. Focus on pin bars that penetrate major support or resistance. Then, find confirmation from other indicators or chart patterns, and you have a high probability trade.

When confirmation is lacking, it is a good idea to delay your entry. Let more price action unfold after the pin bar and enter if it confirms the pin bar.

Need help find the pin bar on your charts? Get an indicator for five price action patterns including pin bar here.

You should refer to Martin Pring’s solid work on technical analysis to learn more about the pin bar and other bar patterns.

10 PRICE ACTION BAR PATTERNS YOU MUST KNOW

Bar patterns are nifty short-term patterns that are useful for timing trades and finding logical stop-loss points. No price action trader can do without learning about bar patterns.

So these are 10 bar patterns that you must know.

Reversal Bar Patterns

1. Reversal Bar

2. Key Reversal Bar

3. Exhaustion Bar

4. Pinocchio Bar

5. Two-Bar Reversal

6. Three-Bar Reversal

7. Three Bar Pullback

Volatility Bar Patterns

8. Inside Bar

9. Outside Bar

10. NR7

Learn more: Price Action Trading Resource Guide

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1. REVERSAL BAR PATTERN

What does it look like?

A bullish reversal bar pattern goes below the low of the previous bar before closing higher.

A bearish reversal bar pattern goes above the high of the last bar before closing lower.

What does it mean?

For the bullish pattern, the market found support below the low of the previous bar. Not only that, the support was strong enough to push the bar to close higher than the previous bar. This is the first sign of a possible bullish reversal.

For the bearish pattern, the market met resistance above the high of the previous bar. Furthermore, the resistance was powerful enough to cause the current bar to close lower.

How do we trade it?

1. Buy above the bullish reversal bar in an uptrend
2. Sell below the bearish reversal bar in a downtrend

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2. KEY REVERSAL BAR

What does it look like?

A key reversal bar is a particular instance of a reversal bar that shows clearer signs of a reversal.

A bullish key reversal bar opens below the low of the previous bar and closes above its high.

A bearish key reversal bar opens above the high of the previous bar and closes below its low.

By definition, key reversal bars open with a price gap. As gaps within intraday time frames are rare, you will find most key reversal bars in the daily and above time-frames.

What does it mean?

A down gap is a powerful down thrust. When the market rejects such a strong bearish move with certainty, it might have reversed its sentiment to bullish.

On the other hand, when a gap upwards bumps into clear resistance, the market might have turned bearish.

Essentially, a key reversal bar is a violent display of strength that hints at a change of market sentiment.

How do we trade it?

1. Buy above a bullish key reversal bar (If uncertain, wait for the price to close above it before buying.)
2. Sell below a bearish key reversal bar (If unsure, wait for the price to close below it before selling.)

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3. EXHAUSTION BAR

What does it look like?

A bullish exhaustion bar opens with a gap down. Then, it works its way up to close near its top.

A bearish exhaustion bar opens with a gap up before moving down to close as a bearish bar.

In both cases, the gap remains unfilled. Also, high volume should occur with the exhaustion bar.

What does it mean?

Its name explains it all. It represents exhaustion and a failed last-ditch attempt.

After the bears are exhausted, the bulls will take over, and the market will rise.

After the bulls are exhausted, the bears will take the market down.

How do we trade it?

1. Buy above a bullish exhaustion bar
2. Sell below a bearish exhaustion bar

Read: Exhaustion Gap Trading

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4. PINOCCHIO BAR (PIN BAR)

What does it look like?

It resembles the nose of Pinocchio. It has a long and distinct tail.

For bullish pin bars, the lower tail takes up most of the bar. For bearish pin bars, it is the upper tail that dominates.

What does it mean?

Paraphrasing Martin Pring, the pin bar lies like Pinocchio.

With its long tail, a pin bar breaks a support or resistance momentarily to trick traders into entering the wrong direction. These traders are trapped, and there is often money to be made when you find trapped traders.

How do we trade it?

1. Buy above a bullish pin bar that is rejected from support level
2. Sell below a bearish pin bar that is rejected from a resistance level

Find more pin bar examples here.

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 5. TWO-BAR REVERSAL

What does it look like?

The two-bar reversal pattern is made up of two strong bars closing in opposite directions.

The bullish variant consists of a strong bearish bar followed by a bullish bar. Reverse the order to get its bearish counterpart.

What does it mean?

Every reversal pattern works on the same premise. A clear rejection of a downward thrust is a bullish reversal, and a clear rejection of an upthrust is a bearish reversal.

In this case, the first bar represents the first thrust, and the second bar represents its rejection.

How do we trade it?

1. For bullish reversals, buy above the highest point of the two-bar pattern.
2. For bearish reversals, sell below the lowest point of the two-bar pattern.

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6. THREE-BAR REVERSAL

What does it look like?

In sequence, the three bars of the bullish pattern are:

1. A bearish bar
2. A bar has a lower high and lower low
3. A bullish bar with a higher low and closes above the high of the second bar

Accordingly, the bearish pattern is made up of:

1. A bullish bar
2. A bar has a higher high and higher low
3. A bearish bar with a lower high and closes below the low of the second bar

What does it mean?

A three-bar reversal pattern shows a turning point. Compared to the other reversal patterns, the three-bar reversal pattern is the most conservative one as it extends over three bars, using the third bar to confirm that the market has changed its direction.

How do we trade it?

1. Buy above the last bar of the bullish pattern
2. Sell below the last bar of the bearish pattern

Read: Adapting the Three-Bar Reversal for Day Trading

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7. THREE-BAR PULLBACK

What does it look like?

This bar pattern is easy to identify.

Three consecutive bearish bars form a bullish pullback pattern, and three consecutive bullish bars form a bearish pullback pattern.

What does it mean?

When the market is trending, it is hard to sustain a counter-trend pullback. Hence, after a pullback of three bars, the trend is ready to resume.

How do we trade it?

1. Within a bull trend, wait for three consecutive bearish bars. Then, buy above the next bullish bar.
2. Within a bear trend, wait for three consecutive bullish bars. Then, sell below the next bearish bar.

Read: Improving the Three-Bar Pullback

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8. INSIDE BAR

What does it look like?

An inside bar must stay completely within the range of the bar immediately before it. In other words, the second bar must have a lower high and a higher low.

What does it mean?

An inside bar is a contraction in price range/volatility. Within the same unit time, the market covers less ground and stays completely within the range of the previous bar.

It is a pause in price action and does not show clear strength in either direction.

How do we trade it?

1. Place bracket orders around it to trade its breakout in either direction. (A buy stop order above its high, and a sell stop order below its low. Once one order is triggered, cancel the other.)
2. Place only one order (buy or sell) according to the market trend.
3. Wait for a breakout of the inside bar and trade its failure.

Read: A Twist on the Inside Bar

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9. OUTSIDE BAR

What does it look like?

An outside bar pattern is the polar opposite of an inside bar.

Its range must exceed that of the previous bar with a higher high and a lower low.

What does it mean?

It is a short-term expansion in price range/volatility. It shows strength in both directions.

In most cases, it is uncertain if the bulls or the bears have won. The only certainty is the increased volatility.

How do we trade it?

1. Wait for a break-out of the outside bar and fade it. (Especially for outside bars that look like dojis, or those that go against the trend.)
2. Trade its break-out, especially when the outside bar closes near its top or bottom. (e.g., Popgun Pattern)

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10. NR7

What does it look like?

This bar pattern requires seven bars. If the last bar has the smallest bar range within the sequence, it is an NR7 pattern.

To clarify, bar range refers to the difference between the high and the low of a bar.

What does it mean?

Like the inside bar, it indicates decreasing volatility.

As the lower volatility comes within the context of seven bars, instead of a single bar like in the case of an inside bar, the NR7 pattern is a stronger sign of decreasing volatility.

However, while the inside bar shows no strength in either direction, the NR7 pattern might drift upwards or downwards. In such cases, the NR7 represents a price thrust with decreasing volatility.

As the market alternates between range contraction and range expansion, the NR7 alerts us to standby for explosive moves.

How do we trade it?

1. Buy break-out of the high of the last bar if the trend is up
2. Sell break-out of the low of the last bar if the trend is down