Bearish Candlesticks
Lesson 1
The Evening Star Pattern
Pattern Type: Bearish
The Evening Star candlestick pattern is a bearish reversal pattern that indicates a potential shift in the market’s direction from bullish to bearish. Forming at the peak of an uptrend, the Evening Star suggests that the day is ending and night (or a bearish phase) is about to set in, metaphorically speaking.
What The Pattern Looks Like
The market psychology behind the Evening Star pattern can be dissected as follows:
First Candle: This is a long bullish (green) candle continuing the prevailing uptrend. It has a long body, signifying a strong upward movement.
Second Candle: The second candle can be either bullish (green) or bearish (red), but it is typically smaller in size or even a Doji (where the opening and closing prices are nearly the same). This candle will often gap up from the close of the first candle, implying it opens at a higher price than the closing price of the previous candle.
Third Candle: This is a long bearish (red) candle that often gaps down from the close of the second candle. Ideally, it should close at least halfway into the body of the first candle. The deeper it penetrates into the first candle’s body, the stronger the bearish reversal signal.
Pattern psychology
The market psychology behind the Evening Star pattern can be dissected as follows:
Continuation of Bullish Sentiment: The first long green candle shows that bulls are still in control, pushing prices higher and continuing the existing uptrend.
Market Indecision: The appearance of the second smaller candle or Doji highlights a slowdown in the bullish momentum. This represents a point of uncertainty in the market where neither bulls nor bears have a definitive grip.
Change in Sentiment: By the third candle, the sentiment undergoes a clear shift. The price gaps down at the open, indicating that bears are now entering the scene with conviction. As this candle pushes downward, it solidifies the notion that bears have taken control, signaling the start of a potential downtrend.
Seeking Confirmation: Although the Evening Star is a robust bearish reversal pattern, prudent traders often wait for additional confirmation. This could come in the form of another bearish candle following the Evening Star or through other technical indicators that might highlight growing bearish momentum.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
In summary, the Evening Star candlestick pattern serves as a valuable indicator for traders aiming to spot potential bearish reversals after a bullish trend. It vividly captures the tussle between bulls and bears and the eventual shift in dominance. As always, while the Evening Star is insightful, it’s crucial to incorporate it with other technical analysis tools to make holistic and informed trading decisions.
Lesson 2
The Three Black Crows Pattern
Pattern Type: Bearish
The Three Black Crows is a bearish reversal pattern that stands out as a clear signal of an impending downfall after a period of uptrend or bullish sentiment. As its name suggests, the pattern is symbolically likened to three crows descending upon a battlefield, symbolizing doom and darkness.
What The Pattern Looks Like
The Three Black Crows pattern consists of three distinct candles:
First Candle: This is a relatively long bearish (red) candle. It appears after a period of uptrend or bullish consolidation, indicating a sharp decrease in price from the opening to the close.
Second Candle: The second candle is also a bearish one, and it should ideally open within the body of the first candle. Crucially, this candle closes even lower than the first, further perpetuating the downward trend.
Third Candle: Following the trend, the third candle is bearish, opening within the body of the second candle. It should close lower than the second candle, affirming the bearish reversal trend.
For the pattern to be a genuine Three Black Crows formation, it’s preferable for all three candles to have minimal or nonexistent upper wicks. This implies that the market consistently closed near its low during the formation of the pattern.
Pattern psychology
Diving into the psychology behind the Three Black Crows:
End of Bull Dominance: Before the emergence of the Three Black Crows, the market is generally in an uptrend or bullish consolidation phase. Bulls are dominant, driving prices upwards.
Bearish Onset: The surfacing of the first long bearish candle indicates an abrupt and potent selling interest. This could be attributed to negative news, shifts in market conditions, or other elements that reverse the prevailing sentiment.
Sustained Selling Pressure: The next two candles showcase a continued selling vigor. The consistent closing near the lows (with small upper wicks) reveals that bears maintain control throughout the trading days, overpowering any bullish attempts to elevate prices.
Shift in Market Mood: The sequential progression of the three candles highlights a decisive turn from a bullish or neutral sentiment to a pronounced bearish disposition. At this juncture, the market anticipates the downward trend to persist.
Prospect of Further Declines: While the Three Black Crows pattern is a formidable bearish signal, savvy traders often seek supplementary confirmation to ascertain the trend’s strength. A continuation pattern or other bearish indicators in the wake of the Three Black Crows can bolster the prognosis of a sustained bearish period.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
In conclusion, the Three Black Crows candlestick pattern offers traders a profound visual cue of a potential shift from bullish momentum to bearish dominance. Its strength is accentuated by its clear portrayal of the transformation in market sentiment. However, as a prudent practice, traders should couple this pattern with other analytical instruments to fortify their trading decisions.
Lesson 3
The Hanging Man Pattern
Pattern Type: Bearish
The Hanging Man is a bearish candlestick pattern that often signals a potential top or resistance level in the market, particularly when it emerges after an uptrend. Its name, suggestive of its appearance, denotes the potential downfall or “hanging” of bullish sentiment.
What The Pattern Looks Like
The Hanging Man is defined by a single candle with these characteristics:
Small Upper Body: The body, whether bullish (green/white) or bearish (red/black), should be located in the upper part of the candlestick. However, a bearish body is seen as a stronger signal.
Long Lower Shadow: The hallmark of the Hanging Man is its long lower shadow (wick), which should be at least twice the length of the body.
Little to No Upper Shadow: Ideally, the Hanging Man should not have an upper shadow, but if present, it should be very short.
Location: For it to be a valid Hanging Man pattern, it should appear after a noticeable uptrend or bullish movement.
Pattern psychology
Breaking down the psychological undertones of the Hanging Man:
Uptrend’s Climax: The formation of the Hanging Man at the end of an uptrend suggests that the bullish rally might be nearing its pinnacle.
Initial Bullishness: The trading session commences with the bulls pushing the price upwards, continuing the prevailing uptrend.
Bears Intervene: As the session progresses, sellers step in, pulling the prices down significantly. This intense sell-off is manifested in the long lower shadow. However, the bulls manage to push the price back up, but not entirely to the session’s high, hence the small body at the top.
Uncertainty and Reversal Indication: The appearance of the Hanging Man after an uptrend indicates a possible shift in momentum. The pattern reflects uncertainty in the market, as bulls fail to sustain higher prices, leading to a potential turning point in sentiment.
Confirmation Is Key: While the Hanging Man is a bearish signal, traders often look for additional confirmation before making decisions. This could be in the form of another bearish candle following the Hanging Man or other corroborating technical indicators.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
In conclusion, the Hanging Man pattern offers traders a visual cue of potential market tops and the impending weakening of bullish momentum. Its distinctive appearance underscores the tussle between bulls and bears within a trading session, with bears hinting at a takeover. Nevertheless, as with all technical patterns, it’s imperative to analyze the Hanging Man in conjunction with other signals and within its broader market context for nuanced and informed trading strategies.
Lesson 4
The Shooting Star Pattern
Pattern Type: Bearish
The Shooting Star is a prominent bearish reversal candlestick pattern that often signals a potential top or resistance in the market, especially when it appears after an uptrend. Its evocative name alludes to the meteoric rise and rapid fall represented by the pattern, suggesting a possible change in market sentiment from bullish to bearish.
What The Pattern Looks Like
The Shooting Star is characterized by a single candlestick with these defining features:
Small Lower Body: The body of the candlestick, whether bullish (green/white) or bearish (red/black), is situated at the lower portion of the candle. However, a bearish body often strengthens the bearish signal of the pattern.
Long Upper Shadow: A distinguishing feature of the Shooting Star is its extended upper shadow (wick), which should be at least twice the length of the body.
Minimal to No Lower Shadow: The pattern typically has a very short lower shadow or none at all.
Location: To be considered a valid Shooting Star pattern, it must appear after a significant uptrend or bullish movement.
Pattern psychology
Understanding the psychological dynamics behind the Shooting Star:
Continuation of Bullish Momentum: The session starts with the continuation of the existing bullish trend, driving prices upwards. This initial surge is represented by the long upper shadow.
Bearish Intervention: At some point during the session, bears take control and start to push prices down, erasing most of the gains made by the bulls. By the end of the session, the price closes near its opening level, forming the small body at the lower part of the candle.
Sign of Potential Reversal: The Shooting Star indicates that, despite initial bullish momentum, selling pressure managed to dominate by the close of the session. This shift from bullish to bearish sentiment within a single trading period, especially after a sustained uptrend, signifies potential exhaustion among the bulls and hints at a bearish reversal.
Seeking Confirmation: While the Shooting Star is a bearish signal on its own, many traders await further confirmation before making trading decisions. A subsequent bearish candle or other bearish technical indicators can solidify the pattern’s reversal implications.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
To wrap up, the Shooting Star pattern provides traders with a clear visual representation of a potential shift in market sentiment. Its characteristic shape tells a story of bullish ambition followed by decisive bearish intervention, signaling that a market top might be in place. As always, however, it’s essential to interpret the Shooting Star within the broader context and in conjunction with other technical indicators for a more holistic understanding of the market’s direction.
Lesson 5
The Bearish Engulfing Pattern
Pattern Type: Bearish
The Bearish Engulfing pattern is a potent bearish reversal signal, typically signifying a potential top or resistance level in the market when it emerges after an uptrend. As its name suggests, the pattern involves a bearish candle “engulfing” the preceding bullish candle, symbolizing a dominant shift from buying to selling sentiment.
What The Pattern Looks Like
The Bearish Engulfing is a two-candlestick pattern characterized by the following attributes:
First Candle: A bullish (green/white) candle that represents a continuation of the existing uptrend.
Second Candle: A more substantial bearish (red/black) candle that opens higher than the close of the previous bullish candle and closes lower than the opening of the prior bullish candle. Essentially, the body of the bearish candle completely engulfs or overshadows the body of the preceding bullish candle.
Shadow Considerations: While the body of the second candle must engulf the body of the first, the shadows (wicks) of the candles are not strictly taken into account. Nevertheless, the pattern is considered more potent if the second candle’s shadows also engulf the shadows of the first candle.
Location: For maximum relevance, the Bearish Engulfing pattern should materialize after a pronounced uptrend or bullish movement.
Pattern psychology
Dissecting the psychological undertones of the Bearish Engulfing pattern:
Prolongation of Bullish Momentum: The initial candle indicates a continuation of the prevailing bullish sentiment, with buyers maintaining control in the market.
Momentum Pivot: The second candle starts with a gap up, signaling an initial extension of the bullish trend. Yet, as the session progresses, selling pressure intensifies dramatically, causing prices to drop and close beneath the opening of the previous day. This robust bearish action effectively “engulfs” the optimism of the prior day.
Indication of Potential Reversal: The Bearish Engulfing pattern conveys a marked shift in market dynamics. After a period of ascending prices, the sudden forceful bearish response hints at potential exhaustion among buyers and a burgeoning assertiveness among sellers. This can be seen as a signal that momentum is pivoting towards the bears.
Emphasis on Confirmation: Although the Bearish Engulfing pattern is a robust bearish sign in isolation, cautious traders frequently seek supplementary confirmation. This could manifest as a subsequent bearish candle, an increase in trading volume during the formation of the engulfing candle, or other supportive technical indicators.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
In summary, the Bearish Engulfing pattern offers a clear depiction of a market turning point, where bears regain the upper hand after a phase of bullish dominance. This pattern is invaluable for traders, serving as a potential forewarning of a bearish reversal. Nevertheless, as is the case with all candlestick patterns, it’s essential to evaluate the Bearish Engulfing within the broader market landscape and in tandem with other technical instruments to craft well-informed trading strategies.
Lesson 6
The Bearish Three Line Strike Pattern
Pattern Type: Bearish
The Bearish Three Line Strike is a striking bearish continuation pattern. It often surfaces during a downtrend, indicating a potent continuation of the bearish momentum. The pattern vividly captures a temporary rebound in the downward movement, swiftly followed by a dominant resurgence of the bears.
What The Pattern Looks Like
The Bearish Three Line Strike consists of a series of four candles:
First Three Candles: These are three consecutive bearish (red/black) candles, with each one closing lower than the preceding, mirroring the continuation of the prevailing downtrend.
Fourth Candle: In a surprising twist, the fourth candle is a long bullish (green/white) one. It opens below the third candle’s close but then dramatically “strikes” upwards, engulfing the real bodies of the preceding three bearish candles and closing above the first day’s open. Nonetheless, it doesn’t necessarily need to cover the shadows of the prior candles.
Pattern psychology
To grasp the mindset behind the formation of the Bearish Three Line Strike:
Persisting Bearish Control: The initial three candles unmistakably showcase the ongoing bearish sentiment. Each day, sellers exert their influence, pushing prices lower and securing a close at or near the daily low.
Temporary Hiccup: The fourth day begins with a downward bias, consistent with the established trend. Yet, as trading unfolds, buyers momentarily swing into action, driving prices upwards and erasing the losses from the prior three days. This indicates a fleeting resurgence of the bulls.
Bearish Determination: Despite the bullish interruption on the fourth day, the overarching trend remains bearish. The pattern is generally perceived as a bearish continuation, suggesting that the bulls’ brief attempt on the fourth day fails to overturn the dominant downtrend.
Evaluating the Context: The potency of the Bearish Three Line Strike is bolstered when aligned with other technical indicators. For instance, if the fourth candle faces resistance at a known level or is paired with a high selling volume, it amplifies the pattern’s bearish continuation indication.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
To wrap things up, the Bearish Three Line Strike epitomizes the resilience of a bearish market. Even when the bulls make a valiant effort on the fourth day, the overarching bearish sentiment persists, dominating the narrative. As with all candlestick patterns, while the Bearish Three Line Strike offers valuable insights, it is paramount to interpret it in tandem with the broader market landscape and other technical tools to ensure a comprehensive and judicious trading strategy.
Lesson 7
Three Inside Down
Pattern Type: Bearish
The Three Inside Down is a bearish reversal candlestick pattern, indicating a potential shift from an existing uptrend to a new downtrend. This pattern suggests that selling pressure is mounting, marking a likely end to a prior bullish phase and signaling a transition towards a bearish sentiment in the market.
What The Pattern Looks Like
The Three Inside Down pattern is formed by a sequence of three candles:
First Candle: A long bullish (green/white) candle, indicative of the continuation of the preceding uptrend.
Second Candle: A bearish (red/black) candle that forms within the range of the first candle. This candle closes lower than its open but doesn’t dip below the close of the first candle. Essentially, this forms a bearish harami pattern when combined with the initial bullish candle.
Third Candle: Another bearish candle that closes beneath the low of the first candle, thus solidifying the reversal indication.
Pattern psychology
To grasp the mentality driving the Three Inside Down pattern:
Initial Optimism: The bullish candle that begins the sequence suggests that buyers are still active and are steering the market in an upward direction.
Emergence of Uncertainty: The subsequent bearish candle, contained within the boundaries of the initial candle, implies a waning bullish sentiment. The sellers are starting to gather momentum, introducing doubt into the previously dominant bullish trend.
Bearish Affirmation: The third bearish candle, closing below the low of the first, is a forceful move signaling that sellers have wrested control from the bulls. This culmination indicates that a bearish reversal is likely underway.
Pattern Significance: The Three Inside Down portrays the power dynamics shift from bulls to bears. Initially, the bullish sentiment appears to prevail, but the consecutive candles unveil a growing and then confirmed bearish dominance.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
In conclusion, the Three Inside Down serves as a strong hint of an impending bearish phase after an existing uptrend. For traders, it can be a signal to contemplate short positions or to take precautions on existing long positions. As always, interpreting the Three Inside Down alongside other technical indicators and within the broader market context is crucial to ensure robust and informed trading decisions.
Lesson 8
The Gravestone Doji Pattern
Pattern Type: Primarily Bearish (but context matters)
The Gravestone Doji is an intriguing candlestick pattern often signaling a potential bearish reversal, especially when observed after an uptrend. The pattern derives its ominous name due to its resemblance to a gravestone, representing the end of the bullish sentiment.
What The Pattern Looks Like
The Gravestone Doji is characterized by a single candle with the following traits:
Open, Close, and Low Prices: These prices are almost identical or very close, resulting in an extremely small or nonexistent body. Essentially, the open and close are at the lowest price point of the session or close to it.
Upper Shadow: The Gravestone Doji exhibits a long upper shadow (wick) that stretches above the body, signifying the range between the session’s highest traded price and the opening/closing price.
Lower Shadow: This pattern either lacks a lower shadow or has a very short one, denoting that the lowest price of the day is around where the security opened and closed.
Pattern psychology
Delving into the psychological underpinnings of the Gravestone Doji:
Initial Bullish Momentum: The session starts with bulls pushing the price upwards, reflected in the long upper shadow as the price surges to its peak for the day.
Bears Take Control: As trading progresses, bears intervene and drag prices downwards. This bearish push is so pronounced that the session’s close is at or near its opening price.
Indication of Reversal: The formation of the Gravestone Doji suggests that while bulls initially dominated the trading session, by its end, the bears managed to completely offset the bullish advance. Especially when appearing after an uptrend, this balance and eventual overpowering of bulls by bears points to a potential bearish turnaround or a deceleration of bullish momentum.
Importance of Context: While the Gravestone Doji is primarily interpreted as a bearish signal, its relevance and strength as an indicator are amplified when viewed within a broader trend. For example, its appearance following a protracted uptrend carries a strong bearish reversal implication. On the other hand, its occurrence during a downtrend might suggest potential deceleration in the bearish sentiment, but it doesn’t serve as a robust bullish indicator.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
To summarize, the Gravestone Doji provides traders with a visually compelling representation of a potential shift in market sentiment, typically from bullish to bearish. The pattern illustrates a session-long tug-of-war between bulls and bears, culminating in a bearish stand by the close. However, like all candlestick patterns, it’s crucial to interpret the Gravestone Doji in tandem with other technical indicators and within its larger market context for more accurate trading decisions.
Lesson 9
The Dark Cloud Cover Pattern
Pattern Type: Bearish
The Dark Cloud Cover is a bearish reversal candlestick pattern, often appearing after an uptrend and signaling a potential shift in the prevailing bullish sentiment. The pattern encapsulates the market’s transitioning dynamics, where bullish optimism is being overshadowed by emerging bearish sentiment.
What The Pattern Looks Like
The Dark Cloud Cover is a two-candlestick pattern with the following characteristics:
First Candle: A relatively long bullish (green/white) candle that reflects the continuation of the existing uptrend.
Second Candle: This is where the dynamics change. The candle opens above the high of the preceding bullish candle, creating an initial impression of a continuing uptrend. However, as the session progresses, it closes significantly lower, penetrating at least halfway (typically more) into the body of the first candle. This candle is bearish (red/black).
Ideal Scenario: For a more potent Dark Cloud Cover pattern, the second candle should close below the midpoint of the first candle’s body. The deeper the penetration, the stronger the potential bearish reversal signal.
Pattern psychology
Understanding the mindset behind the formation of the Dark Cloud Cover:
Continuation of Bullish Trend: The initial candle represents a continuation of the bullish trend, indicating that buyers still have the upper hand.
Shift in Sentiment: The second candle starts with optimism as it opens above the prior session’s high. However, as the trading session progresses, sellers come into force, driving the price significantly lower. This culminates in the candle closing well into the body of the previous day’s bullish candle, symbolizing a sudden and marked shift in sentiment.
Emerging Doubts: The rapid shift from the high opening to the deep closing penetration encapsulates growing uncertainty and apprehension among traders. The once prevailing bullish sentiment is now being seriously questioned, and doubt creeps in.
Need for Confirmation: While the Dark Cloud Cover inherently is a strong bearish reversal sign, seasoned traders often look for further confirmation. This could come in the form of another bearish candle following the pattern, a surge in trading volume on the second candle, or corroborative signals from other technical indicators.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
In summary, the Dark Cloud Cover candlestick pattern serves as a graphical representation of a changing tide in market sentiment. From the highs of bullish dominance, there’s a noticeable intrusion of bearish sentiment, suggesting potential trend reversals. As with all candlestick patterns, while the Dark Cloud Cover provides valuable insights, it’s always prudent to assess it in the broader context of the market and alongside other technical tools to derive the most informed trading decisions.
Lesson 10
The Bearish Marubozu Pattern
Pattern Type: Bearish
The Bearish Marubozu is a pronounced bearish candlestick pattern, representing robust selling sentiment throughout a given trading session. Stemming from the Japanese term for “bald” or “shaven,” the name “Marubozu” refers to the pattern’s distinct lack of shadows, showcasing a steadfast commitment from sellers from the session’s beginning to its end.
What The Pattern Looks Like
The distinct features of the Bearish Marubozu include:
No Shadows: The primary hallmark of a Marubozu is its absence (or nearly negligible presence) of upper and lower shadows. This suggests that the opening price was also the session’s high, and the closing price was its low.
Long Red Body: The body of the candle is red (or black depending on the charting system), signifying that the closing price was lower than the opening price.
Size: Typically, the Marubozu boasts a relatively long body in comparison to previous candles, highlighting the strong selling sentiment that prevailed throughout the session
Pattern psychology
Delving into the mentality driving the Bearish Marubozu’s formation:
Consistent Bearish Momentum: The session commences at its peak and concludes at its lowest point, underscoring a persistent selling pressure from start to finish. At no juncture did the buyers push the price above the opening, nor prevent the sellers from driving it down to the close.
Undiluted Seller Control: The sheer absence of shadows paints a picture of a trading period where one sentiment reigned supreme. For the Bearish Marubozu, it’s evident that sellers maintained unwavering dominance.
Potential Continuation or Reversal: If this pattern emerges amidst a downtrend, it solidifies the bearish sentiment, hinting at a continuation. Conversely, if it materializes after an uptrend or at a recognized resistance level, it can signal a potent bearish reversal, suggesting that the bulls have been overpowered and a downward shift may be imminent.
Prudence is Key: While the Bearish Marubozu embodies potent bearish sentiment, traders must exercise caution. If the Marubozu is spotted after an extended downtrend, it could also indicate the final thrust before a reversal or consolidation phase. As always, the broader context and auxiliary technical indicators must be factored in for a holistic analysis.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
In summation, the Bearish Marubozu stands as a testament to bearish supremacy in a specific trading session. Its unmistakable, shadow-free formation underscores a palpable confidence among sellers, making it an invaluable pattern for traders to be acquainted with. Nevertheless, it’s imperative to interpret the Bearish Marubozu in conjunction with other technical tools and within the larger market framework to glean the most accurate insights into prospective price trajectories.
Lesson 11
Bearish Abandoned Baby
Pattern Type: Bearish
The Bearish Abandoned Baby is a significant and dependable candlestick reversal pattern, signaling a potential top in the market. While it’s a rarer pattern, its appearance is a strong indicator of a changing tide in investor sentiment, shifting from bullish to bearish. This pattern can be seen as a counterpart to the Bullish Abandoned Baby, but it typically forms at the end of an uptrend.
What The Pattern Looks Like
The Bearish Abandoned Baby consists of three distinct candles:
A long bullish (green or white) candle, reflecting a continuation of the prevailing uptrend.
A small Doji candle that gaps above the close of the previous bullish candle. The Doji, in this position, represents a state of market indecision and does not overlap with the preceding day’s trading range.
A long bearish (red or black) candle that gaps below the close of the Doji, showcasing a strong reversal and potential initiation of a new downtrend.
Visually, the pattern paints a picture where the “baby” (Doji) is left abandoned, separated from the trading action of the days before and after.
Pattern psychology
The underlying psychology of the Bearish Abandoned Baby pattern mirrors a dramatic change in market dynamics:
First Candle: The bullish momentum is in full swing, with buyers pushing the price higher, resulting in a pronounced bullish candle.
Second Candle (Doji): The market, after opening with a gap up from the previous session’s close, starts to show signs of hesitation. Neither the bulls nor the bears dominate the session, leading to a Doji. This candle hints at the potential exhaustion of the bullish momentum and suggests that a turning point may be near.
Third Candle: The subsequent bearish candle opens with a gap down, underscoring the sudden return of the bears. This shift indicates that the bulls have lost their previous dominance, and the bears are now in control, driving prices lower. The resulting bearish candle confirms the reversal from the uptrend.
What The Pattern Looks Like
An Example Of The Pattern In A Graph
In essence, the Bearish Abandoned Baby pattern narrates a story of bullish fatigue, a pause in market conviction, followed by a bearish takeover. Spotting this pattern can give traders an early warning of a potential bearish reversal after a sustained uptrend.
Lesson 12
Falling Window (Gap)
Pattern Type: Bearish
The Falling Window, also known as the “Gap Down” in Western technical analysis, is a bearish candlestick pattern signaling a potential continuation of the current downtrend. This pattern is characterized by a gap between the low of one session and the high of the following session, with no overlap in prices. The presence of this window or gap provides a strong indication of bearish sentiment in the market.
What The Pattern Looks Like
The Falling Window pattern comprises:
A candle, which can be bullish or bearish, followed by a gap where the next candle opens.
A subsequent candle that opens below the low of the previous session, leaving a clear gap or “window” between the two sessions.
For the pattern to maintain its validity, the window should remain unfilled. This means no trading activity should overlap into the gap area. If future candles close the gap, it can negate the bearish implication of the Falling Window.
Pattern psychology
The psychology underpinning the Falling Window (Gap Down) pattern is as follows:
Before the Gap: Prior to the gap’s formation, the sentiment might be mixed, or there could already be a bearish trend in motion.
Formation of the Gap: The emergence of the gap signifies a sudden and robust increase in the asset’s supply, such that the opening price is notably lower than the previous session’s low. This shift could be attributed to negative news, disappointing earnings reports, or other influential negative catalysts.
After the Gap: If prices continue to decline or remain below the gap without filling it, it reinforces the strong bearish sentiment. However, if prices begin to rise and fill the gap, it could indicate weakening bearish momentum or a potential reversal.
What The Patt
ern Looks Like
An Example Of The Pattern In A Graph
The Falling Window serves as a visual depiction of a period where the dynamics of supply and demand tilted heavily in favor of supply, causing a drop in price. The sustained presence of this gap signifies enduring bearish sentiment, as buyers aren’t pushing prices back up to fill the gap, and sellers are willing to offload at these reduced levels.