THE WEALTH

MATRIX
Predicting Profits

with Chart Patterns

 Technical Analysis is a popular technique that allows
1.2 The Importance of Candlestick
Technical analysis us to build this particular skill of maintaining a good
Patterns in Technical Analysis
perspective on these key metrics. It not only helps us

An Overview develop a directional point of view on the price

movement of an asset but also helps us define key

Over time, patterns form within these charts and each
trade variables such as entry, exit and risk.

pattern conveys a message about the future price

1.1 Introduction and Key Concepts movement of the particular asset we’re looking at. The
Although a coveted approach to creating wealth
job of an analyst is to identify these patterns and
through the markets, Technical Analysis also comes
develop a point of view for a trade.

History often repeats itself in financial markets and the

with its pros & cons. It is one of many research
business world, except for black swan events here and techniques to identify trading opportunities based on
Like any research technique, Technical Analysis will
there. The ever-evolving art and science of technical
the collective actions of market participants, which are
have you playing around with a bunch of assumptions,
analysis is based on this very principle and helps visualized by means of candlestick charts.
and as a practitioner of TA, you will need to trade the
individuals predict future price movements on assets
markets keeping these assumptions in perspective. We
they’re looking to trade.

Setting Expectations
will dive deeper and understand these assumptions

with the help of candlestick patterns as we progress

To be able to place profitable trades more often, a Technical analysis is best used to identify short to
through this playbook.
trader must build a good perspective on a few key medium-term trades. Long term investment
metrics, such as:

opportunities are best identified using Fundamental

Analysis, which we will be discussing in a lot more

- The price at which one should buy or sell the stock

detail in our Millionaire Trader’s Playbook. It is

- The risk involved in the trade

recommended that trades based on Technical Analysis

should only have a holding period ranging from a few

- Expected returns on the trade

minutes to a few weeks.

- The expected holding period for the trade
ANATOMY OF A
Bearish candle components
The central real body - Rectangular in shape,
connects the opening and closing price

CANDLESTICK CLOSE
HIGH
Upper shadow - Connects the open to the high point
Lower shadow - Connects the close to the low.

A long bodied candle depicts strong buying/selling

2.1 Understanding Basic OPEN activity. A short bodied candle depicts less trading activity
Candlestick Components LOW
and hence, less price movement. To sum up, candlesticks
are a handy tool to interpret and comprehend the OHLC
Bullish Candle
(Open, High, Low, Close) data points and help us quickly
Before we get into Chart Patterns, we will need to
visualize the relationship between the O & C + H & L
understand the anatomy of the candle to learn
price points.
candlestick charting techniques.

HIGH
Bullish candle components OPEN
The central real body - Rectangular in shape, it
connects the opening and closing prices
Upper shadow - Connects the high point to the close
CLOSE
Lower shadow - Connects the low point to the open. LOW

Bearish Candle
2.2. Time Frames

A time-frame is defined as the duration for which a trader

chooses to study a particular chart. Some popular time

frames that analysts use are

Monthly Chart

Weekly Chart

Daily Chart

4 Hour/Hourly Chart

Intraday Charts - 30/15/5 minute charts

Let’s say we’re looking at the Daily chart for a trade. What

we’re essentially looking at is the open price at 9:30am, the

highest traded price, the lowest traded price and the close

price at 4pm, all contained within one candle.

Based on the type of trader you are or choose to be, you

will need to select a time frame that would suit you the best.
SINGLE CANDLESTICK

This caused the asset to close near its high point for the almost every price point during the day. This led the
day. It does not matter what the prior trend has been, the asset price to close at the low point for the day. Like the
price action on the marubozu suggests that the sentiment case of the bullish marubozu, the prior trend doesn’t

PATTERNS has changed, and the prospects are now bullish. matter and the price action on the marubozu time frame
suggests that the sentiment is bearish.

The general expectation is that this sudden change in

Candlestick patterns help technical analysts setup a trade.
sentiment will be carried forward over the upcoming few
These patterns are typically formed by grouping two or
trading sessions and one should be looking at shorting
more candles in a certain sequence. However, powerful
opportunities.
trading signals can also sometimes be identified by just a
single candlestick pattern.

3.1. The Marubozu: Strong Bullish/Bearish Bullish & Bearish Marubozu Candlesticks

Sentiment
With this sudden change in market sentiment, the
expectation is that the bullishness will continue over the
The Bullish Marubozu:

next few trading sessions. Traders should look at buying

The absence of the upper and lower shadow in a bullish opportunities with the occurrence of a Bullish Marubozu.

marubozu implies that the low is equal to the open and

the high is equal to the close. A bullish marubozu
The Bearish Marubozu:

suggests that there has been so much buying interest in

A red marubozu indicates extreme bearishness - there is
the asset that traders and investors were willing to buy the
too much selling pressure that market participants sold at
asset at every price point during the day.
3.2. The Spinning Top: Equilibrium of Buyers To understand the price action for a spinning top, we will
need to dissect its three components
Taking into consideration all components of the spinning
top, both the bulls and the bears made attempts to move
and sellers markets their way, but neither of them succeeded.
Small real body: The close proximity of the open and Neither were able to establish influence on the market as
close prices represents indecision in the market, evident with the small real body. Hence, spinning tops
Spinning tops give out valuable information with regard
suggesting that neither the buyers nor the sellers could are indicative of a situation in the market where
to the situation of the market and traders can use this to
gain an upper hand during the trading period, hence indecision and uncertainty prevails.

pick the best position for themselves.

the small real body. The color of the candle doesn’t

really matter in the case of spinning tops
Spinning tops look like this
The candles have a small bod
Upper shadow: The upper shadow connects the real
Upper and lower shadows are almost equal
body to the high point of the day. Taking real body in
conjunction with the upper shadow, ignoring the lower
shadow, leads us to the conclusion that the bulls
attempted to take the price significantly higher than
what happened to be the close price

Lower shadow: The lower shadow connects the real

body to the low point of the day. Taking the real body
in conjunction to the lower shadow ignoring the upper
shadow, we understand that bears tried to take the
market lower than the close.
Bullish & Bearish Spinning Tops
 A doji/spinning top at the bottom of a rally indicates that It consists of two trend reversal patterns - when it appears
3.3. The Doji: Uncertainty and Indecision
there is an equal chance of the market continuing its at the bottom of a downtrend, it’s called The Hammer

downtrend or starting a reversal. A doji that appears after and when appearing at the top of an uptrend, it is called

Dojis don’t have a real body at all. This means that the a healthy uptrend could indicate a trend reversal. The The Hanging Man.

open and close prices are (almost) equal. The upper and next time you see a standalone doji or a spinning top, or

lower shadows can be of any length and the color of the both of them in a cluster, you’ll need to build a stance

candle doesn’t matter.

that adapts to the expected movement in the market.

Looking at the prior trend and the support and resistance

levels could help you position yourself correctly in the

Like spinning tops, Dojis hint at indecision. More often

than not, dojis and spinning tops appear in clusters event of a doji.

indicating indecision and uncertainty in the market.

3.4 The Paper Umbrella: Reversals with

The Hammer and The Hanging Man Paper Umbrellas

The paper umbrella is a single candlestick pattern that The Price Action & Thought Process behind a Hammer

helps traders set up directional trades. The interpretation

changes based on where it appears on the chart. The

The longer the lower shadow, the more bullish the

Doji Candlesticks paper umbrella is characterized by a long lower shadow

pattern. The color of the hammer doesn’t really matter as
with a small upper body. To qualify a candle as a paper
long as it fulfils the shadow to real body ratio, although It
umbrella, the length of the lower shadow should be at
is slightly more comforting to see a green candle.
least twice the length of the real body.
The prior trend is a downtrend, where the bears are in The Price Action & Thought Process behind The Hanging
absolute control Man:

Every day, the asset opens lower than the previous A hanging man signals a market high, and the color
day’s close and forms lower highs and lower lows doesn’t matter if it fulfils the shadow to real body ratio

On the day of the hammer formation, the market The market is in an uptrend, and the bulls are in
A hammer at the bottom of a downtrend
trades lower as expected and makes a new low absolute control

At the low point, buying interest emerges and pushes The market is characterized by new highs and higher
the prices higher, to the extent that the asset closes lows.
near the high point of the day
The day of the hanging man formation, the bears
The price action on the hammer formation day have managed to influence the market, which is
suggests that the bulls attempted to stop the price emphasized by a long lower shadow of the formation
from falling further and were reasonably successful
The selling pressure at the top of an uptrend with the
This buying interest at the bottom of a downtrend has formation of The Hanging Man suggests a short
the potential to change the market sentiment, and trade.
traders should look at buying opportunities.

A Hanging Man at the top of an uptrend

3.4 The Shooting Star: Short it Now
The price action the day of a shooting star is quite
powerful, which makes it a very popular candlestick
pattern to trade. It looks like an inverted paper umbrella.
The longer the upper wick, the more bearish the pattern.
The shooting star should not have a lower shadow, but a
small lower shadow is acceptable.

Shooting Stars

The Price Action & Thought Process behind The Shooting

Star The selling pressure indicates that the bears have
successfully influenced the price action. This is evident
The market is in an uptrend, implying that the bulls by the long upper shadow
are in control and the asset tends to make higher
highs and higher lows The expectation is that the bears will continue selling
over the next few trading sessions and traders should
On the day of the shooting star formation, the market look for shorting opportunities.
trades higher as expected and makes a new high
At the high point of the day, there is selling pressure
to an extent where the price closes near the low point
of the day.
MULTIPLE
CANDLESTICK
PATTERNS
Bullish Engulfing Bearish Engulfing

4.1 engulfing Patterns: Bullish And

Bearish Signals

The Day 1 candle should be a red one, confirming In the Bearish Engulfing pattern, the exact opposite of its
In a typical engulfing pattern, we find a small candle on
the bearish sentiment in the market bullish counterpart plays out over the course of two
Day 1 and a relatively long candle on Day 2. The Day 2
trading sessions and one needs to think about the asset
candle appears to engulf the Day 1 candle.

The price action on Day suggests that the bulls from a shorting perspective.
The Bullish Engulfing pattern is a two-candlestick pattern
made a strong attempt to break the bearish
which appears at the bottom of a downtrend. This is a
momentum and did so quite successfully
prompt for the trader to go long.

The bullishness is expected to continue over the next

The Prerequisites, Thought Process & Price Action behind
few successive trading sessions, driving the prices
the Bullish Engulfing Pattern
higher and traders should look for buying
opportunities.
The prior trend should be a downtrend
4.1.1 Unusual Subtleties at the presence of On Day 2, the market opens higher and makes a

new high. At the high point of the day, the selling

a doji pressure starts and the price closes below opening

prices
Doji

The trading action on Day 2 sets in a state of panic

for the bulls but they are not shaken yet. On Day 3,

the opening is weak but it is not much lower than Day

2’s close. This doesn’t comfort the bulls as they

expect the markets to be stronger. The market

attempts to move higher (Upper shadow of Doji) but

the high is not sustained. The low is also not

sustained and the day closes with the formation of a

Doji on Day 3 of the Bearish Engulfing Pattern Doji, which indicates uncertainty in the market

On Day 2, the bulls panicked and on Day 3, they

From this pattern, we can infer that were uncertain. Panic with uncertainty is the perfect

recipe for a catastrophe, which explains the long red

The prolonged uptrend confirms that the bulls are in candle following the Doji. Whenever a Doji follows a

absolute control recognizable candlestick pattern, the opportunity

created is bigger.

On Day 1, a green candle is formed, reconfirming

the bulls’ dominance. In this scenario, shorting the asset would prove to be very

profitable until the next time the market suggests a start

of an uptrend.
4.2 Piercing Line and Dark Cloud Cover: Hints
of Changing Dynamics

In a piercing pattern, the Day 2 green candle partially

engulfs the Day 1 red candle. The engulfing should be at
least 50% but less than 100%. The price action and trade
setup for this pattern remains the same as that of the Piercing Line Pattern
bullish engulfing pattern.

The dark cloud cover is very similar to the bearish

engulfing pattern with the same variations as seen
between the bullish engulfing and the piercing patterns.
The thought process and trade setup should be exactly
the same as the bearish engulfing pattern.

Dark Cloud Cover

 On Day 2, the market opens at a price higher than
4.3 The Harami: Bearish and
the previous day’s close. On seeing a higher opening
Bullish Variations price, the bears panic as they would’ve otherwise

expected the prices to go lower

The harami is a two candlestick pattern where the first The market gains strength on Day 2 and manages to

candle is usually long at the second candle has a small close on a bullish note, forming a green candle. The

body. The second candle is typically opposite in color to close of Day 2 is just below the open of Day 1.

the first candle. Much like the engulfing patterns, at the

The price action on Day 2 creates a small green
appearance of a harami, a trend reversal is on the cards.

candle which appears contained within the bounds of

the Day 1 red candle. The least expected green

The Bullish Harami

candle unnerves the bears and encourages bulls to

The bullish harami appears at the bottom of the chart
build long positions
and evolves over a two-day period.

The expectation at this point is that the panic amongst

The Thought Process & Price Action behind the Bullish
the bears will spread rapidly, giving greater control to
Engulfing Pattern
the bulls. This pushes the prices higher, hence one
The market is in a downtrend, giving the bears
should look on going long on the asset.
absolute control

On Day 1, a red candle with a new low is formed,

reinforcing the bears’ influence in the market

The Bearish Harami

The bearish harami appears at the top end of an uptrend

which gives the trader an opportunity to initiate a short
trade.

The Thought Process behind a Bearish Harami

The market is in an uptrend, with the bulls controlling
the price action
Stop Loss
Bullish Harami
On Day 1, the market trades higher and makes a
new high. The asset closes with a green candle. This
confirms the bulls’ dominance in the market.

On Day 2, the market unexpectedly opens lower

which displaces the bulls and sets in a bit of panic to Stop Loss

the bulls. The market continues to trade lower to an

extent where it manages to close negatively, forming a
red candle

The unexpected red candle unnerves the bulls and the

expectation is that the breakage of the bullish
momentum will cause a reversal, and one should look
at shorting opportunities.
Bearish Harami
 The Gap Up
The Gap Down

4.4 The Gaps: When Markets Don’t Sleep

When a company releases positive news after the market If there's unfavorable news about a company after the

closes—like a favorable earnings report or a new market closes, such as a disappointing earnings report,

The morning and evening stars are the last two patterns product launch—buyers may scramble to purchase regulatory issues, or a leadership change, sellers may

we will be looking at in this category. They are called shares when the market opens again. This rush of buying rush to offload their shares when the market opens. This

“star patterns”, and before we understand these patterns, activity can cause the stock's opening price to be surge of selling activity can cause the stock's opening

we will need to understand two common price behaviours significantly higher than its previous closing price, price to be significantly lower than its previous closing

- the gap up opening and the gap down opening.

creating a gap up.

price, creating a gap down.

The price gap is common price behavior in the markets.

After regular market hours, trading still occurs during If a significant number of investors decide to sell a stock

after-market hours. If a significant number of investors during after-market hours due to some negative
A gap on a daily chart happens when the asset closes at

buy a stock during this period, it could cause the price to sentiment, it could cause the price to drop. When the
one price but opens the following day at a different price.

rise. When the market officially opens the next day, it market officially opens the next day, it could open at this

could open at this higher price, again creating a gap up. lower price, again resulting in a gap down.

Gap Up Gap Down

4.5 Morning Star and Evening Star: The The occurrence of a Doji/Spinning Top sets in a bit of
restlessness within the bears, as they would’ve
Dawn and Dusk of Trends otherwise expected another down day especially after
the promising gap down opening

Morning Star

The Morning Star is a bullish candlestick pattern that On Day 3, the market opens with a gap up followed

evolves over a three day period. This pattern typically by a green candle which manages to close above

appears at the bottom of a downtrend. Day 1’s red candle opening. Ignoring the Day 2 Doji/
Spinning Top, it would appear as though Day 1 and

The Thought Process behind the Morning Star Day 3 have formed a bullish engulfing pattern

Morning Star
The market is in a downtrend, placing the bears in
Day 3 is where all the action unfolds. The gap up
control. The market makes successive new lows
opening sets fear in the bears and buying persists
during this period
throughout the day, so much so that it manages to
recover all the losses of Day 1
On Day 1, the market makes a new low and forms a
long red candle. The large red candle confirms the
The expectation is that the bullishness on Day 3 is
bearishness
likely to continue over the next few trading sessions
and hence one should look at buying opportunities.
On Day 2, the bears show dominance with a gap
down opening. After the gap down, nothing much
happens, resulting in a Doji or a Spinning Top, which
hint at indecision in the market.

Evening Star
On Day 3, the market opens with a gap down and
The Evening Star is the bearish equivalent of the Morning progresses into a red candle. The long red candle
Star and appears at the top end of an uptrend. indicates that the sellers are taking control

The Thought Process behind shorting the Evening The expectation is that the bearishness will continue
Star over the next few trading sessions, therefore one
should look at shorting opportunities.
The market is in an uptrend placing the bulls in
control

During the uptrend, the asset is making higher highs

and higher lows

On Day 1, the market opens high as expected,

makes a new high and closes near the high point of
the day. The long green candle on Day 1 shows
buying acceleration

On Day 2, the market opens with a gap up,

reconfirming the bulls’ stance in the market.
However, after the encouraging open, the market
doesn’t move and closes on a Doji/Spinning Top. The
closing on Day 2 sets in a bit of panic for the bulls.
Evening Star
 On Day 1, the market opens lower, creating a new

4.6 Tweezer Tops and Bottoms: Reversal low, with bears controlling the trading session. The

candlestick could be any color, but the main

Indicators
characteristic is that a new low is achieved

Tweezer Top

On Day 2, the market opens and dips to the same

The Tweezer Top is a bearish reversal pattern that occurs

low as the previous day but fails to push any lower,

at the end of an uptrend.

creating a second trough at the same level as Day 1.

Tweezer Top The candlestick this time may be green, indicating a

The Thought Process behind the Tweezer Top
buying pressure at this level. The identical lows of Day

The market is in an uptrend, indicating that the bulls

The expectation, therefore, is that the bearishness will 1 and Day 2 form the "tweezer" pattern

are in control. The asset makes consistent higher

carry over the next few trading sessions, making it a
highs and higher lows during this period
good opportunity for potential short positions. The inability to make a lower low is a signal of

potential exhaustion of the bearish trend and can

On Day 1, the market opens higher, pushing to a new
indicate a possible reversal. Therefore, the
high, with bulls dominating the trading session Tweezer Bottom

expectation is that bullishness will prevail over the

The Tweezer Bottom is the bullish equivalent of the
next few trading sessions, making it a potentially good
On Day 2, the market opens and pushes to the same Tweezer Top and occurs at the end of a downtrend.
opportunity for long positions.
high as the previous day but fails to push further,
The Thought Process behind the Tweezer Bottom
forming another peak at the same level as the day

before. This time, the candlestick may be red, The market is in a downtrend, putting the bears in

indicating a selling pressure at this level control. The asset is making consistent lower lows and

lower highs.

The identical highs of Day 1 and Day 2 form what

resembles a pair of tweezers, hence the name of the

pattern. The failure to break past the previous high

signals a potential exhaustion of the bullish trend,

indicating a possible reversal. Tweezer Bottom

 Here's a broad look at how trends are identified Minor Trend: This trend is short-term in nature, lasting

Dow Theory and confirmed according to the Dow Theory from hours to a few weeks. It's the fluctuation within

the secondary trend, akin to ripples on the waves in

Pattern Primary Trend: This is the major market trend and it

can be either bullish (an uptrend) or bearish (a

our sea analogy. These are the day-to-day market

fluctuations

Formations
downtrend). In an uptrend, the market hits

successively higher peaks and higher troughs. In a Trend Confirmation: According to Dow Theory, the

downtrend, it forms successively lower peaks and trends are confirmed by volume. The volume should

lower troughs. The primary trend is analogous to the increase in the direction of the primary trend. For
The Dow Theory was derived from Charles H. Dow’s
tide in the sea, it's the main direction where the example, in an uptrend, the volume should increase
writings in The Wall Street Journal and later refined by
market is heading over the long term (usually a year when the prices rise and decrease when the market
William Hamilton and Robert Rhea. The Theory is based
or more) pulls back
on six basic tenets, which we will dive into greater detail

in this chapter.

Secondary Trend: This trend acts as a correction Trend Reversals: The theory suggests that a primary

phase to the primary trend and can last from three trend remains intact until it gives definite signals that it
The Dow Theory's fundamental concept is that the market has reversed. This is often seen as a series of higher
weeks to as long as several months. It's a move
moves in a series of measurable trends, and these trends peaks and higher troughs for an uptrend, and a series
against the primary trend where the market retraces a
are indicators of the health of economic cycles. The Dow of lower peaks and lower troughs for a downtrend
part of the previous move. Think of it as waves in the
Theory lays out principles for understanding market
sea, moving against the tide (primary trend). In an
trends, their classifications, and phases. These principles Trendlines: Though not explicitly stated, trendlines and
uptrend, a secondary trend would be a pullback or a
are often used in conjunction with patterns recognized in channels drawn based on peaks and troughs are
correction, while in a downtrend, it would be a rally
broader technical analysis to gain better trading insights. often used in conjunction with Dow Theory principles
or a bounce.
for more precise entries and exits.
Some chart patterns that integrate with the tenets of The Dow Theory:

Head & Shoulders Double Bottom Ascending Triangle

BULLISH

Head & Shoulders Double Top Descending Triangle

BEARISH
 BULLISH BEARISH INDEFINITE

falling Wedge Rising Wedge

CONTINUATION

Symmetrical Triangle

Falling Wedge rising Wedge

rEVERSAL
More Chart Patterns:

bull Flag Bull Pennant

BULLISH

Bear Flag Bear Pennant

BEARISH
 6.2. Take your Finance game to the

Conclusion
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with our high-accuracy trade signals, helping you identify

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6.1 Continued Learning and Practice Congratulations on unlocking the secrets of chart

patterns with this playbook!

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