Chapter 21 · Double Candle Patterns
Double candle patterns
Engulfing, harami, piercing and tweezers, each with the exact test it has to pass.
Engulfing and harami
A two-candle pattern is a claim about a relationship: what the second body did to the first. Every definition below is a test you can apply with four numbers, and if the test fails the pattern is not there, however much the chart looks suggestive.
| Pattern | The exact test | Conventional reading |
|---|---|---|
| Bullish engulfing | Candle 1 red. Candle 2 green, opens at or below candle 1's close, closes at or above candle 1's open. | Buyers took control |
| Bearish engulfing | Candle 1 green. Candle 2 red, opens at or above candle 1's close, closes at or below candle 1's open. | Sellers took control |
| Piercing | Candle 1 red. Candle 2 green, opens below candle 1's low, closes above the midpoint of candle 1's body but below its open. | Weaker bullish reversal |
| Dark cloud cover | The mirror image, at a top. | Weaker bearish reversal |
| Bullish harami | Candle 1 a large red body. Candle 2 a small green body wholly inside it. | Selling momentum stalled |
| Bearish harami | Candle 1 a large green body. Candle 2 a small red body wholly inside it. | Buying momentum stalled |
| Harami cross | As above, but the inside candle is a doji. | A stronger version of the same |
| Tweezer top | Two candles with near-identical highs. | A level rejected twice |
| Tweezer bottom | Two candles with near-identical lows. | A level defended twice |
| Bullish kicker | A red candle, then a green one that opens above the red's open and never trades back into it. | An abrupt change of view, usually on news |
Worked: does this qualify as a bullish engulfing?
| Open | High | Low | Close | |
|---|---|---|---|---|
| Day 1 | 268 | 272 | 251 | 254 |
| Day 2 | 252 | 274 | 249 | 271 |
- 1Day 1 is red — close 254 is below open 268. Condition met.
- 2Day 2 is green — close 271 is above open 252. Condition met.
- 3Day 2's open, 252, is at or below day 1's close, 254. Condition met.
- 4Day 2's close, 271, is at or above day 1's open, 268. Condition met.
- 5It is a bullish engulfing.
What a bullish engulfing actually says
Read the mechanics rather than the name. The stock opened below where it closed yesterday — the sellers still had the upper hand at the open — and then finished above where yesterday's session began. An entire session's worth of selling was reversed and exceeded in one day. That is a real event, and it is why the pattern is taken more seriously than most.
What separates one worth acting on from one that is noise
- Size relative to the stock's own range. An engulfing body of Rs 19 on a stock whose ATR is Rs 6 is meaningful. The same pattern with a Rs 2 body is not.
- Location. At a support zone, a 200-day average or a prior swing low it matters. In the middle of a range it does not.
- Volume on the second candle, measured against that stock's own 20-day average volume — not against another stock's.
- A real trend before it. A reversal pattern needs something to reverse. Three flat weeks then an engulfing candle reverses nothing.
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