Learn & Earn through Candlestick Charts

- A Practical Approach to Indian Stock Markets

Binay Kr. Sharma

 Copyright © 2021 Binay Kr. Sharma

All rights reserved

The characters and events portrayed in this book are fictitious. Any similarity to real persons, living or
dead, is coincidental and not intended by the author.

No part of this book may be reproduced, or stored in a retrieval system, or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording, or otherwise, without express written
permission of the author.

ISBN-13: 9781234567890
ISBN-10: 1477123456

Cover design by: Art Painter

Library of Congress Control Number: 2018675309
Printed in the United States of America
 Introduction

Technical Analysis is a vast subject, and this industry is expanding at an exponential rate. Google
search of the word “Technical Analysis” provides over 1.77 Billion search results (Mar 2021)!

Technical Analysis rests on a framework of Mind, Method, and Money:

a) Mind (EMOTION) - is the most underestimated element. One needs to control his emotions
and follow the trading discipline to be successful at trading. It is an art and requires lot of practice and
self-control. No wonder, people with psychology background make good Technical Analysts.

b) Method (TECHNIQUE) - is what can be learnt. It encompasses Candles, Charts, Patterns,

Supports & Resistances, Trend, Indicators, Trading Techniques etc. The building blocks of all these
are Candles. A Candle is formed on a chart due to market Price-Action, and Price-Action is supreme --
it does not lie or hide any information.

c) Money (RISK) - means understanding and managing risk though proper management of
Trading Capital and Position Sizing.

In this book, we will primarily discuss the ‘Method’ part and focus on the core -- Candlestick &
Price-Action Patterns. We will also touch upon the ‘Risk’ element for logical continuity and
completeness.
 Objective

The objective of this book is two folds:

a) provide general information about Indian Stock Market

Reason #1 - required for logical beginning of the book, and

Reason #2 - many experienced market professionals, despite working for many years, still may
be unaware of this information

b) introduce detailed explanation of Candlestick Charts to everyone from absolute beginners to

an experienced trader

Students, Professionals, Salaried professionals, Homemakers, Businessperson -- all can benefit

from this book. This aims at being the go-to book for all those aspiring to learn Stock Market &
Technical Charts.

Reading this book would be the first step towards becoming a successful trader or investor!
 Disclaimer

All ideas, opinions, expressed or implied herein, information, charts, or examples contained in the
chapters, are for informational and educational purposes only and should not be construed as a
recommendation to invest or trade in stock market.

The author would not be responsible for any liability, loss, or risk resulting, directly or indirectly,
from the use or application of any contents of this book.

Investors and Traders are advised to take the services of a competent ‘Investment Adviser’,
before making any investment or trading decision.

Gender-neutral disclaimer – for the sake of better readability, when I state any gender-specific
term (he, him or his) throughout this book, I am referring to both male and female.

Chart Source disclaimer - technical candlestick charts are available freely at many websites.
However, all the charts depicted in the book have been taken from www.tradingview.com.

In case of any suggestion, one can reach the author at

binaysharma@hotmail.com
 Contents

Title Page
Copyright
Introduction
Objective
Disclaimer
General Information
On
Indian Stock Market
01 : Stock Markets & Trading Hours
02 : Stock Markets Participants
03 : What makes market move?
04 : Trading vs. Investing
05 : Fundamental vs Technical Analysis
06 : Animals in Stock Market Jungle
Technical Analysis
incl.
Candlestick Patterns & Charts
07 : OHLC Price
08 : Candlestick – an introduction
09 : Say ‘Hello’ to First Candlestick Chart
10 : Candlestick Patterns
11 : Single Candle Patterns
12 : Two Candle Patterns
13 : Three Candle Patterns
14 : Let us recap
15 : Does Candle Patterns really work?
16 : Support & Resistance
17 : Prepare for Trade
18 : Appendix
 General Information
On
Indian Stock Market
 01 : Stock Markets & Trading Hours
NSE (National Stock Exchange) & BSE (Bombay Stock Exchange) are
major Indian Stock Exchanges in India

a) Trading is done on Stock Exchanges (widely called Stock Market)

b) Trading is open from Monday to Friday (5 days a week) except

Trading-Holidays

c) Regular Trading timings are 09:15 hours to 15:30 hours

d) The market timing can broadly be divided into Morning Block Deal,
Pre-Market, Normal Market, and Closing Session. The details are as
follows:

e) Other major indices in the global market & their trading hours are
provided in Appendix
 History & Interesting facts about BSE
Although this section has nothing to do with trading, but the facts are so
interesting (from starting under a banyan tree to becoming 1st stock
exchange in Asia), that I could not resist myself to skip this. The history is
provided in chronological sequence:

the idea of the stock-exchange in India was born during British

rule
there was a banyan tree at Horniman Circle (Opposite Town Hall)
in Mumbai, where 5 cotton merchants use to gather and discuss
business ideas. Soon they started trading
the first stock traded was that of the Dutch East India Company
(unverified source)
25 of these merchants formed a group “The Native Shares and
Stock Brokers Association” and officially started trading in the
stock market
each of them contributed 1 Rs. each to start trading
this was the birth of Bombay Stock Exchange (BSE)

recognized by Indian Government as Stock Exchange under

Securities Contracts Regulation Act

the exchange moved to the Phiroze Jeejeebhoy Towers at Dalal

Street
that’s why BSE is also called Dalal Street
 BSE (Bombay Stock Exchange) developed its index, called
SENSEX (SENSitive indEX) for measuring the overall market
performance

BSE is the 1st stock exchange in Asia and has maximum number of listed
companies (~ 5000) in the world (source BSE website).
 02 : Stock Markets Participants
Four kind of participants exist in Indian Stock market:

Pros vs Retailers
 Retailer Individuals constitute ~95% of traders -- they watch business
news, listen to friend’s advice, always keep on searching for tips, and almost
always lose money
Professionals (Pros) analyze, strategize & plan their trades -- use charts,
spend time to educate themselves, takes logical decisions, and make Big
money most of the time

We aim to transition towards becoming a Pro …

 03 : What makes market move?
Stock prices change every moment due to constant Buying & Selling by
Investors & Traders.

Generally speaking, if more people want to buy a stock (demand), then

the price moves up. Similarly, if more people wanted to sell a stock, then the
price would fall.
 04 : Trading vs. Investing
Many people in Stock Market use these terms interchangeably. The basic
differences between these terms are as listed below:

Trading
a) TRADING is done for REGULAR SMALL INCOME on a relatively
SHORTER timeframe
b) TRADING is skill of timing the market
c) TRADER aspires for 50% or more annual return on his Capital
deployed
d) TRADING comparatively involves higher risk and higher potential
returns as the price might go high or low in a short while
e) If TRADING was a One-Day Cricket Match …… then INVESTING
would be a 5-day Test-Match

Investing
a) INVESTING is done for the purpose of WEALTH GENERATION
over a LONG PERIOD of time
b) WEALTH GENERATION is achieved through an art of buying &
holding quality stocks and compounding interest & dividend over
the years
c) Generally, an INVESTOR is happy with annual return of 10-15% on
his portfolio
d) INVESTING involves comparatively lower risk and lower returns in
a short run but might deliver higher returns by compounding
interests and dividends if held for a longer period of time. Daily
market cycles do not affect much on quality stock investments over
longer time
e) If TRADING was a One-Day Cricket Match …… then INVESTING
would be a 5-day Test-Match

Trading can be classified based on the time frame for which the position
is kept open:
 INVESTOR hold his position for months/ years, where TRADER is
opportunist and closes his position as soon as he is comfortable with profit!
 05 : Fundamental vs Technical Analysis
Analysts deploy various method for stock analysis, namely:

Fundamental Analysis
a) mainly used for INVESTING in the business of a Company
b) focuses on the difference between a stock’s value, and the price at
which it is trading
c) studies economy, market conditions, industry performance,
company’s financial positions, its management, and books of
accounts – including income statement, cash flows, balance sheet,
financial ratios etc.

Technical Analysis
a) mainly used for TRADING purpose
b) focuses on stock price and/ or volume data
c) studies candlestick chart patterns and trends, support and resistance
levels, and price and volume behavior to identify trading
opportunities with high probability

Principles of Technical Analysis

Technical Analysis works on certain principles, which are as follows:
a) whatever has happened before …. will happen again
b) the “what” (price action) is more important than the “why” (news,
earnings, and so on)
c) stock price is supreme … and all the information; known or
unknown; past, present or future; technical or fundamental; are
already factored in the stock price
d) buyers and sellers move the markets based on expectations and
emotions (fear and greed)
e) focuses on chart patterns and trends, support and resistance levels,
and price and volume behavior to identify trading opportunities with
high probability

one more kind of analysis – namely Quantitative Analysis, is used is for

data interpretation by Traders
 06 : Animals in Stock Market Jungle
While Bulls & Bears are common, other animals too exist in the Stock
Jungle. Some of them are:
 Technical Analysis
incl.
Candlestick Patterns & Charts
 07 : OHLC Price
OHLC – refers for Open, High, Low, Close price of a stock during a
period (say 1 day). OHLC is formed because of price-action movement of a
security's price plotted over a period of time.
a) Open Price (Rs. 90) -- is the first price at which stock gets traded at
09:15
b) High Price (Rs. 100) -- is the highest price traded during the day
c) Low Price (Rs. 88) – is the lowest price traded during the day

Example of OHLC of a typical stock

 d) Last Price (Rs. 95) -- LTP (Last Traded Price) is the actual last traded
price during the day

e) Close Price -- is the weighted average of last 30 minutes (from 15:00

to 15:30 hours) of trading

The Last traded price (LTP) usually differs from the closing price of the
day. The difference is usually wide if the market makes big move in the last
30 mins.
 08 : Candlestick – an introduction

Technical Analysis is a tool, or method, used to predict the future price

movement of a stock, based on market data.

The market data is presented in graphical form and which displays Open,
High, Low, Close information for a particular time-frame.
Technical Analyst use Candlestick Charts (or simple Candles) to show
the price movement on a chart.
Before we proceed further, lets us discuss a bit about the evolution of
Candlestick. Although there is little practical use, but for the sake of
completeness & logical continuity, we will touch upon briefly. Not to worry,
we will wrap it up fast.

History & Background

Long back, sometime in 18th century, there was a rice trader,
Munehisa Homma, in Sakata, Japan.
Munehisa Homma used to track the daily price movement of rice
at the local rice exchange.
He developed Candlestick Chart to track the daily Open, High,
Low & Close price of rice. With this technique, he could
successfully predict when the prices were going to increase or
decrease.
Thus, Candlestick or Japanese Candlestick was born. Munehisa
Homma is considered to be the father of the candlestick chart.
The candlestick charts soon became very popular in Japan.
The rest of the world were unaware about this until late 1980s as
the Japanese kept this knowledge with themselves. Even all the
early books & literature on this subject were written in Japanese.

Candlestick techniques can be used for Equity, Derivatives, Currency,

Commodity, and all other places where we have OHLC (Open, High, Low &
Close) data for a period (period may be minute, hour, day, week etc.)
 A Candle or Candlestick is composed of 3 parts – Upper Wick, Real
Body, and Lower Wick, and it depicts the OHLC (Open, High, Low &
Close) of a stock during a period.

The Real Body is nothing but the distance between Open and Close.

A candle is said to be Bullish or Bearish depending upon its Open and

Close. The Real Body is accordingly coloured Green (for Bullish candle) or
Red (for Bearish candle).
 Bullish Candle

Bullish Candle denotes positive sentiment in the market. The close price
of the candle is more than open Price, and hence its Real Body is shown in
Green (or white) colour.
 Bearish Candle

Bearish Candle denotes negative sentiment in the market. The close price
of the candle is less than open Price, and hence its Real Body is shown in
Red (or black) colour.
 A Candle may have varying sizes of Real Body and may be formed with
or without wicks. Here are some of the different candles which are
frequently formed:

Candle with no Upper Wick

The stock’s opening and high prices are same. It means that the price of
the stock came down immediately as soon as the market started.
Since the closing price of the candle is less than the opening price, the
Real Body is shown in Red colour.

Candle with large Real Body

The stock opened and moved up a big distance. Due to big difference in
the opening and closing price, the Real Body is very large. It is also called
LRC (Long Range Candle).
The Real Body is shown in Green colour because the closing price of the
candle is more than the opening price.
 Candle with big Upper Wick
The stock opened and moved up a big distance, and again came down
near the open.
The long upper wick implies that the high price was rejected and so the
stock came down.
The Real Body is shown in Green colour because the closing price of the
candle is still more than the opening price.

Candle with no Wicks at all

The stock opened and immediately started coming down. It kept coming
down and the closing was also at the day low.
 We can say that the sentiment was very Bearish as the Real Body was
large enough.
 A typical Candle chart is shown as example:

The 1-day chart of Asian Paints is shown above. It means that each
candle on the chart represent 1 day. The OHLC (Open, High, Low & Close)
for 26th Feb are marked.
Looking at the stock, it is clearly visible that the stock formed a Bearish
Candle on 26th Feb, as the Close price was less than the Open price, and
hence the Real Body is shown in Red.
We will look how to draw a candlestick chart in the next section!
Time frames of Candles
a) Time Frame is the duration of time of a single price bar on a chart.
On a 1-minute time frame chart, each candle contains the opening,
closing, high and low price of that 1-minute.

b) The commonly used time frames on a candlestick charts are 1

minute, 5 minutes, 15 minutes, 30 minutes, 1 hour, 1 day & 1 week.

c) Traders use two types of time-frames for trading:

bigger Time Frame just for TREND DETERMINATION, and

TRADING Time Frame for actual trading (refer to the table
below)

d) Trade should be taken in the direction of the TREND as per Bigger

Time Frame.
 1-day (Daily) time frame of KOTAKBANK
each candle on the chart represent data formed in 1 day from 09:15 am to
03:30 pm
 15-minute time frame of KOTAKBANK
each candle on the chart represent data formed in 15 minutes.
The first 15-minute candle of day will be formed with the open, high,
low and closing price during 09:15 to 09:30 am
 09 : Say ‘Hello’ to First Candlestick Chart
Now that you have basic idea about candles, let us create our first
candlestick chart. Here we go:

Almost all the brokers in India provide free candlestick chart with the
demat account subscription. There are other websites where one can get free
charts. Some of them are given below. You may use anyone of them (or as
offered by your broker) as per your choice.

https://chartink.com/
https://in.investing.com/
https://in.tradingview.com/

I have used free charts from www.tradingview.com. The step by step

method is provided below:

Step 1 :
Open https://in.tradingview.com/ in a web browser
Click at CHART
 Step 2 :
A chart similar to below one will open

Point (A) is SYMBOL of the stock/ index whose chart is open above.
You can change the chart to stock of your choice by clicking there.
Point (B) is TIMEFRAME of the chart. It is showing DAILY chart (D)
currently. You can change it to 5 min, 15 min, 1 hour etc by clicking there.
Point (C) shows that the chart type. It is showing CANDLESTICK
Chart currently. You can change the chart type to BAR CHART, AREA
CHART etc by clicking there.

Step 3 :
You will get additional controls, as shown below in red box, by hovering
your mouse pointer in that area.
“-“ is for zooming out, “+” for zooming in, “<” and “>” for moving left
and right. One more control would be visible for RESETTING the chart
once you click zoom in/ out button.
 Step 4 :
You may be prompted to ‘join free’ which you may decide to take a call.
However, you need to sign-in for saving your chart related settings.
 Step 5 :
The section ‘D’ provides DRAWING TOOLs to draw on the chart. You
can explore yourself by checking these tools. The section ‘E’ is your
watchlist. You can add/ delete stock/ index of your choice. The watchlist will
be saved once you sign-in to trading view using free account.

Step 6 :
Now you can explore the chart. Each candle on the chart represents 1 day
(if the TIMEFRAME is 1 day) -- you can change the stock, change the time-
frame, mark the different shapes and sizes of green (bullish) & red (bearish)
candles, and the sizes of the upper wicks & lower wicks on the chart

CONGRATS now that you are familiar with Candlestick charts!

 10 : Candlestick Patterns
Imagine a big crowd of people, and we are looking out for a person. It is
easier to spot & call the person if you know their name. Similarly, amongst
many candle patterns, if we know the name of few important candle patterns,
it is easy to spot & recognize the pattern on a candlestick graph.

A candle pattern is formed from OHLC price-action in a stock. A pattern

can be formed with a single candle, two candles or three candles.

There are plenty of patterns which Technical Analysts use. However, we

will discuss patterns which are common, widely used and are most useful.

Most important point to note that we need to understand the psychology

behind a particular candle pattern and remain flexible with the text-book
definition of these patterns.
 11 : Single Candle Patterns
Common Patterns formed from single candle are described below:

Hammer

a) Hammer is a Bullish Candle pattern.

b) A typical Hammer has small Real Body, no upper wick, and long tail
(or lower wick).
c) The size of the tail is usually more than 2 times that of Real Body.
d) Since the close price is more than open, the Real Body is Green.

e) A hammer is considered to be Bullish, if it occurs in a down-trending

market. See the presence of Hammer at Point ‘A’ and ‘B’ in below
chart of Hindustan Unilever. An uptrend is visible after the
occurrence of Hammer.
f) A Hammer occurring in the middle of sideways-trending or upward-
trending market should be ignored.
g) Bullish-Price-confirmation (the closing price of next candle should
be higher than the previous candle, on which the pattern was formed)
is required before making Buy decision on the next day.
Shooting Star

a) Shooting Star is a Bearish Candle pattern.

b) A typical Shooting Star has small Real Body, long upper wick, and
no tail (or lower wick).
c) The size of the upper wick is usually more than 2 times that of Real
Body.
d) Since the close price is less than open, the Real Body is Red.

e) A Shooting Star is considered to be Bearish if it occurs in an up-

trending market. See the presence of Shooting Star at Point ‘A’ in
below chart of HDFC. A downtrend is visible after the occurrence of
Shooting Star.
f) A Shooting Star occurring in the middle of sideways-trending or
downward-trending market should be ignored.
g) Bearish-Price-confirmation (the closing price of next candle should
be lower than the previous candle, on which the pattern was formed)
is required before making Sell decision on the next day.
Spinning Top

a) Spinning Top is a Candle pattern which indicates change in trend (up

to down & vice-versa).
b) A typical Spinning Top has small Real Body.
c) The size of the upper wick is usually equal to that of lower wick.
d) The colour of the Real Body can be Green or Red.

e) Spinning Top conveys indecision (confusion) as both bulls and bears

were not able to influence the markets (real body is small, and open
& close price are nearby).
f) A Spinning Top is considered to be Bearish (RED body is preferred),
if it occurs in an up-trending market. See the presence of consecutive
Spinning Tops at Points ‘A’ and ‘B’ in below chart of ICICI Bank.
A downtrend is visible after the occurrence of Spinning Top.
g) Similarly, a Spinning Top is considered to be Bullish (GREEN body
is preferred), if it occurs in a down-trending market.
h) Spinning Top occurring in the middle of sideways-trending market
should be ignored.
i) Bullish/ Bearish Price-confirmation is must before making Buy/ Sell
decision.
Doji

a) The Doji is the most important candle pattern. Whenever a Doji is

observed, don’t ignore it.
b) Doji’s are similar to Spinning Tops, except that it does not have a
real body. This means the open and close prices are (almost) equal.
c) A typical Doji has tiny Real Body, and equal size of upper & lower
wicks.
d) The colour of the Real Body is not important – it can be Green or
Red.
e) It indicates in-decisiveness (confusion) in the market, and chances of
trend reversal (up to down & vice-versa).
f) High chances of prices going down when a Doji appears after a
prolonged up-trend (even better after a Green LRC, and in high RSI
overbought zone). Similarly, there are high chances of prices going
up when a Doji appears after a prolonged down-trend (even better
after a Red LRC).

RSI (Relative Strength Index) is an indicator which denotes whether

a market is over-bought or over-sold state
 g) A Doji is considered to be Bearish if it occurs in an up-trending
market. See the presence of Doji at Points ‘A’ and ‘B’ in below
chart of HCL Tech. A downtrend is visible after the occurrence of
Doji.

h) Similarly, a Doji is considered to be Bullish if it occurs in a down-

trending market.
i) Doji occurring in the middle of sideways-trending market should be
ignored.
j) Bullish/ Bearish Price-confirmation is required before making Buy/
Sell decision on the next day.

Doji can have 5 different types as follow:

 Colour of a Doji is not important
Gravestone Doji & a Dragonfly Doji are more effective in up-trending &
down-trending market respectively, and there are high chances of reversal.
Marubozu

a) Marubozu is a Japanese word which means “Bald”, i.e., a candle

without any wicks.
b) It indicates that a stock has traded strongly in one direction
throughout the session and closed at its high or low price of the day.
c) A typical Marubozu has strong (big) real body, and no upper or
lower wicks.
d) The body can be either Green (Bullish Marubozu) or Red (Bearish
Marubozu).
e) It is simplest of the candle pattern and very easy to spot & easy to
trade.
f) Green Marubozu indicates bullishness and Red Marubozu indicates
bearishness in the market
g) Prior trend is not very important in case of Marubozu
h) Marubozu can be a Bullish or Bearish pattern

Bullish Marubozu
 A big green Long Range Candle (LRC) is formed, which has no
wicks
The stock opens at the low of the day and keeps on rising through-
out the day. The bullish momentum is so strong that the close is at
the highest point of the day
The pattern is Bullish Marubozu
It indicates that the price will keep on rising further

Bearish Marubozu
A big red Long Range Candle (LRC) is formed, which has no
wicks
The stock opens at the high of the day and keeps on falling
through-out the day. The bearish momentum is so strong that the
close is at the lowest point of the day
The pattern is Bearish Marubozu
It indicates that the price will keep on falling further
 12 : Two Candle Patterns
Common Patterns formed from two candle are described below:

Harami Pattern
a) Harami is a Japanese word, which means ‘pregnant’.
b) The pattern consists of 2 candles – one big mother candle and second
a baby candle.
c) The colour of the mother candle and baby candle should be different
(If the baby candle is very small (Doji), then the colour of the baby
candle does not matter. It can be of same or different colour as of
mother candle).
d) The pattern gives an illusion that the Baby is completely engulfed in
Mother’s belly!
e) It is a trend reversal pattern (prior trend is a must). The smaller the
baby candle, the higher are chances of trend reversal.

f) Harami pattern can be a Bullish or Bearish pattern

Bullish Harami
 Market is in Downtrend
A Red LRC is followed by a small Green Candle
The Green baby candle is engulfed completely by Red mother
candle
The pattern is Bullish Harami
A candle closing higher the following day would confirm the trend
reversal
Bearish Harami

Market is in Uptrend
A Green LRC is followed by a small Red Candle
The Red baby candle is engulfed completely by Green mother
candle
The pattern is Bearish Harami
A candle closing lower the following day would confirm the trend
reversal
Psychology behind Bullish Harami pattern

a) The market is in downtrend as evident from consecutive red candles.

b) The 1st day of pattern (d1) is a LRC indicating heavy selling.
c) However, the next day (d2), price opens higher than the close of the
previous day.
d) The Short traders are alarmed, and they start covering their short
positions, which in turn increases the price further.
e) However, there are latecomers, who missed to short the trend first
time -- they short and slow down the price increase. Thus, a small
Green body is formed.
f) This shows that bears are weakening and may signal trend reversal.
 See the presence of Bullish Harami pattern at Point ‘A’ in above chart of
TCS. The stock was in clear downtrend, then Harami pattern was formed.
Next day price-confirmation was positive, and trend reversal was successful!
Piercing Pattern
a) Piercing Pattern consists of 2 candles – both LRCs (Long Range
Candles).
b) The 1st candle should be Red LRC & the 2nd candle should be Green
LRC.
c) The 2nd candle must open below the 1st candle, and close above the
mid-point of 1st candle.
d) It is a Bullish pattern which should appear in a downtrend.
Psychology behind Piercing pattern

a) The market was in downtrend … refer Point ‘A’ above.

b) On Day 1 (d1) of the pattern formation, a red LRC was formed …
refer Point ‘B’.
c) Next day (d2) also market opened gap down ... refer Point ‘C’.
d) At this point, the stock was looking cheaper to some Bulls/ Traders
and they started buying the stock -- this led to increase in price and a
Green candle was formed ... refer Point ‘D’.
e) The Short traders were alarmed, and they also started covering their
short positions, which in turn increased the price further. The buying
momentum was so strong that the stock closed above 50% of
previous day candle … refer Point ‘E’.
f) The next day candle (candle after d2) also opened gap-up (price-
confirmation), and the trend reversal was successful … refer Point
‘F’.
 See the presence of Piercing pattern at Point ‘A’ in above chart of HDFC
Bank. The stock was in clear downtrend, then Piercing pattern was formed.
Next day price-confirmation was positive, and trend reversal was successful!
Dark Could Cover
a) Dark Cloud Cover (DCC) is bearish version of Piercing Pattern.
b) It consists of 2 candles – both LRCs (Long Range Candles).
c) The 1st candle should be Green LRC & the 2nd candle should be Red
LRC.
d) The 2nd candle must open above the 1st candle, and close below the
mid-point of 1st candle.
e) It is a Bearish pattern which should appear in an uptrend.

Psychology behind Dark Cloud Cover pattern

a) The market was in uptrend … refer Point ‘A’ above.
b) On Day 1 (d1) of the pattern formation, a green LRC was formed …
refer Point ‘B’.
c) Next day (d2) also market opened gap up ... refer Point ‘C’.
d) At this point, the stock was looking expensive to some Bears/
Traders and they started selling the stock -- this led to decrease in
price and a Red candle was formed ... refer Point ‘D’.
e) The Bulls (Long traders) were alarmed, and they also started
covering their long positions, which in turn decreased the price
further ... the selling momentum was so high that the stock closed
below 50% of previous day candle … refer Point ‘E’.
f) The next day candle (candle after d2) also opened gap-down (price-
confirmation), and the trend reversal was successful … refer Point
‘F’.
 See the presence of DCC (Dark Cloud Cover) pattern at Points ‘A’ and
‘B’ in above chart of SBI Life. The stock was in clear uptrend, then DCC
pattern was formed. Next day price-confirmation was positive, and trend
reversal was successful!
Engulfing Pattern
a) Engulfing pattern is mirror image of Harami pattern.
b) The Engulfing pattern consists of 2 candles – first candle is small
and second a bigger candle.
c) The colour of both the candles should be different.
d) The pattern gives an illusion that the 2nd candle engulfs (covers) the
1st candle completely.
e) The smaller the first candle, more powerful is the pattern. Even
better to have a Doji on day one.
f) It is a trend reversal pattern.

g) Engulfing pattern can be a Bullish or Bearish pattern.

Bullish Engulfing

Market is in Downtrend
A small red candle is formed on day 1 (d1) which indicates
loss of momentum of Bears
The next candle (d2) is a Green LRC which completely engulfs the
previous day candle
The pattern is Bullish Engulfing
A candle closing higher the following day would confirm the trend
reversal
Bearish Engulfing

Market is in Uptrend
A small green candle is formed on day 1 (d1) which indicates loss
of momentum of Bulls
The next candle (d2) is a Red LRC which completely engulfs the
previous day candle
The pattern is Bearish Engulfing
A candle closing lower the following day would confirm the trend
reversal
Psychology behind Bullish Engulfing pattern

a) The market is in downtrend as evident from consecutive red candles.

b) The 1st day of the pattern (d1) is a small red candle indicating the
Bears may be tiring.
c) The next day (d2) also, market opens weak, lower than the close of
the previous day
d) At this point, the stock looks cheaper to some Bulls/ Traders and
they started buying the stock -- this leads to increase in price and a
Green candle starts forming (d2)
e) The increase in price panics Short traders and they also started
covering their short positions, which in turn increased the price
further. The buying momentum is so strong that the stock closes
above the high of previous day candle
 See the presence of Bullish Engulfing pattern at Point ‘A’ in above chart
of HDFC Bank. The stock was in clear downtrend, then Engulfing pattern
was formed. Next day price-confirmation was positive, and trend reversal
was successful!
 13 : Three Candle Patterns

3-White Soldiers & 3-Black Crows

Three White Soldiers

Bullish candlestick pattern -- predicts reversal of the current

downtrend on a chart
The market was in downtrend
Three big green candles (refer d1, d2 & d3 on above chart)
appeared after the downtrend
This pattern is 3 white soldiers, and it predicts the reversal of
earlier downtrend
 Three Black Crows

Bearish candlestick pattern -- predicts reversal of the current

downtrend on a chart
The market was in uptrend
Three big red candles (refer d1, d2 & d3 on above chart) appeared
after the uptrend
This pattern is 3 black crows, and it predicts the reversal of earlier
uptrend

Both these patterns (3 white soldiers and 3 black crows) are more of
theoretical patterns, because a lot of move already would have taken place
by the time 3 candle pattern is completed. Moreover, the risk-reward would
not be very lucrative (although as per theory the move should continue in the
direction of 3 candles).
Morning Star & Evening Star
Morning Star
 3-candle Bullish reversal pattern -- predicts reversal of the current
downtrend on a chart
The first candlestick in the morning star pattern is a red
candlestick with a relatively large real body (refer d1)
The second candle (d2) is the star with a small real body & is
separated from the real body of the first candle. The gap between
the real bodies of the two candlesticks distinguishes a star from a
Doji or a spinning top
This strength is confirmed by the 3rd candle (d3), which is strong
green candle
Morning Star is effective if the 2nd candle is formed near the
SUPPORT level

Evening Star
3-candle Bearish reversal pattern -- predicts reversal of the current
uptrend on a chart
The first candlestick in the evening star pattern is a green
candlestick with a relatively large real body (refer d1)
The second candle (d2) is the star with a small real body & is
separated from the real body of the first candle. The gap between
the real bodies of the two candlesticks distinguishes a star from a
Doji or a spinning top
This weakness is confirmed by the 3rd candle (d3), which is strong
red candle
Evening Star is effective if the 2nd candle is formed near the
RESISTANCE level
 14 : Let us recap
Let’s quickly recap whatever we have read in previous sections. The
candle patterns and their significance are summarized in the below table:

Marubozu is the only candle pattern where the prior trend is not required.
The Marubozu indicates bullishness if it is green coloured, and bearishness if
it is red coloured.
Practical Tips for Chart Patterns
a) Prior trend is a must for any reversal pattern. Bullish reversal
pattern will be effective after a downtrend & Bearish reversal pattern
will be effective after an uptrend.
b) For all reversal patterns, it is suggested to wait for price confirmation
on the next day, mainly for Bullish Reversal Candle patterns (e.g.,
Hammer, Piercing Pattern).
c) Longer the lower shadow, more effective is Hammer.
d) Longer the upper shadow, more effective is Shooting Star.
e) Smaller the real body, more effective is Doji.
f) Bullish Engulfing pattern is more effective than Piercing Pattern &
Bearish Engulfing Pattern is more effective than Dark Cloud Cover.
g) Doji is more effective than Spinning Top.
h) Harami Pattern (whether Bullish or Bearish) is more effective when
the 2nd Baby candle is smaller (preferably a Doji).
i) Marubozu is more effective when it does not have any wicks.
j) You should trust a weak candle more than trusting a stronger
candle.
k) Most important point to note that we need to understand the
psychology behind a particular candle pattern, and remain flexible
with the text-book definition of these patterns.
l) Bullish Reversal is more effective if the price is in Support Zone.
Similarly Bearish Reversal works best when the prices are also
near Resistance Zone.
 15 : Does Candle Patterns really work?
Before I answer this question at this stage of the book, let’s go through
the following analogy. I am sure your doubts will be addressed cent percent!
Let us go through Section A, and Section B given below:

So, to answer the question “does candle pattern work?” -- we can

conclude that while the reversal candle pattern may offer chances of
reversal, it does not guarantee reversal… But when looked holistically with
other factors, gives an edge in predicting the next candle’s move!
 So what are the other factors – well, one important factor is Support &
Resistance, which we will discuss in next section
 16 : Support & Resistance
The Support and Resistance (S&R) are specific price zones on a chart,
where one can expect good amount of buying or selling. The Support price is
a price at which one can expect more buyers than sellers (demand zone).
Similarly, the Resistance price is a price at which one can expect more
sellers than buyers (supply zone).
S&R are not a particular price point, rather a price zone.

Why are Support & Resistance levels formed?

Market psychology plays a major role as traders and investors have a
memory, and together they remember:

(1) what was the price range, where the stock was looking cheaper, and
the buyers returned to buy after a big selling
 Essentially this area is SUPPORT -- where the falling stock gets support,
and there are chances of price starts rising once again

(2) what was the price range, where the stock was looking expensive,
and the sellers returned to dump after a big up-move

Essentially this area is RESISTANCE -- where the rising stock faces

resistance, and there are chances of price coming down
 Example of Support

In the above candle chart of HDFC BANK, we can see that Rs. 1345
zone (marked with blue horizontal line) acts as Support. Stock price fell 3
times (marked in red) and came near the Support level but bounced sharply
respecting the level.
Also mark the Hammer type candles (Points B and C) at the Support
level, where price bounced back upwards. Thus, candle patterns work best
when combined with Support & Resistance levels.
Support is always below the current market price (CMP).
 Example of Resistance

In the above candle chart of CIPLA, we can see that Rs. 818 zone
(marked with blue horizontal line) acts as Resistance. Stock price increased
5 times (marked in red) and came near the Resistance level, but reversed
sharply respecting the level
Also mark the presence of following trend reversal candle pattern near
the Resistance level in above chart:
Point A – Piercing Pattern, and a Shooting Star
Point B – Doji
Point C & E - Piercing Patterns
Point D – 2 no. Shooting Stars

Thus, candle patterns work best when combined with Support &
Resistance levels. I know I am repeating it again in bold letters, so should
you repeat in your mind.
Resistance is always above the current market price (CMP).
Support & Resistance - interchange
Once a Resistance is broken, it becomes Support … and vice versa!

In the above candle chart of ICICI BANK, we can see that:

a) the level Rs. 615.70 (marked with blue horizontal line), acts as
both Resistance & Support.
b) It acted as Resistance at Points A and B.
c) It broke the Resistance at Point C. See the size of big green candle
at Point C -- power needed to break a strong Resistance!
d) Once the Resistance was broken at C, the same level now acted as
Support at Point D.
e) Once the Support was broken, it again became Resistance at Point
E.
 How to draw Support & Resistance?
Here is the step-by-step method to draw S&R on a candle chart -

a) Preparatory work

Load the candle chart of stock of your choice

Select the time frame of your choice (see recommendation below)
Zoom out (squeeze) the chart to load more candles on the chart
(see recommendation below)

In the example above for CIPLA, I have used 15 minutes time-frame and
zoomed-out (squeezed) the chart so that 30 days candles are visible on a
screen… there is no hard & fast rule for 30 days, you may load 20 days or 60
days candle as per comfort of your eyes. The idea is to load many candles
and see the recent price action zones (swing high & lows) on the chart.
 b) Identify price action zones on the chart & draw a horizontal line
connecting the price action zones (min. 3 required to draw horizontal
line). Price action zones are :

price points on the chart from where there was a sharp reversal
(swing highs & lows)
price points where the stock spent more time

In the CIPLA example above, I have drawn horizontal lines at Rs. 818,
Rs. 800 and Rs. 780 levels. All these are levels where price found either
Support or Resistance, and hesitated to continue previous trend.

c) These horizontal lines are Support and/ or Resistance. If the

horizontal line is above CMP, then it acts as Resistance. Similarly, if
the horizontal line is below CMP, then it acts as Support

Generally stock price respects Support & Resistance. Once the price
reaches Resistance level in rising market, it will either (a) pause there for
some time, or (b) reverse and start falling, or (c) break the Resistance and
continue the upward journey.
Practical Tips for Support & Resistance
a) Do not be too rigid with the price levels, e.g. If the price reversed
from Rs. 801, Rs. 803, and Rs. 798, you can mark a Resistance near
Rs. 800 zone.
b) Round figures become stronger Support & Resistance (S&R), e.g.,
Rs. 5000 (three zeros) will be stronger S&R than Rs. 4900 or Rs.
5100 (two zeros) levels.
c) For the stock to cross big Resistance (say 12000 level resistance on
Nifty), either of these two scenario is desired:

The stock (or index) opens gap up above the resistance on the next
day
There is a substantial buying (push) – formation of big Green
LRC
 17 : Prepare for Trade
It’s high time now to prepare for the first trade. We will introduce a few
new concepts which are absolutely must, and then summarize the learnings
so far!

Risk Reward Ratio (RRR)

The Risk Reward Ratio (RRR) compares the potential profit of a trade to
its potential loss.

Let’s understand the concept with an example:

Reliance Industries is trading at, say Rs. 2004. A Day Trader spots a
bullish pattern (say hammer) near the support level of Rs. 2000, and he
decides to take a trade. The setup is as follows:
 A scalper or day trader is happy with a RRR of 0.25 to 1.00. Swing/
Positional Traders generally look for a minimum RRR of 2.
If RRR is practiced with discipline, then a trader even with 50%
win-rate would be able to make decent money in stock market
 Position Size & Risk Management
There are different thoughts as how one should manage his risk. Let me
put my thoughts on this topic. You are free to change as per your risk
appetite.

a) A beginner should start trading with a Capital of not more than Rs.
50,000 (experienced traders can multiply this amount by any number
of their choice)
Capital = Rs. 50,000
b) Max Loss on a single trade should not be more than 1% of your
Capital
Max Loss = 1% of Capital Rs. 50,000 = Rs. 500
c) Position Size (trade quantity) should be computed by dividing the
Max Loss by Potential Loss per share. Thus as per the above
example of Reliance Industries,

d) Thus if the person buys 45 shares of Reliance Industries, and if the

trades goes wrong, the max loss the person would suffer is Rs. 500/-

Brokerage & Govt. taxes are not considered for the sake of keeping the
calculation simple
Remember the 3 candles rule
a) Don’t enter into a Bullish trade (BUYING) if you spot 3 consecutive
green candles
b) Similarly, don’t enter into a Bearish trade (SELLNG) if you spot 3
consecutive red candles
c) The point is that a lot of move has already happened in last 3
candles, and a retracement of 30%-50% is very likely after 3
consecutive same colour candles
d) Wait for the price to retrace back in opposite direction and then enter
the trade. If the price does not retrace, no regret in missing the trade

In the picture above, price increased from A to B (see candle

numbered 1, 2 and 3) --- you are bullish and wanted to buy the stock.
Don’t just jump and buy the stock. We want a better entry price. Since
there are 3 consecutive green candles, we expect the price to retrace
back a bit (generally between 30%-50%). We will wait for the
retracement and should target to buy the stock at level C. It may also
happen that the price does not retrace and keeps on increasing, and we
may miss the trade. But that is part of game, and we should accept it.

e) The 3 candle rule is applicable for all the time frames. You can use it
on a 5 minute/ 15 minute chart if you are a day trader.
 Practical Tips for Trade
Here are some practical tips … there are repetitions, but it is intentional:
a) Start trading with a Capital of Rs. 50,000
b) Max Loss on a single trade should not be more than Rs. 500 (1%
of your capital). Put Stop-Loss in system or exit your position
immediately on reaching the max loss level.
c) Take a trade only after knowing your trade set-up (i.e Entry, Target,
Stop Loss, Position Size & RRR)
d) Position Size (Qty) can be computed by dividing the Max Loss (Rs.
500) by Potential Loss per share

Figures with pink background are auto calculated

A sample illustration for a Long Trade is provided above. You can make
a simple template in MS Excel yourself, both for a Long Trade (Buy and
then Sell), and Short Trade (Sell and then Buy) – to calculate RRR and
Position Size (Quantity to trade)

e) Never compromise with Stop Loss level

f) Try to keep the RRR above 1 (assuming you are a day trader)
g) Remember the 3 candles rules (applicable at all the time frames)
h) Long Trade -- Try to enter (buy) on spotting a suitable pattern (and
near the support level), and exit near the resistance. Keep the Stop
Loss (SL) slightly below last swing low (or support) on the chart
i) Short Trade -- Try to enter (sell) on spotting a suitable pattern (and
near the resistance level), and exit near the support. Keep the Stop
Loss (SL) slightly above last swing high (or resistance) on the chart
j) Points (h) and (i) are simple entry and exit rules. As you gain
experience, you can deploy other method such as pyramiding,
 trailing stop-loss etc.
k) Practice at least 100 trades over 2-3 months with the above rules, and
write down your observations. You will understand the nitty-gritties
yourself after 100 trades, and learn how to optimize a trade
l) If your capital is still Rs. 50000 or more after 100 trades,
congratulate yourself on this achievement. Now, if you want, you
can double the Capital size to Rs. 100,000 (max loss should still be
1% of total capital deployed). You are advised to go slow, stick to
all the rules and not take un-necessary risks
 Summing it Up!
Step -- <Reference Chapter Section in Book>

1) open a candlestick chart on computer

-- <Section 09 - Say ‘Hello’ to First Candlestick Chart>

2) select a stock of your interest

3) select a suitable BIGGER Time Frame to determine the direction of

TREND (Up, Down or Sideways)
-- <Section 08 - Time Frames of candles>

Trades should be taken ONLY in the direction of trend as per Bigger

Time Frame.
One should look for opportunity to

BUY if the Bigger Time Frame Trend is Up,

SELL if the Bigger Time Frame Trend is Down
avoid trading if the Bigger Time Frame Trend is Sideways or Not
Clear

4) select a suitable TRADING Time Frame

-- <Section 08 - Time Frames of candles>

5) zoom-out (squeeze) the chart & draw horizontal Support &

Resistance lines
-- <Section 16 - How to draw Support & Resistance>

6) zoom-in the chart to normal view

7) look for candle patterns as follows:

if the Bigger Time Frame Trend is UP, then look for bullish
reversal patterns near the SUPPORT
if the Bigger Time Frame Trend is DOWN, then look for bearish
reversal patterns near the RESISTANCE
-- <Section 11, 12 & 13 – Single, Two & Three Candle Patterns>

8) once you get the candle pattern near S&R, quickly compute the trade
setup (Entry, Target, Stop Loss, RRR and Quantity)
-- <Section 17 - Prepare for the Trade>

9) enter the trade if RRR is favorable

-- <Section 17 – Risk Reward Ratio (RRR) & Remember the 3 candles
rule>

10) exit the trade when the price hits either Target or the Stop Loss
 18 : Appendix

Trading Holidays in 2021

Following are the list of Holidays at National Stock Exchange (NSE) in
2021.
 Source of this information is NSE website

https://www1.nseindia.com/global/content/market_timings_holidays/mar
ket_timings_holidays.htm
 Global Stock Markets Indices
The major indices of the world which has a direct or indirect impact on
Indian Stock Marker are listed below:
 Nifty 50 Constituents & Weightage
Top Constituents Stock (by weight) in Nifty 50 are as follows (Feb
2021):

source: https://www1.nseindia.com/content/indices/ind_nifty50.pdf