Understanding key candlestick patterns

Before you map swings on the NAS100, be fluent with a short list of reliable candlestick patterns. For a tech-heavy index like NAS100, price reacts quickly to news and liquidity, so patterns paired with context are essential.

• Engulfing (bullish/bearish) — strong reversal signal when a candle fully engulfs the prior candle; on NAS100, watch for engulfing after strong intraday moves.
• Hammer / Hanging Man — small body with long lower wick; hammer at a pullback suggests buyers stepping in, hanging man at highs warns of potential tops.
• Shooting Star — long upper wick at resistance; a common reversal at tech sector supply zones.
• Doji / Spinning Top — indecision; on NAS100 these often precede breakouts or sharp continuation moves once resolved.
• Morning Star / Evening Star — three-candle reversal that gives clearer confirmation than a single candle.

Interpret patterns relative to nearby support/resistance, session time (US market open), and recent volatility. A hammer at daily support is stronger than the same hammer on a random small-range bar.

Workflow

1. Analyze recent high and low points.

   Scan the timeframe you trade (daily and 4H for swing context; 1H for finer swings). Mark the latest swing highs and lows — these define structure. On NAS100, cluster your focus around prior intraday highs, 50/200 moving averages, and reaction zones from earnings or macro events.

2. Look for candlestick formations signaling reversals.

   At each marked high or low, inspect candlesticks for reversal signatures outlined above. Prefer patterns that occur at significant levels (previous high, trendline touch, moving average). Example: a bullish engulfing bar at a recent low on the 4H chart carries more weight than the same pattern on a 5-minute chart.

3. Use trendlines to define swings.

   Draw trendlines connecting swing highs or lows. For uptrends, connect higher lows; for downtrends, connect lower highs. Trendlines help you identify swing start/end points and breakout candidates. When price respects a trendline with a clear rejection candle, the swing remains intact; a close beyond the trendline suggests a potential swing change.

4. Confirm with volume analysis.

   Volume confirms conviction. Look for volume spikes on reversal candles or breakouts from trendlines. On NAS100, increased volume on a bullish engulfing at support suggests genuine buying interest; low-volume breakouts are more suspect and prone to failure.

5. Set alerts for potential entries.

   Program alerts for specific conditions: a close above/below a trendline, a confirmed engulfing candle at a swing, or a volume spike above recent average. Combine alerts with predefined entry rules (e.g., enter on candle close above resistance or on a retest after breakout) to avoid impulsive entries.

Common mistakes

1. Ignoring smaller timeframes for trend confirmation.

   Relying only on one timeframe can produce false signals. Confirm higher-timeframe trend direction with a lower timeframe to validate momentum and refine entries.

2. Misreading candlestick patterns.

   Not every hammer or engulfing is meaningful. Context matters: size relative to recent bars, location at key levels, and accompanying volume all change the reliability of the pattern.

3. Not considering overall market conditions.

   Macro drivers (Fed announcements, US jobs data, major tech earnings) can overwhelm pattern signals on NAS100. Always check the economic and news calendar before treating a pattern as decisive.

Checklist

1. Identify recent highs/lows across your chosen timeframes (daily, 4H, 1H).
2. Note significant candlestick formations at those levels (engulfing, hammer, doji).
3. Use trendlines effectively to map swing structure and breakout/retest points.
4. Confirm signals with clear volume shifts—look for spikes or divergence.
5. Set clear entry and exit points and alerts: candle closes, retests, stop-loss and target levels.