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Technical Analysis · Intermediate · 5 min

Two-candle patterns: engulfing, harami, piercing

You can recognize engulfing, harami and piercing patterns, describe what each shows about buyers and sellers, and explain their limits.

Two candles, one shift

A single candle tells the story of one period. But markets often change their mind from one period to the next. A decline that seemed unstoppable meets a strong buying day. A rally pauses on a small, hesitant candle.

Two-candle patterns put names on these shifts. They are popular, easy to spot and often overrated. This lesson shows what they really describe.

Swallow or pause

The names come from Japanese rice trading and were popularized in the West by Steve Nison in 1991. All of them compare the bodies of two neighboring candles.

Engulfing pattern. In an engulfing pattern, the second candle's body covers the whole body of the first, in the opposite color.

Candle chart A decline from 54 to 50.30. The sixth candle is small and red. The seventh opens lower at 50.10 and closes at 51.70, its body covering the whole body of the candle before: a bullish engulfing pattern.

In the chart, sellers were in control for six candles. Then the seventh opened below the previous close at 50.10 and closed at 51.70, above the previous open. Buyers absorbed all the selling of the period before and more.

Harami. A harami is the reverse picture: a small body that sits entirely inside the previous, larger body. Harami is Japanese for pregnant, because the shape resembles one. It shows that a strong move has paused. A bearish harami follows a long green candle, a bullish harami a long red one.

Candle chart A rise from 50 to 53.40 ends with a long green candle. The next candle is small and red, opening at 53.10 and closing at 52.80, entirely inside the body of the long candle: a bearish harami.

What these patterns describe is a change in behavior between two periods. That is real information. What they do not describe is the future. A shift can be the start of a reversal, a short pause, or nothing at all. The name of a pattern adds no certainty.

Researchers have tested this. Ben Marshall, Martin Young and Lawrence Rose examined candlestick signals on Dow Jones Industrial Average stocks and found no evidence that they created value for investors on their own.

Past the midpoint

A third pattern sits between the two. A fictional share falls for four candles. The fourth is long and red, from 52.00 to 50.50.

Candle chart A decline ends with a long red candle from 52 to 50.50. The next candle opens lower at 50.10 and closes at 51.60, above the middle of the red body at 51.25: a piercing line.

This is a piercing line: sellers pushed the price lower at the open, and buyers answered strongly enough to recover more than half of the previous loss. Its bearish mirror after a rise is called dark cloud cover. Whether it matters depends on where it appears, for example at an important support level, and on what the next candles do.

Common mistakes

The takeaway

Two-candle patterns describe a shift between two periods. They need context to mean anything.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

  1. 1Tap the candle that completes the bullish engulfing pattern.

    Tap the chart.

    Candle chart Chart for the question: Tap the candle that completes the bullish engulfing pattern.

    Candle 7 opens below the previous close and closes above the previous open, so its body covers the whole body of candle 6.

  2. 2What defines a harami?

    Harami is Japanese for pregnant. The small second body sits inside the first, showing that the strong move paused.

  3. 3A long red candle runs from 52.00 to 50.50. Where must the next candle close to form a piercing line?

    The piercing line opens lower and closes more than halfway into the previous body. Closing above 52.00 would be an engulfing pattern.

  4. 4What did Marshall, Young and Rose find when they tested candlestick signals on Dow Jones stocks?

    Their 2006 study of US large-cap stocks found no reliable value in the candlestick signals they tested.

of 4 correct.

Sources

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