How To Use Candlestick Patterns for Day Trading

One of the most frequent questions I get regarding candlestick patterns is how to apply them to the day trading scenario.

You have probably noticed by now, that many of the candlestick reversal patterns include a small gap somewhere in the pattern. This is fine on a daily chart, but when you are day trading, there is typically not a gap between candles because the market has not closed.

Any continuous market such as day trading or forex will have a different look to the candles because there is no close at the end of the day. Consequently, you will typically not see gaps in a forex chart (except over the weekend). In a similar way, you will not see gaps on a 5-minute chart that you maybe day trading from.

So how do the patterns change?

It’s simple: The patterns with gaps become patterns that do not have gaps, and some patterns that are obvious on a daily chart, become obsolete on an intra-day day trading chart.

“Patterns with gaps become patterns that do not have gaps.”

Let’s take a look at some of the most popular patterns:

Engulfing Patterns

Engulfing patterns are very popular because they are very good at predicting the next directional move of a stock. There’s just one problem when we convert this pattern to an intra-day chart for day-trading…

… There’s no gap.

The standard Engulfing pattern is supposed to engulf the entire previous session’s spinning top.

Here’s what a standard Engulfing pattern looks like:

On an intra-day chart, simply remove the criteria for the opening gap.

As long as the 2nd candle closes above the first, we can call it an engulfing pattern.

If you are trading on an intra-day or forex chart and see this pattern in the right location, at support, treat it like an engulfing pattern. The odds are pretty high it will play out like a traditional engulfing pattern.

Dark Cloud Cover

Another very popular pattern for bearish reversals is the Dark Cloud Cover. This pattern is a highly predictable pattern that typically plays out as a bearish reversal (when found at resistance).

Again, the challenge is this pattern needs to have an opening gap!

The Dark Cloud Cover becomes a challenging pattern intra-day because we cannot have the opening gap. Instead, we classify it this way: any pattern that trades at least halfway into the previous day but not more than the entire candle body.

You notice how small the distinction can be. If the second candle doesn’t move at least half-way, by definition, we would need to call it a Harami. If it moves more than the full size of the candle, by definition we now have an engulfing pattern.

Here’s my personal feeling (not a textbook): On an intra-day chart, the Dark Cloud Cover and Harami are essentially the same patterns. I would not suggest spending precious day trading time splitting hairs of how you name this candle.

Similar to a traditional Harami, this pattern can work as a reversal, but it also can be equally neutral. As such, it is not as strong as an engulfing pattern and certainly not as strong as the traditional Dark Cloud Cover.

Morning & Evening Star Reversals

Morning and Evening Star patterns are excellent reversal signals. Even though they both require gaps, the conversion to an intraday pattern is quite simple:

Here’s a traditional morning star pattern:

All we need to do is remove the gaps and it looks like this:

One challenge that can confuse traders is the middle candle. The middle candle does not need to be either black or white; both work just fine. But when there is no gap, it can create a slightly different looking image. Here are two variations of the same setup but with the middle candle alternating between black and white:

These two images look quite different because there is no gap on the intra-day chart. On a regular daily chart, the Morning Star is clearer, because of the gaps. Yet, both of these iterations are perfectly legitimate as a Morning Star Reversal on an intra-day chart.

The evening star is the exact same principle. To identify an intra-day evening star pattern, just remove the expectation of the gap:

Morning Star and Evening Star patterns are excellent reversal signals in the traditional sense on a daily chart, and they are equally good on an intra-day chart. In my experience, both of these patterns are probably the most reliable intra-day reversal signal. These are two patterns you should become very acquainted with and learn to recognize regardless of the time frames you tend to trade.

The Tweezer Mystery

Now that we have looked at how we adapt regular reversal patterns into intra-day patterns, let’s address the issue of the Tweezer Pattern on an intra-day chart.

Tweezer patterns, in general, are the subject of controversy. Some people think they are great reversal patterns, and some people think they are not.

Technically all of these patterns below are tweezer patterns:

The challenge is that not all of these patterns lead to good signals. I refer to what I call the “ideal tweezer pattern.” This is a tweezer top or bottom where both candles are of similar size.

More often than not, when we find the above setups, the tweezer works as a very good reversal signal.

(For broader insight into this issue you can read my article “How to correctly interpret the tweezer candlestick pattern”)

Now let’s address how this applies to intra-day since the tweezer pattern does not require a gap, creating an ideal tweezer pattern on an intra-day chart is a non-issue; it is very easily accomplished.

In fact, it’s too easily accomplished!

If you look at all of the patterns, we have looked at already, in a strict interpretation, they would each be classified as a tweezer.

And now you can see the mystery of the tweezer as it applies to intra-day trading. In the purest sense of the tweezer definition, all reversal patterns on an intra-day chart would be tweezers. This is not a practical interpretation.

So how should we approach it?

I suggest one of two approaches:

  1. Ignore all tweezer patterns on an intra-day chart
  2. Only identify a truly “ideal” tweezer top or bottom.

If we choose to ignore all tweezers on an intra-day chart, then we are left with nothing but a handful of patterns from which to choose. This is probably the simplest solution.

If we choose to only name truly Ideal Tweezers, then it may be of value because a truly ideal tweezer is a very good reversal signal intra-day.

If we take this latter approach, we can reduce intra-day two candle reversals to the following list of only four patterns:

  1. Bullish/Bearish Harami
  2. Bullish Piercing/Dark Cloud Cover
  3. Tweezer Top/Bottom
  4. Bullish/Bearish Engulfing

In my opinion, simplicity is best. There is a fine line between “Ideal tweezer” and either “Engulfing” or “Piercing.” It must be exact to be an ideal tweezer. So, does it matter what we call it? I don’t think it does.

At the end of the day, the only thing that matters is you know how to interpret the patterns. With these guidelines, you can easily make the adaptation of the gaps into intra-day patterns. You can now see there are really only 3 or 4, depending on how you count them. Add to that the Morning/Evening stars, and you have the ideal set of intra-day candlestick reversal signals.

Wrap Up

At this point, you should see how simple it is to adopt a traditional “daily” candle pattern into an intra-day candlestick application. To make the adaptation, simply remove the need for the gap.

It is important to understand, everything I have just shared works on any continuous market. So any market that never closes, such as Forex and some Futures markets, will also benefit from the same interpretation I have shared with you here.

Even if you have no plans of becoming a day trader, learning to recognize these subtle situational differences will make you a much better trader. I highly encourage you to spend some time with this list, make your notes, and learn how to make the adaptations. Your trading will thank you one day.