Breakout Candlestick Patterns

Simple Breakout Candlestick Trading

Strategies for Consistent Profits
Table Of Contents
Introduction
Chapter 1 – Candlesticks
– Bearish and Bullish Candles
– Upper and Lower Shadows
– Buying and Selling Pressure
Chapter 2 – What are Candlestick Patterns?
Chapter 3 – Types of Breakout Candlestick Patterns
Chapter 4 – Real-World Examples
– Head and Shoulders
– Double-Bottom
– Double-Top
– The Pennant
– Symmetrical Triangle
– Flags
Chapter 5 – Warnings
Chapter 6 – Tips and Techniques
Chapter 7 – Final Notes
Conclusion
Introduction
I want to thank you very much and congratulate you for downloading the
book, Breakout Candlestick Patterns—Simple Breakout Candlestick Trading
Strategies for Consistent Profits .
In this book, you’ll learn about the most powerful breakout candlestick
patterns. You’ll learn what they and how to recognize them. You’ll learn how
to execute numerous specific breakout trading strategies. And you’ll be taken
step-by-step through detailed real-world examples with candlestick charts and
diagrams.
Thanks again for downloading this book, I hope you enjoy it!
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Chapter 1 – Candlesticks

The candlestick is made up of three main parts. The opening and closing
prices make up the body of the candle, while high and low prices of the given
candle make up the upper and lower shadows of the candlestick.

Therefore, we have
the body, the upper and the lower shadows. These three parts play a major
role in candlestick patterns.
Bearish and Bullish Candles
Now, just to note, a bear candle is formed when the closing price is lower
than the opening price of a given time horizon while a bullish candle is
formed when the closing price is higher than the opening price of a given
time horizon. Time horizons can range from one minute, 15 minutes to one
day or a week, and so on.
Each candle represents one unit of the selected time horizon. For instance, if
you select a chart made up of daily transactions, then the time horizon would
be one day, and the opening and closing price on the candlestick will
represent the opening and closing prices of the underlying instrument for a
given day.
Upper and Lower Shadows
Now, we also have the highs and lows of the candlestick as illustrated in the
graphic above. The region between the highest price posted during the day,
and the opening/closing price of the day (bear/bullish candle) represents the
upper shadow. The higher the difference between the two points, the longer
the upper shadow.
A similar situation is depicted on the lower regions of the candle, but in this
case, the difference is between the lowest price posted during the day and the
closing/opening price of the day (bear/bullish) candle.
Buying and Selling Pressure
Another thing worth noting is that, the difference between the opening and
closing price form up the body of the candle. In this case, longer bodies
depict a day marked by a one-sided market. In the case of a bear candle, this
indicates that there were more sellers in the day, than buyers meaning the
underlying instruments experienced selling pressure.
On the other hand, a bullish candle indicates that there were many buyers
during the day putting the underlying security under buying pressure.
Chapter 2 – What are Candlestick Patterns?

A candlestick pattern is a movement of price in a candlestick chart that

technical analysts believe could be used to predict the overall direction of the
market, or the price of the underlying security within a given time horizon.
In most cases, candlestick patterns occur scarcely within a candlestick chart,
but there are occasions when the patterns can be traced sequentially, with one
leading to the other. This is why technical analysts use more than one
indicator/strategy to confirm various patterns before making a trading
decision.
The most common candlestick patterns are breakouts and reversals.
Breakouts tend to occur scarcely within a candlestick chart, while reversals
tend to take place after a certain pattern.
For instance, reversals could take place after a sustained period of an uptrend,
in which case, most technical analysts would refer to this as a pullback. When
reversals take place after a continuous downtrend, most analysts would call
this a recovery. However, for now the focus is on breakouts.
So, what exactly are breakouts?
A breakout is a candlestick pattern, which predicts a major change in the
direction of the price of an underlying security, after a sustained period of
indifference, or minor trends. Breakouts can take place in either a downward
movement or an upward movement.
When breakouts occur in an upward movement, this is called a
bullish/upward breakout while when they occur in a downward movement,
this is called a bearish/downward breakout. Technical analysts try to map out
various candlestick patterns to predict/identify possible breakouts. These
candlestick patterns are what traders refer to as breakout candlestick patterns.
Chapter 3 – Types of Breakout Candlestick
Patterns
There are several breakout candlestick patterns, and in most cases, various
analysts will refer to the same candlestick pattern by a different name.
However, the most common breakout candlestick patterns include;

Head and shoulders- this is a series of candlesticks in a

candlestick chart that appear to form a head and shoulders of a
human being

Double-top- this is a series of candlesticks that form two peaks

and a trough, forming an image like letter M, within a given time
horizon.

Double-bottom-this is a series of candlesticks that form two

troughs and within it a peak, forming an image like letter W,
within a given time horizon.

Pennant pattern-this is a series of candlesticks that is marked by

a sharp advance/decline, followed by a sustained period of small
swings that tend to fall within given support and resistance levels.

Bullish triangle-this is a series of candlesticks that form upward

trending troughs with relatively similar peaks within a given
period. In most cases, the candles would become flatter with time,
showing an increasing sentiment of indecision in the market. The
peaks and troughs can be joined to form a triangle with a
horizontal top line, and a diagonal under line. Whenever this
pattern occurs, there is usually 80-85% chance that the follow-up
breakout would results in an upward movement.

Symmetrical triangle-this is a series of candlesticks that tend to

form converging turning points in a trending support and
resistance levels. Whenever this pattern appears, there is usually
60% chance that the follow-up breakout will follow the direction
of the initial (main) trend.

Bearish triangle-this is a series of candlesticks in a candlestick

chart that form a bearish trending resistance and a horizontal
support. This is the exact opposite of a bullish triangle. Whenever
this pattern occurs, there is 80-85% chance that the follow-up
breakout would be a downward movement.

Flag-this is a series of candlesticks in a candlestick chart that form

a contained upward/downward trending movement, and are
preceded by a sharp uptrend/downtrend in the price of the
underlying security. The downward/upward trending movement is
usually within trending support and resistance levels. The
preceding uptrend is what forms the flagpole, and the higher the
preceding uptrend, the taller the pole.
Chapter 4 – Real-World Examples
Talking about the various breakouts candlestick patterns would be better
emphasized by using real-life case examples. Below is a demonstration of
each of the candlestick patterns listed above.
Head and Shoulders
First, head and shoulders can occur in two different ways, upright and
inverted.
Inverted Head and Shoulders
In most cases, an inverted head and shoulders signals a bullish breakout, but
in this case, it represents the slight percentage of times, which results to
bearish breakouts.
Below is an example of an inverted Head and Shoulders candlestick pattern,
which seems to usher in a bearish breakout, with the USD/CAD daily
dropping towards the 1.000 mark in early October the year 2010.

The target entry

point for a short position is well indicated by using the neckline, and in this
case, at 1.05220 this presents a compelling opportunity, considering that the
downtrend continues well towards the 1.000 mark.

Upright Head and Shoulders

Upright candlestick patterns are ideal indicators of a bearish breakout. The
example below illustrates a real-life scenario, using the USD/CAD daily price
between April and June, in 2010. The left shoulder formed in early May
2010, while the head emerged towards the end of May.
The Right Shoulder formed in early June, and consequently created an
opportunity to open a short position at 1.0454, as illustrated using the
trending neckline. In this case, a trader could have easily made 200 pips by
exiting at 1.0250.
Double-Bottom
The double-bottom candlestick pattern is used to signal an impending bullish
breakout. In the example below, a bullish breakout began in early May
following a double-bottom candlestick pattern and ended in early June, 2014
for the USD/CHF daily.

The bullish
breakout is also seen to have started after breaking the immediate rebound
point for the peak between the two troughs. This signaled an entry
opportunity for a long position trader.
Double-Top
A double-top candlestick pattern signifies an impending bearish breakout. In
the example below, there was a slight delay before the bearish breakout
happened, after the occurrence of the main double-top pattern.
However, a smaller double-top pattern can be seen just before the bearish
breakout, only that this time the price had pulled back to form a new
resistance level halfway the level of the initial double-top peaks.
The bearish breakout also happens after breaking the support level, where the
troughs had bounced off. The short opportunity for the USD/CHF is
presented at S1, with a potential exit point at S2, as illustrated in the chart
below.
The Pennant
The pennant pattern can occur in two different ways, a bullish pennant
pattern is often preceded by an uptrend, which in this case forms the pole
while a bearish pennant pattern is often preceded by a sharp down trend. The
example below illustrates a bearish pennant pattern in use.
The line between the support and resistance levels is crucial for identifying
potential exit points upon opening a short position. In our case, we can see
that the support and resistance levels remained strong for about ten days. On
the other hand, the downtrend preceding the pennant pattern lasted about
three days, within which the price of the XAG/USD (4-hourly) fell by 70
pips.

Now, interestingly,
the decline following the bearish breakout also lasted for about three days,
with the XAG/USD (4-hourly) falling by nearly 70 pips.
Symmetrical Triangle
Now, as noted in the beginning, a symmetrical triangle pattern signifies an
impending breakout, which in 60% of the time breaks in the direction of the
main trend.
In the example below, GBP/USD (4-Hourly) presents a clear example with
two demonstrations, all breaking in the direction of the main trend (bullish
breakouts).

Bullish Triangle
As the name suggests, technical analysts use bullish triangle candlestick
patterns to identify impending bullish breakouts. The triangle is made of a
horizontal line on top and a diagonal line below. As the triangle narrows with
time, with the two lines converging, the chances of a bullish breakout
increase.
The example below involving the EUR/USD currency pair is a clear
illustration of a bullish triangle breakout pattern, and in this case, it appears
as though the bullish opportunity was enormous for long position traders. In
85% of times, a bullish breakout will occur following this type of candlestick
pattern.
Bearish Triangle
A bearish triangle candlestick pattern forms to signify an impending bearish
breakout. In 85% of the cases, a bearish breakout will occur following this
type of candlestick pattern. A diagonal line on top joining the peaks and a
horizontal line in the bottom joining the troughs, form the bearish triangle.
As the two lines continue to converge with time, the chances of a bearish
breakout increase. In the example below, USD/CAD currency pair formed a
bearish triangle between late 2011 and early 2012, triggering a bearish
breakout on Jan 26, at S1 with a possible take profit point at S2 ten days later.
Flags
Flags and pennants are close relatives in technical analysis. However, flags
are represented by a descending or ascending support/resistance levels,
preceded by a sharp advance/decline in the price of the underlying security.
The distance between the beginning of the preceding uptrend/downtrend and
the beginning of a downward/upward trending support and resistance levels
is what forms the flagpole. In the case of a downward trending support and
resistance levels, a bearish breakout follows while in an upward trending
support and resistance levels a bullish breakout occurs.

However, there are

situations when the eventual breakout occurs contrary to the above, in which
case, it is identified as a retracement. Swing traders are very popular with
using flags and pennants to identify key retracements.

In the example above, the USD/CAD daily in 2012 is used to illustrate a

downward trending support and resistance levels, which form a lazy flag. The
bearish breakout can be seen at 0.99507, which represents the ideal point to
open a short position, with a potential take profit point at 0.96835, with a six-
week waiting period.
Chapter 5 – Warnings

Breakout candlestick patterns have demonstrated that not all times the
expected happens, a good example in this case being the inverted head and
shoulders pattern.
Additionally, in some cases, fundamental analysis, like breaking economic
news, which affect a particular currency pair can influence the direction of
the price of the currency pair leading to unusual trends.
Breakout candlestick patterns can sometimes be confused with reversal
candlestick patterns. However, the most important thing is to get right the
final direction of the trend, regardless of whether you perceived it as a
breakout pattern or a reversal pattern.
Finally, this is an introduction to breakout candlestick patterns eBook, and
therefore, does not include the nitty-gritty items. Consider learning each of
these breakout candlestick patterns in-depth.
Chapter 6 – Tips and Techniques

When you get used to technical analysis, sometimes it is not necessary to

draw the triangle, flags, pennants etc, because you will be able to identify
them with ease, just by looking at the candlestick chart. This speeds up your
decision making process.
It is important to consider suing various indicators like MACD, the
Stochastic and RSI to confirm the trend indicated by the breakout candlestick
pattern. This helps avoid some of the warnings listed above.
Finally, breakout candlestick patterns are several, and different analysts have
their own favorites, but the ones listed here are the most common among
technical analysts.
Chapter 6 – Final Notes

Now, as you may notice, at the beginning I did mention the parts of a
candlestick. However, in the several examples featured here, I may not have
highlighted how the different parts influence the formation of the various
breakout candlestick patterns.
This is because, as noted, it is only the introduction into breakout candlestick
patterns. As we delve deeper into the topic analyzing each breakout
candlestick pattern on its own eBook, then we will discuss all that.
However, for now, the discussions here cover the basics that are critical
before digging deeper into the topics. Nonetheless, the examples used have
demonstrated just how technical analysts/traders use these breakout
candlestick patterns to profit regardless of the direction of the trend.
Conclusion

Thank you again for downloading this book!

You should now have the knowledge you need to get started trading with
breakout candlestick patterns.
The next step is to take action!
Finally, if you enjoyed this book, please take the time to share your thoughts
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Thank you and good luck!

Bonus: Download the Free Trading Toolkit

Get instant access to free cheatsheets, workbooks and guides to help you
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As a special thanks for downloading this book, we've put together a toolkit of
exclusive resources, including…
- Our exclusive ebook: How to Protect Your Trading Profits
- Downloadable cheatsheets for proven option trading strategies
- Our step-by-step guide for using a demo trading account to
maximize your profits
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videos and more each month
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