Candlestick Patterns

Question 1 (10)

(a) (4 — 1 each formula/value, 1 for all correct)

• Body $= |C - O| = |108 - 100| = 8$
• Upper wick $= H - \max(O,C) = 112 - 108 = 4$
• Lower wick $= \min(O,C) - L = 100 - 96 = 4$
• Range $= H - L = 112 - 96 = 16$ ✓ (body + wicks = 8+4+4 = 16, consistency check)

(b) (3)

• Ratio $= 8/16 = 0.50$.
• $0.30 < 0.50 < 0.95$ → Neither marubozu nor spinning top. (1 for ratio, 1 for comparison, 1 for verdict.)

(c) (3) The ratio normalises body size against the candle's own trading range, making it scale-invariant: an 8-point body means very different things on a \50 stock vs a $5000 stock, but body/range compares intent (conviction) to activity within the same session. This lets one threshold classify candles across all price levels and volatilities.

Question 2 (12)

(a) Rules (4)

• Body ratio $r = |c-o| / (h-l)$; doji if $r \leq 0.10$ (and $h>l$).
• Upper wick $u = h-\max(o,c)$; lower wick $d = \min(o,c)-l$.
• Dragonfly: $u \approx 0$ (small), $d$ large → long lower, negligible upper.
• Gravestone: $d \approx 0$, $u$ large → long upper, negligible lower.
• Long-legged: both $u$ and $d$ large and roughly balanced.
• Standard: small body, modest balanced wicks (default doji).

(b) Code (6)

def classify_doji(o, h, l, c):
    rng = h - l
    if rng == 0:
        return "not_doji"
    body = abs(c - o) / rng
    if body > 0.10:
        return "not_doji"
    u = (h - max(o, c)) / rng   # upper wick fraction
    d = (min(o, c) - l) / rng   # lower wick fraction
    if u < 0.10 and d > 0.60:
        return "dragonfly_doji"
    if d < 0.10 and u > 0.60:
        return "gravestone_doji"
    if u > 0.30 and d > 0.30:
        return "long_legged_doji"
    return "standard_doji"

(2 marks structure/guards, 2 marks body test, 2 marks variant branches.)

(c) (2) A doji shows equilibrium between buyers and sellers; its meaning is directional only relative to what preceded it — a dragonfly after a downtrend is bullish reversal, the same candle mid-range is just noise. Context supplies the "from what state are we reversing."

Question 3 (10)

(a) Bullish engulfing (4) — Day 1 bearish, Day 2 bullish body engulfs Day 1 body:

• $C_1 < O_1$ (day 1 red)
• $C_2 > O_2$ (day 2 green)
• $O_2 \leq C_1$ (opens at/below prior close)
• $C_2 \geq O_1$ (closes at/above prior open)

(b) Bullish harami (3) — Day 1 large bearish, Day 2 small body inside:

• $C_1 < O_1$ (day 1 red, large body)
• $C_2 > O_2$ (day 2 green, small)
• $O_2 > C_1$ and $C_2 < O_1$ (day-2 body contained inside day-1 body)

(c) (3)

• Engulfing: buyers overwhelm sellers completely, seizing full control — strong momentum reversal. (1.5)
• Harami: selling momentum suddenly stalls and contracts inside prior range — hesitation/exhaustion, a weaker, "pause" reversal needing confirmation. (1.5)

Question 4 (10)

(a) (4)

1. Day 1: long bearish (red) candle continuing the downtrend.
2. Day 2: small body (star), often gapping down; colour secondary; shows indecision.
3. Day 3: long bullish (green) candle that closes well into (above midpoint of) Day-1 body. (Gaps between bodies strengthen the pattern.)

(b) (4)

• Day 1: $O=50, C=44$ → red, large body ✓. Midpoint $=(50+44)/2 = 47$.
• Day 2: body $=|43.5-43.2| = 0.3$, small ✓; below day-1 close, gapped down ✓.
• Day 3: $O=44, C=49$ → green, large ✓.
• Confirmation rule: Day-3 close $49 > 47$ (midpoint of day-1 body) ✓.
• Verdict: valid morning star. (1 each: day1, day2, day3, midpoint check.)

(c) (2) The small middle body means neither side won that session — the downtrend's selling pressure has evaporated but buyers haven't yet committed; it is the fulcrum where control transfers, so the following strong green candle confirms the tilt to buyers.

Question 5 (10)

(a) (4)

• Tweezer top: two adjacent candles with near-equal highs: $|H_1 - H_2| \leq \epsilon$, occurring in an uptrend (first bullish, second bearish typical) → resistance rejection.
• Tweezer bottom: near-equal lows: $|L_1 - L_2| \leq \epsilon$, in a downtrend (first bearish, second bullish) → support hold. ($\epsilon$ = small tolerance, e.g. a fraction of ATR or of price.)

(b) (4)

def is_falling_three_methods(candles):
    # candles: list of 5 dicts with o,h,l,c
    c1, c2, c3, c4, c5 = candles
    big_red   = c1['c'] < c1['o']                 # day1 long bearish
    up_middle = all(m['c'] > m['o'] for m in (c2, c3, c4))  # small greens (climbing)
    contained = all(c1['l'] <= m['l'] and m['h'] <= c1['h']
                    for m in (c2, c3, c4))          # inside day1 range
    big_red5  = (c5['c'] < c5['o']) and (c5['c'] < c1['c'])  # day5 breaks below day1 close
    return big_red and up_middle and contained and big_red5

(1 day1, 1 middle three, 1 containment, 1 day5 breakdown.)

(c) (2) Containment shows the counter-trend rally (the three small candles) is only a weak, corrective pause that never overcomes the dominant move; if they broke out of the range the trend would be genuinely contested and the continuation thesis would fail.

Question 6 (8)

(a) (3, 1 each)

1. Occurs after a defined downtrend (reversal needs something to reverse).
2. At a prior support / demand zone (confluence).
3. On elevated volume (2.3× avg) confirming genuine buying interest, not thin drift.

(b) (5)

• Wait for the next candle to close bullish above the hammer's high (or high of hammer body) before entering — confirms buyers followed through rather than a one-day fake. (3)
• Place stop-loss just below the hammer's low (the session low that buyers defended); a break below invalidates the support/reversal thesis, giving a defined, logical risk point and favourable reward-to-risk against the next resistance. (2)

[
  {"claim":"Q1 body=8, upper wick=4, lower wick=4, range=16, ratio=0.5, neither category","code":"O,H,L,C=100,112,96,108\nbody=abs(C-O)\nup=H-max(O,C)\ndn=min(O,C)-L\nrng=H-L\nratio=Rational(body,rng)\nverd=(ratio<Rational(3,10)) or (ratio>=Rational(95,100))\nresult=(body==8 and up==4 and dn==4 and rng==16 and ratio==Rational(1,2) and verd==False)"},
  {"claim":"Q4 morning star: day1 midpoint 47 and day3 close 49 recovers above it","code":"mid=Rational(50+44,2)\nd3_close=49\nresult=(mid==47 and d3_close>mid)"},
  {"claim":"Q4 day2 body 0.3 is small relative to day1 body 6","code":"d1=abs(50-44)\nd2=Rational(3,10)\nresult=(d1==6 and d2<Rational(1,10)*d1)"},
  {"claim":"Q3 bullish engulfing sample O1=10,C1=8,O2=7,C2=11 satisfies all conditions","code":"O1,C1,O2,C2=10,8,7,11\nc=(C1<O1) and (C2>O2) and (O2<=C1) and (C2>=O1)\nresult=bool(c)"}
]