Noesis
Level 4 — ApplicationCandlestick Patterns

Candlestick Patterns

printable — key stays hidden on paper

Level 4 (Application) · Time: 60 minutes · Total: 50 marks

Instructions: Show all reasoning. Use OHLC (Open, High, Low, Close) data provided. Round prices to 2 decimals. No formula sheet provided.

Question 1 — Anatomy & Classification (10 marks)

A daily candle has the following data:

O=148.00,H=152.50,L=138.00,C=149.20O = 148.00,\quad H = 152.50,\quad L = 138.00,\quad C = 149.20

(a) Calculate the real body length, the upper wick length, and the lower wick length. (3)

(b) Express the lower wick length as a multiple of the real body length. (2)

(c) This candle appears after a sustained downtrend. Classify the single-candle pattern and justify using your calculated ratios. (3)

(d) State ONE piece of confirmation you would require on the next candle before acting on this pattern. (2)

Question 2 — Two-Candle Reversal (12 marks)

Two consecutive daily candles are given:

Candle O H L C
Day 1 210.00 211.50 204.00 205.00
Day 2 204.50 216.00 203.80 214.80

(a) State whether each candle is bullish or bearish. (2)

(b) Determine which two-candle pattern is formed. Prove it by comparing the exact body boundaries. (5)

(c) The prior trend was down. Explain in terms of buyer/seller psychology why this pattern is significant. (3)

(d) If Day 2 had instead closed at 209.00 (all else equal), would the pattern still qualify? Justify numerically. (2)

Question 3 — Three-Candle Pattern & Midpoint Logic (12 marks)

Three consecutive candles during a rally:

Candle O H L C
Day 1 90.00 95.20 89.50 94.80
Day 2 96.00 97.00 95.60 96.40
Day 3 95.80 96.10 88.90 89.40

(a) Identify the pattern. Justify each of the three candles' roles. (5)

(b) Day 1's midpoint is a key threshold. Compute it and verify whether Day 3's close penetrates below it as required. (3)

(c) Classify the middle candle (Day 2) as a specific single-candle type using its body-to-range ratio. (2)

(d) State the expected direction implied and one contextual factor that would strengthen the signal. (2)

Question 4 — Pattern Discrimination (10 marks)

Consider candle X: O=50.00, H=50.30, L=44.00, C=49.70O=50.00,\ H=50.30,\ L=44.00,\ C=49.70.

(a) Compute body, upper wick, lower wick. (3)

(b) The same numeric shape can be a hammer OR a hanging man. Explain what determines which one it is, and give the market context for each. (4)

(c) Contrast candle X with an inverted hammer in terms of wick placement. Sketch/describe both. (3)

Question 5 — Context Combination (6 marks)

A stock forms a bullish harami at a well-tested support level, but the RSI is deeply overbought (RSI = 78) — which is unusual for a bottom.

(a) Explain the apparent contradiction between the harami signal and the RSI reading. (3)

(b) State, with reasoning, whether you would take a long trade here and what additional confirmation you would demand. (3)

Answer keyMark scheme & solutions

Question 1 (10 marks)

(a) (3 marks)

  • Real body = ∣C−O∣=∣149.20−148.00∣=1.20|C - O| = |149.20 - 148.00| = 1.20 (1)
  • Upper wick = H−max⁡(O,C)=152.50−149.20=3.30H - \max(O,C) = 152.50 - 149.20 = 3.30 (1)
  • Lower wick = min⁡(O,C)−L=148.00−138.00=10.00\min(O,C) - L = 148.00 - 138.00 = 10.00 (1)

(b) (2 marks) Ratio = 10.00/1.20=8.3310.00 / 1.20 = 8.33 → lower wick ≈ 8.3× body. (2) (accept 8.33)

(c) (3 marks) This is a Hammer (1): small real body near the top of the range, long lower wick (≥ 2× body, here 8.3×), little/no upper wick (1), occurring after a downtrend — signals potential bullish reversal as sellers pushed price down but buyers regained control by close (1).

(d) (2 marks) Require a bullish confirmation candle — next candle closing above the hammer's close/high (or a gap up). (2) (accept: volume spike, close above body.)

Question 2 (12 marks)

(a) (2 marks)

  • Day 1: C(205.00)<O(210.00)C(205.00) < O(210.00) → bearish (1)
  • Day 2: C(214.80)>O(204.50)C(214.80) > O(204.50) → bullish (1)

(b) (5 marks) Pattern = Bullish Engulfing (1). Proof:

  • Day 1 body spans 205.00205.00 to 210.00210.00.
  • Day 2 body spans 204.50204.50 to 214.80214.80.
  • Day 2 open 204.50<204.50 < Day 1 close 205.00205.00 (2)
  • Day 2 close 214.80>214.80 > Day 1 open 210.00210.00 (1) Day 2's bullish body fully engulfs Day 1's bearish body → confirmed. (1)

(c) (3 marks) After a downtrend, sellers were in control (Day 1 bearish). Day 2 opens lower (sellers still trying) but buyers overwhelm them, closing above the entire prior body (2), signaling a decisive shift in momentum from sellers to buyers → potential reversal. (1)

(d) (2 marks) Close = 209.00 → Day 2 body top = 209.00 < Day 1 open 210.00. Body does not fully engulf Day 1 body (1) → fails the engulfing criterion (would be a partial/inside relation). (1)

Question 3 (12 marks)

(a) (5 marks) Pattern = Evening Star (1):

  • Day 1: long bullish body (C=94.80>O=90.00C=94.80>O=90.00) continuing the rally. (1)
  • Day 2: small-bodied candle gapping/high near the top (indecision) — the "star." (1)
  • Day 3: long bearish body (C=89.40<O=95.80C=89.40<O=95.80) closing deep into Day 1's body. (1) Three-candle bearish reversal at a top. (1)

(b) (3 marks) Day 1 midpoint = (O+C)/2=(90.00+94.80)/2=92.40(O+C)/2 = (90.00+94.80)/2 = 92.40 (1). Day 3 close =89.40<92.40= 89.40 < 92.40 (1) → penetrates below midpoint → satisfies the evening-star confirmation. (1)

(c) (2 marks) Day 2 range = 97.00−95.60=1.4097.00-95.60 = 1.40; body = ∣96.40−96.00∣=0.40|96.40-96.00| = 0.40; ratio = 0.40/1.40=0.2860.40/1.40 = 0.286 (~29%) (1). Small body relative to range → spinning top (indecision). (1) (Accept "star candle.")

(d) (2 marks) Implies bearish reversal / downward move (1). Strengthened by: occurrence at resistance, high volume on Day 3, or overbought oscillator. (1)

Question 4 (10 marks)

(a) (3 marks)

  • Body = ∣49.70−50.00∣=0.30|49.70-50.00| = 0.30 (1)
  • Upper wick = 50.30−50.00=0.3050.30 - 50.00 = 0.30 (1)
  • Lower wick = 49.70−44.00=5.7049.70 - 44.00 = 5.70 (1)

(b) (4 marks) Numerically identical shape (small top body, long lower wick). The distinguishing factor is prior trend/context (1):

  • Hammer: appears after a downtrend → bullish reversal signal. (1.5)
  • Hanging man: appears after an uptrend → bearish reversal warning. (1.5)

(c) (3 marks) An inverted hammer has the long wick on the upper side with a small body near the low of the range (2). Candle X (a hammer shape) has the long wick on the lower side with body near the high (1). They are vertical mirror images.

Question 5 (6 marks)

(a) (3 marks) A bullish harami suggests a bottom (waning selling momentum, small inside body after a large down candle) (1), but RSI 78 indicates overbought — typical of a top, not a bottom (1). The contradiction means either the "downtrend" is a shallow pullback within a larger uptrend, or the signal is unreliable in this context. (1)

(b) (3 marks) I would not take an immediate long (1) — signal quality is low due to conflicting context (overbought). (1) Demand confirmation: a bullish close above the harami's first candle open on strong volume, and RSI cooling / no bearish divergence. (1)

[
  {"claim":"Q1 lower wick is 8.33x body", "code":"body=abs(149.20-148.00); lw=148.00-138.00; result = abs(lw/body - Rational(25,3)) < Rational(1,100)"},
  {"claim":"Q2 bullish engulfing: Day2 open<Day1 close and Day2 close>Day1 open", "code":"result = (204.50 < 205.00) and (214.80 > 210.00)"},
  {"claim":"Q2(d) close 209 fails to engulf Day1 open 210", "code":"result = not (209.00 > 210.00)"},
  {"claim":"Q3 Day1 midpoint 92.40 and Day3 close below it", "code":"mid=(90.00+94.80)/2; result = (abs(mid-92.40)<0.01) and (89.40 < mid)"},
  {"claim":"Q3 Day2 body/range ratio approx 0.286", "code":"rng=97.00-95.60; bod=abs(96.40-96.00); result = abs(bod/rng - 0.2857) < 0.01"},
  {"claim":"Q4 lower wick 5.70 and body 0.30", "code":"result = (abs((49.70-44.00)-5.70)<0.01) and (abs(abs(49.70-50.00)-0.30)<0.01)"}
]