What You'll Learn
Candlestick patterns are visual representations of price action that reveal the psychology of buyers and sellers. Developed by Japanese rice traders centuries ago, these patterns remain incredibly effective for modern forex trading.
Introduction to Candlestick Patterns
Candlestick charts display four key pieces of information for each time period:
- Open: Starting price
- High: Highest price reached
- Low: Lowest price reached
- Close: Ending price
Why Candlesticks Work
Each candlestick tells a story about the battle between buyers (bulls) and sellers (bears). Certain formations repeat because human psychology is consistent. When traders recognize these patterns, they act on them, creating self-fulfilling prophecies.
Candlestick Anatomy
| ← Upper Shadow (Wick)
[____] ← Body
| ← Lower Shadow (Wick)
Components
Body: Rectangle between open and close
• Green/White body = Close > Open (Bullish)
• Red/Black body = Close < Open (Bearish)
• Large body = Strong conviction
• Small body = Indecision
Wicks/Shadows: Lines above and below body
• Upper wick = Price went higher but rejected
• Lower wick = Price went lower but rejected
• Long wicks = Rejection, reversal potential
Single Candlestick Patterns
Hammer (Bullish Reversal)
Appearance: Small body at top, long lower wick (2-3x body size), little/no upper wick
Meaning: Sellers pushed price down, but buyers rejected low prices and pushed back up. Strength returning to bulls.
Where to Find: At bottom of downtrend
Confirmation: Next candle closes above hammer's high
Trade: Enter long on confirmation, stop below hammer's low
Shooting Star (Bearish Reversal)
Appearance: Small body at bottom, long upper wick (2-3x body size), little/no lower wick
Meaning: Buyers pushed price up, but sellers rejected high prices and pushed back down. Strength returning to bears.
Where to Find: At top of uptrend
Confirmation: Next candle closes below star's low
Trade: Enter short on confirmation, stop above star's high
Doji (Indecision)
Appearance: Open and close nearly identical (very small or no body), often with wicks on both sides
Meaning: Perfect balance between buyers and sellers. Neither side won. Indecision and potential reversal.
Types:
- Standard Doji: Equal wicks
- Long-Legged Doji: Very long wicks, high volatility
- Dragonfly Doji: Long lower wick, no upper wick (bullish at bottom)
- Gravestone Doji: Long upper wick, no lower wick (bearish at top)
Trade: Wait for next candle to show direction
Spinning Top (Indecision)
Appearance: Small body (can be any color), long wicks on both sides
Meaning: Price moved significantly in both directions but closed near open. Indecision.
Difference from Doji: Has visible body (doji has virtually no body)
Significance: Weak - shows equilibrium but not necessarily reversal
Marubozu (Strong Trend)
Appearance: Large body, no wicks (or very tiny wicks)
Bullish Marubozu: Green/white, opens at low, closes at high
Bearish Marubozu: Red/black, opens at high, closes at low
Meaning: Complete domination by one side. Strong momentum.
Trade: Continuation signal in direction of marubozu color
Double Candlestick Patterns
Bullish Engulfing (Strong Reversal)
Appearance: Two candles
- First candle: Small bearish (red) candle
- Second candle: Large bullish (green) candle that completely engulfs first candle's body
Meaning: Bears were in control (red candle), but bulls overpowered them completely (green candle bigger than entire red candle)
Where: At bottom of downtrend
Strength: Very reliable reversal pattern
Trade: Enter long on close of engulfing candle, stop below pattern low
Bearish Engulfing (Strong Reversal)
Appearance: Two candles
- First candle: Small bullish (green) candle
- Second candle: Large bearish (red) candle that completely engulfs first candle's body
Meaning: Bulls were in control, but bears overpowered them completely
Where: At top of uptrend
Trade: Enter short on close of engulfing candle, stop above pattern high
Tweezer Top/Bottom (Reversal)
Tweezer Bottom (Bullish): Two or more candles with same/similar lows at bottom of downtrend. Shows price rejected that low multiple times.
Tweezer Top (Bearish): Two or more candles with same/similar highs at top of uptrend. Shows price rejected that high multiple times.
Meaning: Support/resistance level established, likely reversal
Trade: Enter when next candle confirms reversal direction
Piercing Line (Bullish) / Dark Cloud Cover (Bearish)
Piercing Line:
- First: Bearish candle
- Second: Bullish candle opens below first's close, closes above 50% of first's body
Dark Cloud Cover:
- First: Bullish candle
- Second: Bearish candle opens above first's close, closes below 50% of first's body
Strength: Moderate reversal signals, need confirmation
Triple Candlestick Patterns
Morning Star (Strong Bullish Reversal)
Three candles at bottom of downtrend:
- First: Large bearish candle (downtrend continues)
- Second: Small candle (any color), shows indecision - the "star"
- Third: Large bullish candle, closes well into first candle's body
Meaning: Downtrend (1st) → Indecision (2nd) → Reversal up (3rd)
Reliability: One of the most reliable reversal patterns
Trade: Enter long on close of 3rd candle, stop below pattern low, target previous resistance
Evening Star (Strong Bearish Reversal)
Three candles at top of uptrend:
- First: Large bullish candle
- Second: Small candle (any color), the "star"
- Third: Large bearish candle, closes well into first candle's body
Meaning: Uptrend → Indecision → Reversal down
Trade: Enter short on close of 3rd candle, stop above pattern high
Three White Soldiers (Strong Bullish)
Appearance: Three consecutive large bullish candles, each opening within previous candle's body and closing higher
Meaning: Strong, sustained buying pressure. Bulls in complete control.
Where: After downtrend or consolidation
Trade: Continuation of uptrend, can buy pullbacks
Three Black Crows (Strong Bearish)
Appearance: Three consecutive large bearish candles, each opening within previous candle's body and closing lower
Meaning: Strong, sustained selling pressure. Bears in complete control.
Where: After uptrend or consolidation
Trade: Continuation of downtrend, can short rallies
Trading with Candlestick Patterns
Rules for Success
- Context is Everything: Patterns at S/R levels or trend extremes are more reliable than random patterns
- Confirm the Pattern: Wait for next candle to confirm direction before entering
- Use Higher Timeframes: Daily chart patterns more reliable than 5-minute patterns
- Combine with Other Analysis: Patterns + S/R + trend analysis = high probability
- Volume Matters: Patterns with high volume more reliable (when available)
- Risk Management: Always use stop-loss, typically beyond pattern's high/low
Entry and Exit Strategy
Standard Approach
Entry: When confirmation candle closes
Stop-Loss: 10-20 pips beyond pattern's extreme (high for shorts, low for longs)
Take-Profit: Nearest S/R level or 1:2 risk-reward minimum
Position Sizing: Risk 1-2% of account on the stop distance
Pro Tip: Multiple Timeframe Confirmation
- Spot pattern on daily chart
- Wait for confirmation
- Drop to 4H chart for precise entry
- Enter on pullback with tight stop
This approach gives you the reliability of daily patterns with the precision of lower timeframe entries.
Common Candlestick Pattern Mistakes
Mistake #1: Trading Every Pattern
Not every doji or hammer is worth trading. Only trade patterns at significant levels (S/R, trend extremes) with clear context. Quality over quantity.
Mistake #2: Ignoring the Trend
Bullish patterns in strong downtrends often fail. Bearish patterns in strong uptrends often fail. Don't fight the trend. Best trades are reversal patterns at trend extremes or continuation patterns in established trends.
Mistake #3: No Confirmation
Entering immediately when you see a pattern (before it closes or before next candle confirms) leads to false signals and losses. WAIT FOR CONFIRMATION.
Mistake #4: Wrong Timeframe
15-minute patterns are noise. Focus on 4H, daily, and weekly charts for reliable signals. Lower timeframes for fine-tuning entry only.
Pattern Trading Checklist
- ✓ Pattern formed at significant S/R level?
- ✓ Pattern at trend extreme or in established trend?
- ✓ Pattern on daily or 4H chart?
- ✓ Confirmation candle closed?
- ✓ Stop-loss placement identified?
- ✓ Risk is 1-2% of account?
- ✓ Take-profit target at logical level?
If any answer is "no", skip the trade.