Candlestick Patterns Every Trader Must Know

Candlestick patterns are one of the most powerful tools in technical analysis. Originating in 18th century Japan, these visual representations of price action reveal market psychology and potential future moves. Mastering candlestick patterns will dramatically improve your entry timing and market understanding.

Understanding Candlesticks

Anatomy of a Candlestick

The Body (Real Body):

• Rectangle showing open and close
• Green/White = Close > Open (bullish)
• Red/Black = Close < Open (bearish)
• Size shows strength of move

The Wicks (Shadows):

• Upper wick: High of period
• Lower wick: Low of period
• Show rejected prices
• Indicate buying/selling pressure

What They Tell Us:

• Direction of price movement
• Strength of buyers vs sellers
• Market sentiment
• Potential reversals

Single Candle Patterns

Bullish Reversal Patterns

1. Hammer

Appearance:

• Small body at top
• Long lower wick (2-3x body size)
• Little to no upper wick
• Forms after downtrend

Psychology:

• Sellers push price down
• Buyers step in strongly
• Price closes near high
• Rejection of lower prices

How to Trade:

• Wait for confirmation (next candle closes higher)
• Enter long above hammer high
• Stop below hammer low
• Target previous resistance

Reliability: High when at support

2. Inverted Hammer

Appearance:

• Small body at bottom
• Long upper wick
• Little to no lower wick
• Forms after downtrend

Psychology:

• Buyers trying to push up
• Sellers still present but weakening
• Potential shift in control

How to Trade:

• Needs strong confirmation
• Wait for bullish follow-through
• Enter on next green candle
• Stop below low

Reliability: Medium (requires confirmation)

3. Bullish Engulfing

Appearance:

• Two-candle pattern
• First: Small red candle
• Second: Large green candle that completely engulfs previous
• Forms after downtrend

Psychology:

• Bears in control initially
• Bulls overwhelm with strong buying
• Clear shift in momentum
• Power reversal

How to Trade:

• Enter on close of engulfing candle or next candle
• Stop below engulfing candle low
• Target previous swing high
• Very reliable pattern

Reliability: Very High

4. Morning Star

Appearance:

• Three-candle pattern
• First: Long red candle (downtrend)
• Second: Small body (doji or spinning top)
• Third: Long green candle closing above midpoint of first

Psychology:

• Downtrend losing momentum
• Indecision (middle candle)
• Bulls take control strongly
• Major reversal

How to Trade:

• Enter on close of third candle
• Stop below pattern low
• Strong signal, larger position possible
• Target significant resistance

Reliability: Very High (one of best reversal patterns)

5. Piercing Line

Appearance:

• Two-candle pattern
• First: Long red candle
• Second: Green candle opens below previous low, closes above 50% of red candle

Psychology:

• Gap down shows fear
• Strong buying throughout session
• Closes well into previous candle
• Rejection of lower prices

How to Trade:

• Enter on close or pullback
• Stop below pattern low
• Target resistance
• Confirm with volume

Reliability: High

Bearish Reversal Patterns

1. Shooting Star

Appearance:

• Small body at bottom
• Long upper wick (2-3x body size)
• Little to no lower wick
• Forms after uptrend

Psychology:

• Buyers push high
• Sellers overwhelm
• Close near lows
• Rejection of higher prices

How to Trade:

• Wait for confirmation
• Enter short below shooting star low
• Stop above high
• Target previous support

Reliability: High at resistance

2. Hanging Man

Appearance:

• Identical to hammer but at top of uptrend
• Small body at top
• Long lower wick
• Little to no upper wick

Psychology:

• Despite lower wick showing buying
• Appearing after uptrend is warning
• Potential exhaustion
• Needs confirmation

How to Trade:

• Requires strong confirmation (next candle closes lower)
• Enter short below low
• Stop above high
• Less reliable than shooting star

Reliability: Medium

3. Bearish Engulfing

Appearance:

• Two-candle pattern
• First: Small green candle
• Second: Large red candle completely engulfs previous
• Forms after uptrend

Psychology:

• Bulls in control initially
• Bears overwhelm with strong selling
• Clear momentum shift
• Power reversal

How to Trade:

• Enter on close of engulfing candle
• Stop above engulfing candle high
• Target previous swing low
• Very reliable

Reliability: Very High

4. Evening Star

Appearance:

• Three-candle pattern
• First: Long green candle (uptrend)
• Second: Small body (doji or spinning top)
• Third: Long red candle closing below midpoint of first

Psychology:

• Uptrend losing momentum
• Indecision
• Bears take control
• Major reversal

How to Trade:

• Enter on close of third candle
• Stop above pattern high
• Strong signal
• Target significant support

Reliability: Very High

5. Dark Cloud Cover

Appearance:

• Two-candle pattern
• First: Long green candle
• Second: Red candle opens above previous high, closes below 50% of green candle

Psychology:

• Gap up shows enthusiasm
• Strong selling throughout
• Closes deep into previous candle
• Momentum shift

How to Trade:

• Enter short on close or pullback
• Stop above pattern high
• Target support
• Confirm with volume

Reliability: High

Indecision Patterns

1. Doji

Appearance:

• Open and close at same price (or very close)
• Cross or plus sign shape
• Can have wicks of any length

Types:

• Long-legged Doji: Long wicks both sides (extreme indecision)
• Dragonfly Doji: Long lower wick (bullish if at support)
• Gravestone Doji: Long upper wick (bearish if at resistance)

Psychology:

• Perfect balance buyers/sellers
• Indecision
• Potential reversal
• Especially important after trends

How to Trade:

• Not a signal alone
• Wait for next candle direction
• Doji at key level more significant
• Combine with support/resistance

Reliability: Medium (needs context)

2. Spinning Top

Appearance:

• Small body (any color)
• Upper and lower wicks of similar length
• Wicks longer than body

Psychology:

• Indecision despite volatility
• Neither side in control
• Potential pause or reversal
• More significant after strong trend

How to Trade:

• Wait for direction confirmation
• Note location (support/resistance)
• Part of larger patterns often
• Don't trade in isolation

Reliability: Low alone, Medium in patterns

Continuation Patterns

1. Three White Soldiers

Appearance:

• Three consecutive long green candles
• Each opens within previous body
• Each closes progressively higher
• Little to no wicks

Psychology:

• Strong, steady buying
• Confidence building
• Trend continuation likely
• Institutional accumulation

How to Trade:

• Enter on pullback
• Trend is strong, don't fight it
• Trail stops
• Watch for exhaustion

Reliability: High for continuation

2. Three Black Crows

Appearance:

• Three consecutive long red candles
• Each opens within previous body
• Each closes progressively lower
• Little to no wicks

Psychology:

• Strong, steady selling
• Fear building
• Downtrend continuation
• Distribution

How to Trade:

• Stay out or short
• Strong downtrend
• Wait for reversal signs
• Don't try to catch falling knife

Reliability: High for continuation

3. Rising Three Methods

Appearance:

• Long green candle
• Three small red candles (within range of first)
• Another long green candle

Psychology:

• Uptrend pause
• Brief consolidation
• Buying resumes strongly
• Healthy pullback

How to Trade:

• Enter on final green candle
• Stop below pattern
• Continuation confirmed
• Target measured move

Reliability: High

4. Falling Three Methods

Appearance:

• Long red candle
• Three small green candles (within range of first)
• Another long red candle

Psychology:

• Downtrend pause
• Brief bounce
• Selling resumes
• Failed rally

How to Trade:

• Enter short on final red candle
• Stop above pattern
• Downtrend continues
• Target measured move

Reliability: High

Multi-Candle Patterns

1. Head and Shoulders (Candlestick Version)

Appearance:

• Three peaks: left shoulder, head (highest), right shoulder
• Neckline connects lows
• Head higher than shoulders

How to Trade:

• Enter short on neckline break
• Stop above right shoulder
• Target = height of pattern
• Classic reversal

Reliability: Very High

2. Double Top/Bottom

Appearance:

• Two peaks (top) or valleys (bottom) at same level
• Retest of previous high/low fails

How to Trade:

• Enter on break of neckline
• Stop beyond second peak/valley
• Target = height of pattern
• Confirm with volume

Reliability: High

How to Use Candlestick Patterns

1. Context is Everything

Where Pattern Forms:

• At support = bullish patterns more reliable
• At resistance = bearish patterns more reliable
• Mid-range = less reliable
• With trend = continuation patterns work
• Against trend = reversal patterns can fail

2. Confirmation Required

Never Trade Candlestick Alone:

• Wait for next candle to confirm
• Check volume (high volume = stronger signal)
• Verify support/resistance nearby
• Consider overall trend
• Multiple timeframe check

3. Combine with Other Tools

Increase Probability:

• Candlestick + support level
• Candlestick + moving average
• Candlestick + RSI divergence
• Candlestick + volume surge
• Multiple confluences best

4. Risk Management

Every Pattern Trade:

• Define stop loss before entry
• Risk 1-2% maximum
• Clear invalidation point
• Risk-reward minimum 1:2
• Position size based on stop distance

Common Mistakes

Mistake 1: Trading Every Pattern

Problem: Taking every candlestick signal

Solution: Only trade at key levels with confirmation

Mistake 2: Ignoring Context

Problem: Hammer in middle of range

Solution: Wait for patterns at support/resistance

Mistake 3: No Confirmation

Problem: Enter immediately on pattern

Solution: Wait for next candle or price action confirmation

Mistake 4: Wrong Timeframe

Problem: Trading 1-min patterns for swing trades

Solution: Match pattern timeframe to trading style

Mistake 5: Forcing Patterns

Problem: Seeing patterns that aren't there

Solution: Only trade obvious, clear patterns

Practice Exercise

Daily Routine:

1. Review charts from previous day
2. Mark candlestick patterns that formed
3. Note which worked, which failed
4. Identify context (support/resistance, trend)
5. Build pattern recognition

Focus On:

• Hammer and Shooting Star (easiest to spot)
• Engulfing patterns (most reliable)
• Morning/Evening Star (powerful reversals)
• Doji at key levels (warning signs)

Conclusion: Read Market Psychology

Candlestick patterns are a visual representation of market psychology. They show you the battle between bulls and bears, momentum shifts, and potential reversals. However, they work best when combined with support/resistance, volume analysis, and proper risk management.

Key Takeaways:

• Context matters most - where pattern forms
• Confirmation required - don't jump the gun
• Combine with other analysis - confluence increases probability
• Risk management essential - every trade needs a stop
• Practice builds skill - more charts you analyze, better you get

Priority Patterns to Master:

1. Bullish/Bearish Engulfing (highest reliability)
2. Hammer/Shooting Star (clear reversal signals)
3. Morning/Evening Star (powerful reversals)
4. Doji at key levels (warning signs)

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