Candlestick patterns are the market's body language—visual representations of the eternal battle between buyers and sellers. Developed by Japanese rice traders over 200 years ago, these patterns have stood the test of time because they capture something fundamental: human emotion in financial markets.
While Western traders were still using simple bar charts, Japanese traders had already discovered that the same emotions—fear, greed, indecision—create recognizable patterns that repeat across all markets and timeframes. Master these patterns, and you'll gain a powerful edge in reading market sentiment and timing your trades with precision.
Before diving into patterns, you need to understand what each part of a candlestick tells you about the battle between bulls and bears.
The Four Price Points
Every candlestick captures four crucial pieces of information:
- Open: Where the price started during the period
- High: The highest price reached
- Low: The lowest price reached
- Close: Where the price ended
These four points create the candlestick's distinctive shape.
The Body: The Main Story
The thick part of the candle (the body) shows the range between open and close:
- Green/White Body: Close higher than open (bullish)
- Red/Black Body: Close lower than open (bearish)
- Body Size: Larger bodies indicate stronger conviction
- Small Bodies: Show indecision or consolidation
The Wicks: The Rejection Story
The thin lines above and below the body (shadows or wicks) reveal price rejection:
- Upper Wick: Shows where buyers pushed price up before sellers took control
- Lower Wick: Shows where sellers pushed price down before buyers stepped in
- Long Wicks: Indicate strong rejection at those levels
- No Wicks: Price moved in one direction with conviction
Reading the Message
Every candlestick tells a story:
- Long green body, small wicks: Strong bullish conviction
- Long upper wick, small body: Buyers tried but failed—bearish
- Equal wicks, small body: Total indecision—market at crossroads
- No upper wick, long green body: Buyers in complete control
The key is understanding that each candlestick represents a period of emotional battle, and the final shape reveals who won.
Some of the most reliable signals come from individual candlesticks. These patterns can alert you to potential reversals or continuations with just one candle.
Hammer and Hanging Man
Same shape, different locations, opposite meanings:
- Shape: Small body at the top, long lower wick (2x body minimum)
- Hammer: Appears at bottoms—bullish reversal signal
- Hanging Man: Appears at tops—bearish reversal warning
The long lower wick shows sellers pushed hard but buyers defended successfully. At bottoms, this shows selling exhaustion. At tops, it's an early warning.
Shooting Star and Inverted Hammer
The opposite of hammer patterns:
- Shape: Small body at bottom, long upper wick
- Shooting Star: At tops—strong bearish reversal
- Inverted Hammer: At bottoms—potential bullish reversal
The rejection of higher prices (long upper wick) tells you resistance is strong.
Doji: The Ultimate Indecision
When open and close are virtually equal:
- Standard Doji: Equal wicks—complete indecision
- Gravestone Doji: Long upper wick—bearish reversal
- Dragonfly Doji: Long lower wick—bullish reversal
- Four-Price Doji: Extremely rare—market paralysis
Dojis are powerful because they show the battle between bulls and bears ended in a draw. After a trend, this often precedes reversal.
Marubozu: Pure Conviction
- Bullish Marubozu: No wicks, full green body—unstoppable buying
- Bearish Marubozu: No wicks, full red body—relentless selling
These show one side completely dominated. Strong continuation signal in the direction of the body.
Spinning Tops: Minor Indecision
Small body with wicks on both sides. Less powerful than doji but still shows uncertainty. Multiple spinning tops often precede big moves.
When two candlesticks combine, they often create powerful reversal signals. These patterns show a clear shift in momentum over two periods.
Bullish Engulfing Pattern
The quintessential bullish reversal:
- Setup: Downtrend in place
- First Candle: Red/bearish candle
- Second Candle: Green candle completely engulfs the first
- Psychology: Sellers exhausted, buyers take complete control
The larger the engulfing candle, the stronger the signal. Volume confirmation makes it even more reliable.
Bearish Engulfing Pattern
The mirror image for tops:
- Setup: Uptrend in place
- First Candle: Green/bullish candle
- Second Candle: Red candle completely engulfs the first
- Message: Buyers exhausted, sellers seize control
Piercing Pattern (Bullish)
A more subtle bullish reversal:
- First Candle: Long red candle
- Second Candle: Green candle opens below first's low, closes above midpoint
- Requirement: Must close above 50% of first candle
- Psychology: Sellers push lower but buyers fight back strongly
Dark Cloud Cover (Bearish)
The bearish equivalent:
- First Candle: Long green candle
- Second Candle: Red candle opens above first's high, closes below midpoint
- Signal: Buyers push higher but sellers overwhelm them
Tweezer Bottoms and Tops
Double test of support/resistance:
- Tweezer Bottom: Two candles with same low—support holds
- Tweezer Top: Two candles with same high—resistance holds
- Best when: Different candle types (shows different traders agree on level)
Harami Pattern
'Pregnant' in Japanese—small candle inside previous large candle:
- Bullish Harami: Small green inside large red—potential bottom
- Bearish Harami: Small red inside large green—potential top
- Shows: Momentum slowing, possible reversal coming
Three-candlestick patterns provide the clearest picture of shifting market sentiment. They show the complete story: the trend, the battle, and the resolution.
Morning Star (Bullish Reversal)
The most reliable bullish reversal pattern:
- First Candle: Long red candle—strong selling
- Second Candle: Small body (any color) gaps down—indecision
- Third Candle: Long green closes above midpoint of first—buyers win
Psychology: Sellers exhaust, uncertainty creeps in, buyers seize control. The gap adds power—shows emotional extremes.
Evening Star (Bearish Reversal)
The death knell for uptrends:
- First Candle: Long green candle—strong buying
- Second Candle: Small body gaps up—uncertainty at highs
- Third Candle: Long red closes below midpoint of first—sellers dominate
Three White Soldiers (Bullish)
March of the bulls:
- Three consecutive long green candles
- Each opens within previous body
- Each closes near its high
- Shows: Sustained buying pressure
Warning: After extended moves, can signal exhaustion instead.
Three Black Crows (Bearish)
The bearish battalion:
- Three consecutive long red candles
- Each opens within previous body
- Each closes near its low
- Shows: Relentless selling pressure
Three Inside Up/Down
Confirmed reversal patterns:
- Three Inside Up: Bullish harami + confirmation candle
- Three Inside Down: Bearish harami + confirmation candle
- More reliable than harami alone
Three Outside Up/Down
Engulfing pattern + confirmation:
- Three Outside Up: Bullish engulfing + higher close
- Three Outside Down: Bearish engulfing + lower close
- The confirmation candle validates the reversal
Not all patterns signal reversals. Continuation patterns help you stay with the trend and add to winning positions.
Rising Three Methods (Bullish Continuation)
The pause that refreshes uptrends:
- Long green candle
- Three small red candles within first candle's range
- Long green candle breaking to new highs
Psychology: Profit-taking pause, weak sellers quickly overwhelmed.
Falling Three Methods (Bearish Continuation)
Downtrend takes a breather:
- Long red candle
- Three small green candles within first candle's range
- Long red candle breaking to new lows
Mat Hold Pattern
Similar to three methods but second candle gaps:
- Shows even stronger trend conviction
- Brief pause before continuation
- Less common but very reliable
Flag and Pennant Candles
Tight consolidation after strong moves:
- Series of small-bodied candles
- Decreasing range
- Break in trend direction
Gap Patterns
- Breakaway Gap: Starts new trend
- Runaway Gap: Mid-trend acceleration
- Exhaustion Gap: Near trend end
- Context determines meaning
On Neck/In Neck Lines
Continuation patterns in downtrends:
- Red candle followed by small green
- Green opens below and barely penetrates
- Shows weak buying, selling continues
Knowing patterns is one thing—trading them profitably is another. Here's how to turn pattern recognition into trading success.
Context Is Everything
A hammer in the middle of nowhere means nothing. The same pattern can be bullish or bearish depending on location:
- At Support/Resistance: Patterns are most reliable
- After Extended Moves: Reversal patterns gain power
- In Trends: Continuation patterns work best
- In Ranges: Most patterns fail—wait for breakouts
Confirmation Is Key
Never trade a pattern in isolation:
-
Volume Confirmation
- Reversal patterns need volume surge
- Continuation patterns can have lower volume
- No volume = no conviction
-
Indicator Confirmation
- RSI divergence strengthens reversal patterns
- Moving average support/resistance adds confidence
- Multiple confirmations = higher probability
-
Multiple Timeframe Analysis
- Pattern on daily + support on weekly = powerful
- Check higher timeframes for context
- Don't trade against larger timeframe trend
Entry Strategies
Conservative Entry:
- Wait for pattern completion
- Enter on break of pattern high/low
- Most reliable but worse risk/reward
Aggressive Entry:
- Enter as pattern completes
- Better risk/reward
- Higher failure rate
Scaled Entry:
- Half position on completion
- Half on confirmation
- Balances risk and reward
Stop Loss Placement
- Reversal Patterns: Beyond the pattern extreme
- Continuation Patterns: Below pattern low (uptrend) or above pattern high (downtrend)
- Add Buffer: Include spread + average volatility
- Never Move Against You: If hit, pattern failed
Profit Targets
- Measured Moves: Many patterns have statistical targets
- Next Resistance/Support: Logical profit points
- Trailing Stops: Let winners run in strong trends
- Partial Profits: Book some at first target
Even experienced traders make these errors. Learn from others' mistakes to protect your capital.
1. Pattern Pareidolia
Seeing patterns that aren't there:
- Forcing interpretations to fit bias
- Ignoring context completely
- Trading every pattern you see
Solution: Only trade textbook patterns at significant levels.
2. Ignoring the Trend
Fighting the major trend with minor patterns:
- Trading bearish patterns in strong uptrends
- Expecting reversals without trend exhaustion
- Missing the forest for the trees
Solution: Trade reversal patterns only after trend shows weakness.
3. Premature Entry
Jumping before pattern completes:
- Entering on incomplete patterns
- Not waiting for confirmation
- FOMO driving decisions
Solution: Patience. Let patterns fully form and confirm.
4. Wrong Timeframe Focus
- Trading 5-minute patterns with daily targets
- Ignoring higher timeframe resistance
- Mismatching pattern and trade duration
Solution: Match your holding period to pattern timeframe.
5. Overreliance on Patterns
Patterns aren't magic:
- Ignoring fundamental catalysts
- Not considering market conditions
- Expecting 100% success rate
Solution: Use patterns as one tool among many.
6. Poor Risk Management
- Stops too tight (normal fluctuation)
- Stops too wide (poor risk/reward)
- No stops at all (hope isn't a strategy)
Solution: Place stops beyond pattern structure with proper sizing.
Once you master the basics, these advanced concepts will refine your pattern trading.
Pattern Variations and Flexibility
Real markets rarely form textbook patterns:
- Near-Patterns: 80% correct can still work
- Pattern Morphing: Patterns can evolve
- Failed Patterns: Often lead to strong moves opposite direction
- Pattern Clusters: Multiple patterns increase reliability
Volume Pattern Analysis
Combine candlesticks with volume patterns:
- Climax Volume: On reversal patterns = powerful
- Dry Up Volume: During consolidation = breakout coming
- Volume Divergence: Price up, volume down = weakness
Candlestick Momentum
Measure pattern strength:
- Body/Range Ratio: Higher = stronger conviction
- Close Location: Near high/low = continuation likely
- Gap Relationships: Gaps add pattern power
- Wick Analysis: Long wicks show rejection strength
Market Profile Integration
- Patterns at value area high/low = significant
- Patterns at POC (point of control) = major level
- Patterns in low volume nodes = fast moves likely
Pattern Failure Trading
Failed patterns often provide the best trades:
- Failed bearish pattern = explosive bullish move
- Stops from pattern traders fuel the move
- Enter on clear failure with tight stop
Algorithmic Pattern Recognition
Modern tools can help:
- Scan thousands of charts instantly
- Backtest pattern performance
- Alert on pattern formation
- But always verify with your eyes
Knowledge without action is worthless. Here's how to implement candlestick pattern trading step by step.
Week 1-2: Foundation Building
-
Master Basic Recognition
- Study 5 patterns daily on historical charts
- Draw patterns by hand to internalize shapes
- Focus on major reversal patterns first
- Use daily timeframe to reduce noise
-
Context Training
- Mark all support/resistance on your charts
- Note where patterns succeed/fail
- Identify trend vs range environments
- Build pattern-location awareness
Week 3-4: Pattern Practice
-
Paper Trade Patterns
- Trade only candlestick patterns
- Log every pattern traded
- Note win rate by pattern type
- Track which patterns you see best
-
Develop Your Playbook
- Identify your highest probability setups
- Create rules for each pattern
- Define exact entry/stop/target rules
- Build pattern-specific strategies
Month 2: Integration
-
Combine With Other Tools
- Add one confirming indicator
- Use multiple timeframe analysis
- Integrate with support/resistance
- Build complete trading system
-
Risk Management Refinement
- Optimize stop placement by pattern
- Test different position sizing
- Develop pattern-based targets
- Create maximum loss rules
Month 3: Live Implementation
-
Start Small
- Trade micro positions initially
- Focus on A+ setups only
- Build confidence gradually
- Track real money results
-
Continuous Improvement
- Review every trade taken
- Identify pattern recognition errors
- Refine entry/exit rules
- Adapt to market changes
Daily Routine
Pre-Market (30 minutes):
- Scan for overnight patterns
- Mark key levels
- Plan potential trades
During Market:
- Monitor for pattern completion
- Execute per your rules
- Manage open positions
Post-Market (20 minutes):
- Log all patterns seen
- Review trades taken
- Note lessons learned
Pattern Trading Mastery Timeline
- Month 1: Recognition becomes automatic
- Month 3: Context integration natural
- Month 6: Profitable pattern trading
- Year 1: Intuitive pattern expertise
Your Pattern Trading Edge
Develop specialization:
- Maybe you excel at hammer patterns
- Perhaps morning stars are your forte
- Some traders dominate with engulfing patterns
Find your strength and exploit it.
Final Wisdom
Candlestick patterns have worked for centuries because they reflect unchanging human emotions. Master them, and you'll have a skill that pays dividends throughout your trading career.
Remember: Patterns are probabilities, not certainties. Combine them with solid risk management, and you have a recipe for long-term success.
The markets are speaking to you through these patterns. Are you ready to listen?
Start your candlestick pattern mastery journey today!
