- What candlesticks are and how to read their components (body, wicks, shadows)
- Single candle patterns: Doji, Hammer, Shooting Star, Spinning Top
- Two-candle patterns: Engulfing, Harami, Piercing Line, Dark Cloud Cover
- Three-candle patterns: Morning Star, Evening Star, Three White Soldiers
- How to combine candlestick patterns with support/resistance for high-probability trades
- Common mistakes and how to avoid false signals
What Are Candlestick Charts?
Candlestick charts are a visual method of displaying price movements that originated in 18th-century Japan. Rice trader Munehisa Homma developed this technique to track rice prices, and it's now the most popular charting method worldwide.
Why candlesticks? Unlike simple line charts, candlesticks show four key data points for each time period:
- Open: The price at the start of the period
- High: The highest price reached during the period
- Low: The lowest price reached during the period
- Close: The price at the end of the period
Anatomy of a Candlestick
Candlestick Anatomy
Green = bullish (close > open), Red = bearish (close < open)
Candlestick Components:
- Body (Real Body): The thick part of the candle showing the range between Open and Close
- Upper Wick (Shadow): The thin line above the body showing the High
- Lower Wick (Shadow): The thin line below the body showing the Low
- Green/White Candle: Close > Open (bullish β price went UP)
- Red/Black Candle: Close < Open (bearish β price went DOWN)
Imagine a daily candle for Apple stock:
- Open: $150.00
- High: $155.00
- Low: $148.00
- Close: $153.00
Result: This is a GREEN (bullish) candle because Close ($153) > Open ($150). The body shows $3 of upward movement. The upper wick ($2) shows buyers pushed to $155 but couldn't hold. The lower wick ($2) shows sellers pushed to $148 but bulls recovered.
Single Candlestick Patterns
Single candle patterns can signal potential reversals or indecision. The key is where they appear on the chart.
1. Doji: The Indecision Candle
Doji
Open β Close β Indecision
Doji Pattern:
- Appearance: Open and Close are nearly equal (very small or no body)
- Meaning: Perfect balance between buyers and sellers β indecision
- Signal: Potential reversal when appearing at key levels (support/resistance)
Types of Doji: Standard Doji (cross shape), Dragonfly Doji (long lower wick), Gravestone Doji (long upper wick), Long-Legged Doji (long wicks both sides)
Nvidia formed a Doji at all-time highs:
- Context: NVDA rallied from $800 to $1,200 (+50% in 2 months)
- Pattern: Doji formed at $1,200 resistance with long upper wick
- Interpretation: Bulls exhausted, sellers stepping in at highs
- Outcome: NVDA pulled back to $1,050 over the next 2 weeks (-12.5%)
Key lesson: A Doji after a strong rally, at resistance, is a warning sign. Wait for confirmation (next candle closes red) before selling.
2. Hammer: Bullish Reversal Signal
Hammer
Long lower wick β Bullish reversal
Hammer Pattern:
- Appearance: Small body at the top, long lower wick (2-3x the body), little to no upper wick
- Where it appears: After a downtrend, at support levels
- Meaning: Sellers pushed prices down, but buyers aggressively bought the dip and closed near the high
- Signal: Bullish reversal (stronger if the body is green)
Amazon formed a textbook hammer at key support:
- Context: AMZN declined from $190 to $160 in a 3-week selloff
- Pattern: Green hammer at $160 support, lower wick touched $155
- Volume: Higher than average (confirms buyers stepping in)
- Confirmation: Next day closed green above hammer's high
- Outcome: AMZN rallied from $160 to $185 over 3 weeks (+15.6%)
Trading rule: Buy when the next candle closes above the hammer's high. Stop loss below the hammer's low.
3. Shooting Star: Bearish Reversal Signal
Shooting Star
Long upper wick β Bearish reversal
Shooting Star Pattern:
- Appearance: Small body at the bottom, long upper wick (2-3x the body), little to no lower wick
- Where it appears: After an uptrend, at resistance levels
- Meaning: Buyers pushed prices up, but sellers aggressively sold and closed near the low
- Signal: Bearish reversal (stronger if the body is red)
Tesla formed a shooting star at $280 resistance:
- Context: TSLA rallied from $180 to $280 (+55% in 6 weeks)
- Pattern: Red shooting star at $280, upper wick touched $295
- Volume: Highest volume in 2 weeks (distribution)
- Confirmation: Next day gapped down and closed below shooting star's low
- Outcome: TSLA fell from $280 to $220 over 4 weeks (-21.4%)
Trading rule: Sell/short when the next candle closes below the shooting star's low. Stop loss above the shooting star's high.
4. Spinning Top: Indecision After a Move
Spinning Top
Small body, equal wicks β Indecision
Spinning Top Pattern:
- Appearance: Small body with upper and lower wicks of similar length
- Meaning: Neither bulls nor bears won the day β indecision
- Signal: Potential pause or reversal, especially after a strong trend
Note: Spinning tops alone are weak signals. Look for them in clusters or at key support/resistance levels.
Two-Candlestick Patterns
Two-candle patterns show a shift in momentum from one session to the next. They're more reliable than single candle patterns.
1. Bullish Engulfing: Strong Buy Signal
Bullish Engulfing
Green engulfs red β Strong buy
Bullish Engulfing Pattern:
- First candle: Red (bearish) candle in a downtrend
- Second candle: Green (bullish) candle that completely engulfs the first candle's body
- Requirements: Second candle's body must open below and close above the first candle's body
- Signal: Strong bullish reversal β buyers have overwhelmed sellers
Microsoft formed a bullish engulfing at the 200-day moving average:
- Day 1: Red candle, MSFT fell from $405 to $395
- Day 2: Large green candle opened at $392, closed at $412 (completely engulfed Day 1)
- Location: Right at the 200-day MA support
- Volume: 2x average volume on the engulfing candle
- Outcome: MSFT rallied from $412 to $450 over 4 weeks (+9.2%)
High-probability setup: Bullish engulfing + key support (200-MA, trendline) + high volume = strong buy signal.
2. Bearish Engulfing: Strong Sell Signal
Bearish Engulfing
Red engulfs green β Strong sell
Bearish Engulfing Pattern:
- First candle: Green (bullish) candle in an uptrend
- Second candle: Red (bearish) candle that completely engulfs the first candle's body
- Requirements: Second candle's body must open above and close below the first candle's body
- Signal: Strong bearish reversal β sellers have overwhelmed buyers
Apple formed a bearish engulfing after iPhone event:
- Day 1: Green candle on iPhone 16 announcement, AAPL rose from $220 to $228
- Day 2: Large red candle opened at $230, closed at $215 (completely engulfed Day 1)
- Location: At all-time high resistance ($230)
- Volume: 3x average volume (institutions selling)
- Outcome: AAPL fell from $215 to $195 over 3 weeks (-9.3%)
"Sell the news" confirmation: Bearish engulfing after a major event at resistance = classic distribution pattern.
3. Harami: Potential Reversal Warning
Bullish Harami
Small green inside large red
Bearish Harami
Small red inside large green
Harami Pattern (Bullish & Bearish):
- Bullish Harami: Large red candle followed by small green candle contained within the first candle's body
- Bearish Harami: Large green candle followed by small red candle contained within the first candle's body
- Meaning: The second small candle shows momentum is stalling β potential reversal
- Reliability: Weaker than engulfing patterns; needs confirmation from the third candle
4. Piercing Line & Dark Cloud Cover
| Pattern | Structure | Signal |
|---|---|---|
| Piercing Line | Red candle, then green candle that opens below the low and closes above the midpoint of the red candle | Bullish reversal |
| Dark Cloud Cover | Green candle, then red candle that opens above the high and closes below the midpoint of the green candle | Bearish reversal |
Three-Candlestick Patterns
Three-candle patterns are the most reliable because they show a complete shift in sentiment over three sessions.
1. Morning Star: Powerful Bullish Reversal
Morning Star
Red β Small β Large green
Morning Star Pattern:
- First candle: Large red candle (continuing downtrend)
- Second candle: Small body (doji or spinning top) that gaps down β indecision
- Third candle: Large green candle that closes above the midpoint of the first candle
- Signal: Strong bullish reversal β the "morning star" announces a new day (uptrend)
The S&P 500 formed a textbook morning star at a major bottom:
- Day 1: Large red candle, SPY dropped from $430 to $420
- Day 2: Doji gapped down to $418, closed at $419 (indecision)
- Day 3: Large green candle gapped up, closed at $432
- Location: At the 200-day MA and prior support level
- Outcome: SPY rallied from $432 to $480 over 3 months (+11.1%)
Perfect setup: Morning star at major support (200-MA) after a multi-week selloff. This marked the Q4 2023 rally.
2. Evening Star: Powerful Bearish Reversal
Evening Star
Green β Small β Large red
Evening Star Pattern:
- First candle: Large green candle (continuing uptrend)
- Second candle: Small body (doji or spinning top) that gaps up β indecision at highs
- Third candle: Large red candle that closes below the midpoint of the first candle
- Signal: Strong bearish reversal β the "evening star" announces the end of the day (uptrend)
Bitcoin formed an evening star at all-time highs:
- Day 1: Large green candle, BTC surged from $68,000 to $73,000
- Day 2: Doji formed at $73,500, closed at $73,200 (exhaustion at ATH)
- Day 3: Large red candle gapped down, closed at $67,000
- Context: New all-time high after ETF approval rally
- Outcome: BTC corrected from $73,000 to $60,000 over 5 weeks (-17.8%)
Warning sign: Evening star at all-time highs after a parabolic rally signals distribution. Take profits or tighten stops.
3. Three White Soldiers & Three Black Crows
| Pattern | Structure | Signal |
|---|---|---|
| Three White Soldiers | Three consecutive green candles, each opening within the prior body and closing higher | Strong bullish continuation/reversal |
| Three Black Crows | Three consecutive red candles, each opening within the prior body and closing lower | Strong bearish continuation/reversal |
Candlestick Pattern Reliability Ranking
| Pattern | Type | Reliability | Win Rate* |
|---|---|---|---|
| Morning Star | Bullish | High | 70-78% |
| Evening Star | Bearish | High | 72-79% |
| Bullish Engulfing | Bullish | High | 63-68% |
| Bearish Engulfing | Bearish | High | 66-72% |
| Hammer | Bullish | Moderate | 60-65% |
| Shooting Star | Bearish | Moderate | 59-63% |
| Doji | Neutral | Low (alone) | 50-55% |
*Win rates based on historical backtesting at support/resistance levels. Patterns in isolation have lower win rates.
How to Trade Candlestick Patterns
The 4-Step Candlestick Trading System
Step 1: Identify the Trend
- Use a 50-day or 200-day moving average to determine the trend
- Look for bullish patterns in uptrends (buy dips)
- Look for bearish patterns in downtrends (sell rallies)
Step 2: Find Key Levels
- Identify support and resistance levels
- Mark horizontal levels, trendlines, and moving averages
- Candlestick patterns at these levels are 2-3x more reliable
Step 3: Wait for the Pattern
- Only trade candlestick patterns at key levels
- Require confirmation: next candle must confirm the signal
- Check volume: patterns with high volume are more reliable
Step 4: Execute with Risk Management
- Entry: After confirmation candle closes
- Stop loss: Below the pattern's low (bullish) or above the pattern's high (bearish)
- Target: Next support/resistance level or 2:1 reward-to-risk
High-Probability Setup Example
Stock: Meta (META) β January 2024
- Step 1 (Trend): META above 50-MA and 200-MA β uptrend confirmed
- Step 2 (Level): Pulled back to $350 support (prior breakout level)
- Step 3 (Pattern): Bullish engulfing formed at $350 with 1.5x volume
- Step 4 (Trade): Entry at $355 (above engulfing high), stop at $345 (below pattern low)
- Result: META rallied to $400 in 3 weeks. Risk $10, Reward $45 = 4.5:1 R/R
Key takeaway: This trade had everything: uptrend, support level, bullish pattern, volume confirmation, and defined risk.
Common Candlestick Mistakes to Avoid
Top 5 Candlestick Trading Mistakes:
- 1. Trading patterns in isolation: A hammer in the middle of nowhere means nothing.
- Solution: Only trade patterns at key support/resistance levels.
- 2. Not waiting for confirmation: Entering immediately after a pattern forms without waiting for the next candle.
- Solution: Wait for the next candle to close and confirm the signal.
- 3. Ignoring the trend: Trading bullish patterns in a downtrend (catching falling knives).
- Solution: Trade with the trend. Bullish patterns in uptrends, bearish in downtrends.
- 4. Overcomplicating with too many patterns: Trying to memorize 50+ patterns leads to analysis paralysis.
- Solution: Master 5-6 patterns first (engulfing, hammer, shooting star, morning/evening star, doji).
- 5. Ignoring volume: A pattern with low volume is a weak signal.
- Solution: Look for above-average volume on the pattern candle for confirmation.
Combining Candlesticks with Other Indicators
Candlestick patterns work best when combined with other technical tools:
| Indicator | How to Combine | Best For |
|---|---|---|
| Support/Resistance | Only trade candlestick patterns at major S/R levels | High-probability reversal trades |
| RSI | Bullish patterns when RSI < 30 (oversold), bearish when RSI > 70 (overbought) | Confirming reversal signals |
| Moving Averages | Patterns at 50-MA or 200-MA have higher success rates | Trend-following entries |
| MACD | Bullish pattern + MACD bullish crossover = stronger signal | Momentum confirmation |
| Volume | Patterns with above-average volume are more reliable | Confirming institutional activity |
Action Steps: Start Using Candlestick Patterns Today
- Open TradingView and switch to candlestick charts (default view)
- Mark support and resistance levels on 5 stocks you follow
- Look for historical examples of hammer, engulfing, and morning star patterns at those levels
- Note what happened after each pattern (did it work? what confirmed it?)
- Paper trade: When you see a pattern at a key level, write down your entry/stop/target before the next candle forms
- Track your results over 20+ patterns before trading with real money
- Combine with RSI or MACD for confirmation on your best setups
Final Thoughts
Candlestick patterns are the visual language of price action. They tell the story of the battle between buyers and sellers in a single image. But remember: patterns are just clues, not certainties.
The most important factor in candlestick trading is context. A hammer at a major support level after a 20% decline is a high-probability buy signal. The same hammer in the middle of a range is noise.
Master these patterns, combine them with support/resistance and indicators, and you'll have a powerful edge in timing your entries and exits. Start with the basicsβengulfing, hammer, shooting star, morning starβand add complexity only after you've proven proficiency.
Next Steps: Now that you understand candlestick patterns, combine them with other technical tools for a complete system. Read our guides on Support & Resistance, RSI Indicator, and MACD to build high-probability trading setups.
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