Candlestick Patterns Guide
Master candlestick language to understand market sentiment and bull-bear dynamics
Candlestick Basics & Reading
Candlesticks are the foundation of technical analysis, invented by Japanese rice trader Homma Munehisa in the 18th century to record rice price movements. Each candle contains four key price points: Open, High, Low, Close (OHLC). Compared to traditional line charts, candlesticks intuitively display price movement strength, direction, and market sentiment.
Candlestick Structure
- 1. Body: Rectangular area between open and close. Bullish candles are white/green (close > open), bearish candles are black/red (close < open). Larger body indicates stronger buying/selling force.
- 2. Upper Shadow/Wick: Thin line extending from body top to high. Long upper shadow shows price reached high but was pushed down, indicating selling pressure or weak buying.
- 3. Lower Shadow/Wick: Thin line extending from body bottom to low. Long lower shadow shows price reached low but was lifted, indicating support or strong buying.
- 4. Open & Close: Open is first trade price of period, close is last. Close most important, represents final outcome of bull-bear battle.
Bullish Candle Characteristics
- Large body, bullish (green/white)
- Short/no upper shadow (strong buying, no resistance)
- Long lower shadow (was pushed down but bounced strongly)
- Close near high (bulls in control)
- Examples: Hammer, Marubozu bullish
Bearish Candle Characteristics
- Large body, bearish (red/black)
- Short/no lower shadow (strong selling, no support)
- Long upper shadow (bounced but pushed back down)
- Close near low (bears in control)
- Examples: Shooting Star, Marubozu bearish
Candle Size & Market Meaning
- Big Body: Large open-close gap (50+ pips), strong buying/selling force, trend may continue.
- Small Body: Open-close close together (10-20 pips), balanced forces, market indecision, may consolidate or reverse.
- Doji: Open-close almost same (tiny body), fierce bull-bear battle but no clear winner, key reversal signal.
- Long Shadow: Shadow 2-3x longer than body, price was strongly rejected (upper shadow=selling, lower shadow=buying), reversal signal.
Important: Candles Must Combine with Context
Single candle has limited meaning, must interpret with market context: 1) Location (at support/resistance vs irrelevant position); 2) Trend (with trend vs counter-trend); 3) Surrounding candles (what preceded, how confirmed); 4) Volume (high vs low). E.g., same hammer at key support in downtrend (bullish) vs mid-uptrend (neutral) means completely different. Core of learning candlestick patterns is "recognizing right patterns at right locations".
Reversal Patterns Analysis
Reversal patterns signal potential trend direction change, important tools for catching tops and bottoms. Note: reversal pattern win rate depends on location and confirmation conditions, not all reversal patterns lead to true trend reversal, often just short-term pullbacks.
1. Doji - Bull-Bear Battle Turning Point
Pattern Characteristics: Open and close almost same (tiny/no body), forming cross shape. Upper/lower shadows can be long or short, but must have shadows (no shadows is "four price one", extremely rare).
Doji Types & Meanings:
- Long-Legged Doji: Both shadows very long, price fluctuates wildly but returns to origin, extreme buying/selling imbalance, high uncertainty.
- Dragonfly Doji: Only lower shadow, no upper shadow. Price fell to low then strongly bounced to open, bullish signal (at downtrend bottom).
- Gravestone Doji: Only upper shadow, no lower shadow. Price rose to high then pushed back to open, bearish signal (at uptrend top).
- Standard Doji: Similar length shadows, open/close at middle, neutral signal, wait for next candle confirmation.
⚠️ Trading Points:
Doji itself not trading signal, must meet: 1) At key location in clear trend (previous highs/lows, S/R); 2) Next candle confirms (bullish candle after Doji = long); 3) Larger timeframe trend support. Doji alone 50% win rate, with location and confirmation can reach 65-70%.
2. Hammer/Hanging Man
Pattern Characteristics: Small body (bullish or bearish), long lower shadow (at least 2x body), no/short upper shadow. Shape like hammer, lower shadow is "handle".
Hammer - Bullish
- Appears at downtrend bottom or support
- Price fell to low then strongly lifted
- Shows selling exhausted, buying entered
- Long after next bullish candle confirms
- Stop: 10-15 pips below Hammer low
Hanging Man - Bearish
- Appears at uptrend top or resistance
- Selling pressure after price reached high
- Warns upward momentum weakening
- Short after next bearish candle confirms
- Stop: 10-15 pips above Hanging Man high
⚡ Improving Win Rate: 1) Longer lower shadow better (at least 3x body); 2) Body color opposite trend stronger (Hammer is bullish in downtrend); 3) Volume increases; 4) At key round numbers (like 1.1000); 5) Wait for next candle full confirmation (don't enter early). Meeting these conditions, Hammer win rate can reach 70-75%.
3. Engulfing - Strong Reversal Signal
Pattern Characteristics: Two-candle pattern, second candle body completely "engulfs" first candle body (higher high, lower low). Shows sharp market sentiment reversal.
Bullish Engulfing
- In downtrend, first candle bearish
- Second large bullish candle engulfs previous bearish
- Shows buying force overwhelms selling
- Entry: after second candle close or retest low
- Stop: below engulfing pattern low
- Win rate: 65-70% (at key levels)
Bearish Engulfing
- In uptrend, first candle bullish
- Second large bearish candle engulfs previous bullish
- Shows selling force overwhelms buying
- Entry: after second candle close or retest high
- Stop: above engulfing pattern high
- Win rate: 65-70% (at key levels)
Perfect Engulfing Criteria:
- 1. Engulfing body 1.5-2x+ swallowed candle (power disparity)
- 2. At key S/R (previous highs/lows, round numbers, EMA)
- 3. Prior clear trend (at least 3-5 same-direction candles)
- 4. Volume significantly increases (if available)
- 5. After engulfing, price doesn't retest or small retest then continues
4. Morning Star/Evening Star
Pattern Characteristics: Three-candle pattern, one of most reliable reversals (65-70% win rate). Middle candle is doji or small body, like "star" in sky, flanked by large bodies.
Morning Star - Bullish
Structure: Large bearish + star (small body/doji) + large bullish
- Candle 1: Large bearish, downtrend continues
- Candle 2: Small body/doji, gaps down, selling weakens
- Candle 3: Large bullish, breaks up, engulfs star, strong buying
- Entry: after 3rd candle closes
- Stop: below pattern low
Evening Star - Bearish
Structure: Large bullish + star (small body/doji) + large bearish
- Candle 1: Large bullish, uptrend continues
- Candle 2: Small body/doji, gaps up, buying weakens
- Candle 3: Large bearish, breaks down, engulfs star, strong selling
- Entry: after 3rd candle closes
- Stop: above pattern high
⚡ Notes: 1) Star pattern gaps uncommon in forex (24hr trading), focus on body size contrast; 2) 3rd candle must "penetrate" 1st candle body (at least 50% engulfing); 3) Low frequency but high reliability, worth patient wait; 4) Most effective on D1 chart, H4 next, not recommended below H1.
Continuation Pattern Recognition
Continuation patterns signal current trend will persist, important tools for trend traders. These patterns typically appear mid-trend, representing market "rest" and "consolidation", not reversal. Compared to reversal patterns, continuation patterns have higher win rate (70-75%) as "trend continuation" more common than "trend reversal".
1. Three White Soldiers / Three Black Crows
Pattern Characteristics: Three consecutive large same-direction candles, progressively pushing price higher or lower, showing strong one-sided force. One of most reliable continuation patterns (75% win rate).
Three White Soldiers
- Three consecutive large bullish candles, similar body sizes
- Each candle opens at/above mid-body of previous
- Each candle close makes new high
- Short/no upper shadows, strong buying no resistance
- Appears in early/mid uptrend
- Trade: long after 3rd candle closes
Three Black Crows
- Three consecutive large bearish candles, similar body sizes
- Each candle opens at/below mid-body of previous
- Each candle close makes new low
- Short/no lower shadows, strong selling no support
- Appears in early/mid downtrend
- Trade: short after 3rd candle closes
⚠️ Avoid False Signals:
Not all three same-direction candles are valid signals. Valid Three Soldiers/Crows must meet: 1) Each candle has large body (at least 30-50 pips); 2) Body sizes increasing or similar (not decreasing); 3) Short shadows (body occupies 70%+ of total candle length); 4) Appears in early trend or after key breakout. If appears at trend end (e.g., after 300 pip rise), may be "exhaustion signal" not continuation.
2. Harami (Inside Bar)
Pattern Characteristics: Two-candle pattern, second candle body completely inside first candle body (lower high, higher low), like "pregnancy". Shows market hesitation but usually continues prior trend.
Harami Structure:
- Bullish Harami: First large bearish + second small bullish (inside bearish). In downtrend, hints selling weakening, may bounce.
- Bearish Harami: First large bullish + second small bearish (inside bullish). In uptrend, hints buying weakening, may pullback.
- Harami Cross: Second candle is doji (stronger hesitation signal), higher reliability.
Harami Trading Strategy:
- 1. Reversal Trading (Low 55% Win Rate): Price reverses after Harami, need 3rd candle confirmation. High risk, not recommended for beginners.
- 2. Continuation Trading (High 70% Win Rate, Recommended): View Harami as "consolidation", trade with trend after breaking mother candle high/low. E.g., in uptrend, Harami appears, long after breaking mother candle high.
- Stop-Loss: Opposite end of breakout direction (break up long, stop below mother candle low).
3. Rising/Falling Three Methods
Pattern Characteristics: Five-candle pattern: large body + three small body pullbacks + large body breakout. Shows brief consolidation in trend then continues, classic continuation pattern.
Rising Three Methods
- Candle 1: Large bullish, uptrend continues
- Candles 2-4: Three small bearish/bullish, pullback but don't break candle 1 low
- Candle 5: Large bullish, breaks candle 1 high, trend resumes
- Trade: long after 5th candle closes
- Stop: below pattern low
Falling Three Methods
- Candle 1: Large bearish, downtrend continues
- Candles 2-4: Three small bullish/bearish, bounce but don't break candle 1 high
- Candle 5: Large bearish, breaks candle 1 low, trend resumes
- Trade: short after 5th candle closes
- Stop: above pattern high
⚡ Practical Points: Rising/Falling Three Methods low frequency but high win rate (70-75%). Key criteria: 1) Middle three small candles must stay within first candle range (can't fully break); 2) Fifth candle must strongly break first candle; 3) Best suited for H4/D1 charts, not obvious on M15/H1. If see similar structure, even if not exactly "three" (2 or 4 candles also work), core is "consolidation then breakout" logic.
Pattern Reliability Assessment
| Pattern | Base Win Rate | Optimized Win Rate | Best Timeframe | Difficulty |
|---|---|---|---|---|
| Engulfing | 60% | 70-75% | H1/H4/D1 | ⭐ Easy |
| Pin Bar | 55% | 70-75% | H1/H4 | ⭐⭐ Medium |
| Morning/Evening Star | 60% | 70-75% | H4/D1 | ⭐⭐ Medium |
| Three White Soldiers/Black Crows | 65% | 75-80% | H1/H4 | ⭐ Easy |
| Inside Bar (Harami) | 55% | 70% | H1/H4 | ⭐⭐⭐ Advanced |
| Doji | 50% | 65% | H1/H4/D1 | ⭐⭐⭐ Advanced |
| Hammer/Hanging Man | 55% | 70% | H1/H4 | ⭐⭐ Medium |
6 Key Factors to Improve Pattern Win Rate
- 1. Location (Most Important, 40% Weight): Pattern must appear at key locations: previous highs/lows, round numbers (1.1000), Fibonacci retracements (38.2%, 61.8%), daily/weekly/monthly opens, major S/R zones. Same Hammer, 75% win rate at key support, only 50% at irrelevant position.
- 2. Trend (30% Weight): With-trend patterns significantly higher win rate than counter-trend. In uptrend trade bullish patterns (Bullish Engulfing), in downtrend trade bearish patterns (Bearish Engulfing). Use H4/D1 to judge main trend. Counter-trend trading success rate below 40%.
- 3. Confirmation (15% Weight): After pattern closes, wait for next candle to confirm direction, or wait for price to break pattern high/low. E.g., after Hammer wait for bullish confirmation, or price breaks Hammer high. Early entry easily encounters false signals. Confirmed entry improves win rate 10-15%, though sacrifices some profit potential.
- 4. Multiple Timeframe Alignment (10% Weight): Best case: H1 shows bullish Engulfing, H4 also shows bullish signal at same location (like price bouncing from 20EMA), D1 in uptrend. When multiple timeframes align, win rate can reach 80%+.
- 5. Volume (3% Weight): Forex spot has no true volume, but futures volume or Tick Volume can reference. Pattern with volume increase (bullish) or decrease (bearish) more reliable. Not essential condition.
- 6. Market Sentiment (2% Weight): Avoid trading patterns around major news (NFP, central bank decisions), high volatility causes pattern failure. Choose to trade patterns during EU/US sessions (high liquidity).
✅ High Win Rate Pattern Characteristics
- At daily D1 or 4-hour H4 key S/R levels
- Aligns with H4/D1 main trend direction
- Pattern itself standard (large body, long shadow, clear engulfing)
- Next candle confirms after close
- Multiple timeframes show same signal simultaneously
- At round numbers or Fibonacci levels
- Clear trend precedes pattern (at least 5 candles)
❌ Low Win Rate Pattern Characteristics (Avoid)
- At irrelevant positions (mid-price range)
- Counter-trend trading (shorting bearish pattern in uptrend)
- Pattern not standard (small body, short shadow, incomplete engulfing)
- Only appears on M5/M15 small timeframes
- Enter early without confirmation
- Around news releases
- Patterns in ranging sideways market
False Signal Identification & Avoidance
Biggest challenge of candlestick patterns is false signals: pattern looks perfect, but price subsequently moves in opposite direction. False signals are main cause of beginner losses, mastering identification and avoidance techniques crucial.
5 Major Causes of False Signals
- 1. Market Noise: On ultra-short timeframes like M5/M15, price movements contain significant random noise, candlestick patterns may be random market fluctuation not real signal. Solution: Use H1+ timeframes, less noise.
- 2. Liquidity Trap: Large institutions deliberately create false breakouts or reversals to lure retail traders, then reverse to harvest stop-loss orders. Common near round numbers (like 1.1000). Solution: Wait for pattern close confirmation, don't chase price.
- 3. News Impact: Around major news (NFP, central bank decisions), market violently fluctuates, candlestick patterns lose meaning. Price may quickly reverse multiple times. Solution: Avoid trading 1 hour around news, track with economic calendar.
- 4. Weak Trend: Reversal patterns need clear prior trend, if trend too weak (only 50 pips) or sideways ranging, reversal patterns easily fail. Solution: Only trade reversal patterns after strong trends (at least 100-200 pips).
- 5. Over-interpretation: Traders "force" pattern recognition, actual pattern not standard (body too small, shadow not long enough, incomplete engulfing). Solution: Establish clear pattern recognition criteria, don't trade if not meeting standards.
False Signal Identification Checklist
Before trading candlestick pattern, use following checklist to filter false signals. If 3+ "danger signs", skip this trading opportunity:
- ⚠️ Danger Sign 1: Pattern appears in ranging sideways market (price oscillates within 50 pip range)
- ⚠️ Danger Sign 2: Pattern appears during low liquidity periods (Asian afternoon 12:00-14:00, Friday evening)
- ⚠️ Danger Sign 3: Pattern not standard (body too small, shadow not long enough, engulfing ratio <1.5x)
- ⚠️ Danger Sign 4: Only appears on M5/M15 small timeframes, no corresponding signal on H1/H4
- ⚠️ Danger Sign 5: Counter-trend trading (shorting bearish pattern in uptrend)
- ⚠️ Danger Sign 6: Pattern at irrelevant position (50+ pips from key S/R)
- ⚠️ Danger Sign 7: Within 1 hour of major news release
- ⚠️ Danger Sign 8: Multiple same patterns consecutively (like 3 Dojis in row), extreme market uncertainty
5 Practical Tips to Avoid False Signals
- 1. Wait for Close Confirmation: Don't enter before pattern closes. E.g., see Hammer on H1 chart, wait for hour to end and close confirmation before considering entry. Early entry easily deceived by "fake patterns" (pattern changes after close).
- 2. Require Next Candle Confirmation: More conservative approach: after pattern closes, wait for next candle to move in expected direction. E.g., after bullish Engulfing closes, wait for next bullish candle before long. Though sacrifices some profit, win rate improves 15%.
- 3. Multiple Timeframe Cross-Validation: Before trading H1 pattern, check if H4 also shows similar signal. If H1 bullish Engulfing but H4 is large bearish candle, trade cautiously. When multiple timeframes align, false signal probability reduces 70%.
- 4. Strict Stop-Loss Protection: Even if pattern looks perfect, still set stop-loss (10-15 pips beyond pattern high/low). False signals can't be completely avoided, stop-loss is last line of defense. Don't widen stops or skip stops because "pattern is perfect".
- 5. Record and Review: Record each pattern trade (screenshot, pattern type, entry reason, result). Regular review, analyze which pattern types have high success rate in your trading, which easily fail. Gradually build personal "high win rate pattern library".
Practical Case Studies
Case 1: EUR/USD Perfect Bullish Engulfing (H4 Chart)
Market Context: Jan 18, 2024, EUR/USD on H4 chart experienced 3-day decline (1.0950 to 1.0850), touched 1.0850 key support (previous low + round number).
Pattern Analysis:
- H4 standard bullish engulfing: first bearish (1.0855-1.0850), second large bullish (1.0848-1.0895)
- Engulfing ratio: bullish 47 pips vs bearish 5 pips, ratio 9:1 (extremely strong)
- Perfect location: at key support 1.0850, D1 also shows this is previous low
- D1 trend: uptrend (price above 50EMA), short-term pullback
- Next H4: bullish candle closes 1.0910, confirms reversal
Trade Execution:
- Entry: 1.0895 (after engulfing closes, or wait for next bullish confirmation 1.0910)
- Stop: 1.0835 (15 pips below engulfing low 1.0848, risk 60 pips)
- Target: 1.1015 (previous high resistance, target 120 pips, 1:2 risk-reward)
Trade Result: Price bounced to 1.1010 hitting target, profit 115 pips. Held 2 days (6 H4 candles). Risk 60 pips, reward 115 pips, 1:1.92 risk-reward.
✅ Success Factors: Key support + Standard engulfing (9:1 ratio) + Aligns with D1 trend + Next candle confirmation
Case 2: GBP/USD Pin Bar Reversal (H1 Chart)
Market Context: Jan 20, 2024, GBP/USD on H1 chart rose to 1.2750 resistance (previous high), then bearish Pin Bar (Shooting Star) appeared.
Pattern Analysis:
- Pin Bar characteristics: small body (5 pips), long upper shadow (35 pips), almost no lower shadow
- Shadow to body ratio: 35:5 = 7:1 (standard Pin Bar requires ≥2:1)
- Location: exactly touched 1.2750 previous high resistance
- H4 trend: no clear trend, ranging 1.2650-1.2750 for two days
- Next H1: bearish candle closes 1.2735, confirms rejection
Trade Execution:
- Entry: 1.2740 (Pin Bar close) or 1.2735 (after next bearish confirmation)
- Stop: 1.2760 (10 pips above Pin Bar high, risk 25 pips)
- Target: 1.2690 (range bottom support, target 50 pips, 1:2 risk-reward)
Trade Result: Price fell to 1.2692, near target. Manually closed profit 48 pips. Held 5 hours. Risk 25 pips, reward 48 pips, 1:1.92 risk-reward.
✅ Success Factors: At previous high resistance + Standard Pin Bar (7:1 ratio) + Next candle confirms rejection
Case 3: USD/JPY False Engulfing Failure Lesson (M15 Chart)
Market Context: Jan 22, 2024, USD/JPY on M15 chart rose to 148.50, bearish engulfing appeared. Trader thought it was top reversal signal, shorted.
Error Analysis:
- Pattern: bearish engulfing (first small bullish 10 pips, second bearish 18 pips, ratio 1.8:1)
- Location: 148.50 irrelevant position (previous high at 149.00, 50 pips away)
- H1 trend: strong uptrend (147.50 to 148.50, continuous rise)
- H4 trend: also uptrend, price 30 pips above 20EMA
- Timeframe: only on M15, no corresponding bearish signal on H1
Trade Execution:
- Entry: 148.48 (immediately shorted after engulfing close)
- Stop: 148.68 (above engulfing high, risk 20 pips)
- Target: 148.08 (expected 40 pips, 1:2 risk-reward)
Trade Result: Price briefly fell to 148.40 then immediately bounced, hit stop 148.68, loss 20 pips. Price then continued rising to 148.90 (could have profited 42 pips if long).
❌ Failure Reasons:
- Counter-trend trading (shorting in H1/H4 uptrend)
- Wrong location (148.50 not key resistance, still 50 pips from previous high 149.00)
- Only relied on M15 small timeframe, ignored H1/H4 trend)
- Engulfing ratio not strong enough (1.8:1, recommended ≥2:1)
- Didn't wait for H1 confirmation signal
📚 Lesson: Never counter-trend trade M15 patterns, must have H1/H4 trend support
Frequently Asked Questions
Q1: What is the actual win rate of candlestick patterns?▼
Trading solely on candlestick patterns typically yields 50-60% win rate. But combining with other factors can improve to 70%+: 1) Appears at key support/resistance; 2) Aligns with H4/D1 main trend; 3) Volume confirmation (bullish pattern with volume increase); 4) Multiple patterns simultaneously (e.g., hammer + bullish engulfing). Remember: candlestick patterns are a "probability game" not a "guaranteed win", requires risk management.
Q2: Why do the patterns I see always fail?▼
Common reasons: 1) Counter-trend trading (longing bullish pattern in downtrend); 2) Wrong location (trading patterns in irrelevant positions); 3) No confirmation (entering before pattern completes); 4) Ignoring larger timeframes (M5 pattern suppressed by H1 trend); 5) Over-interpretation (forcing pattern recognition). Solution: Only trade patterns appearing at key locations, with main trend, after close confirmation.
Q3: Are single candlestick patterns (like Doji, Hammer) reliable?▼
Single candlestick patterns have lower reliability (50-55% win rate), worth trading only when meeting: 1) At key support/resistance (previous highs/lows, round numbers); 2) Surrounding candle support (Hammer preceded by large bearish, followed by bullish); 3) Volume increase; 4) Aligns with larger timeframe trend. In comparison, multi-candle combinations (like Morning Star, Three White Soldiers) more reliable (60-70% win rate).
Q4: How to distinguish true reversal from mere pullback?▼
True reversal characteristics: 1) At trend end (e.g., after 300 pip uptrend); 2) Multiple reversal signals (Evening Star + MACD bearish cross + RSI overbought); 3) Larger timeframes also reverse (H1 and H4 both show Evening Star); 4) Significant volume increase. Pullback characteristics: 1) At trend middle; 2) Single reversal candle; 3) Only on small timeframe; 4) Normal volume. Recommendation: Reversal patterns in early/mid trend mainly for "pullback entry" not "reversal trading".
Q5: Which candlestick patterns are most worth focusing on?▼
Beginners priority master 5 high-reliability patterns (by importance): 1) Engulfing (65-70% win rate, strong signal, easy identify); 2) Pin Bar (60-65% win rate, extremely effective at key levels); 3) Inside Bar (continuation, breakout direction 70% win rate); 4) Morning/Evening Star (65-70% win rate, but low frequency); 5) Doji (auxiliary signal, low win rate alone). Avoid: Overly complex multi-candle combinations (like Three Line Strike), low frequency and hard to identify real-time.
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