What are Candlestick Patterns?
💡 Definition
Candlestick patterns are formations created by one or more candlesticks that reveal the battle between buyers and sellers at specific price levels. Each pattern tells a story about market sentiment, momentum shifts, and potential future price direction. Originating from 18th-century Japanese rice trading, candlestick patterns remain one of the most powerful tools in technical analysis, providing visual insights into supply and demand dynamics that drive all financial markets.
Candlestick patterns are the language of price action. They communicate the emotions, decisions, and positioning of market participants in a visual format that's easy to interpret once you understand the fundamentals. Unlike lagging indicators, candlestick patterns show you what's happening right now and what might happen next based on historical probability.
Anatomy of a Candlestick
Understanding Candlestick Components
Key Components: The body shows the difference between open and close prices. Wicks (shadows) show the high and low of the period. Body color indicates who won: buyers (green/white) or sellers (red/black).
Categories of Candlestick Patterns
🟢 Bullish Reversal
Patterns that appear at the bottom of downtrends, signaling potential upward reversals. They indicate buyers are overwhelming sellers and momentum is shifting bullish.
Examples: Hammer, Bullish Engulfing, Morning Star, Piercing Pattern
🔴 Bearish Reversal
Patterns that appear at the top of uptrends, signaling potential downward reversals. They indicate sellers are overwhelming buyers and momentum is shifting bearish.
Examples: Shooting Star, Bearish Engulfing, Evening Star, Dark Cloud Cover
➡️ Continuation
Patterns that suggest the current trend will continue after a brief pause or consolidation. They represent temporary profit-taking before trend resumption.
Examples: Rising/Falling Three Methods, Upside/Downside Tasuki Gap, Mat Hold
⚖️ Indecision
Patterns that show uncertainty and equilibrium between buyers and sellers. These suggest potential trend changes but require confirmation before trading.
Examples: Doji, Spinning Top, Harami, High Wave
Essential Bullish Reversal Patterns
Patterns That Signal Upward Reversals
Hammer
What It Tells You:
- Strong buyer rejection of lower prices
- Sellers lost control during the session
- Potential reversal if confirmed by next candle
- Best at key support levels or oversold conditions
Bullish Engulfing
What It Tells You:
- Complete reversal of selling pressure to buying
- Buyers overwhelmed sellers decisively
- Stronger when engulfing multiple candles
- High probability reversal signal
Morning Star
What It Tells You:
- Downtrend losing momentum (star candle)
- Buyers step in forcefully on third candle
- Gap down shows final capitulation
- Very reliable reversal pattern
Piercing Pattern
What It Tells You:
- Gap down gets completely rejected
- Buyers push price back into seller territory
- Stronger when closing above 50% of first candle
- Indicates potential trend exhaustion
Essential Bearish Reversal Patterns
Patterns That Signal Downward Reversals
Shooting Star
What It Tells You:
- Strong rejection of higher prices
- Buyers lose control into the close
- Best near resistance or in premium zones
- Seek confirmation from the next candle
Bearish Engulfing
What It Tells You:
- Sellers overwhelm buyers aggressively
- Stronger if the body engulfs multiple candles
- High confluence at HTF supply/OB
- Look for follow-through on next sessions
Evening Star
What It Tells You:
- Uptrend fatigue then sharp control by sellers
- Gap up often traps late buyers
- Reliable near major resistance zones
- Volume expansion on third candle adds weight
Dark Cloud Cover
What It Tells You:
- Failed continuation by buyers despite gap up
- Close below 50% of prior body is key
- Stronger near resistance / HTF premium
- Watch for follow-through or a retest entry
Continuation & Pause Patterns
When Trends Catch Their Breath
Rising Three Methods
Read:
- Healthy pullback within an uptrend
- Consolidation shows controlled profit-taking
- Breakout candle resumes trend
Falling Three Methods
Tasuki Gap (Upside / Downside)
Mat Hold
Indecision & Confirmation Patterns
When the Market Hesitates
Doji
Spinning Top
Harami (Bullish/Bearish)
High Wave
Key Trading Principles with Candles
- Location > Shape: A mediocre pattern at a major level beats a perfect shape in the middle of nowhere.
- Trend Alignment: Favor continuation setups in the dominant trend; treat reversals counter-trend with caution.
- Multi-Timeframe: HTF bias, mid-TF structure, LTF execution.
- Close Matters: Use candle closes (not just wicks) for confirmation and invalidation.
- Risk First: Define invalidation before entry; place stops beyond the pattern’s wick/shoulder.
- Confluence: Add OB/FVG, liquidity, premium/discount, volume, or key levels for higher quality.
- Don’t Overfit: Patterns are probabilistic, not guarantees—manage position size and expectations.
Why Candlestick Patterns Work
Order Flow & Crowd Behavior
Wicks = Rejection: Long upper wicks show absorbed buying (supply present); long lower wicks show absorbed selling (demand present).
Large Bodies = Imbalance: Wide bodies indicate decisive control by one side and often lead to follow-through.
Gaps & Ranges: Gaps can trap participants; small inside candles show volatility compression and soon expansion.
Self-Reinforcement: Many traders watch the same signals; entries around shared levels can accelerate moves.
Common Mistakes & Warnings
Don’t Let a Single Candle Decide Everything
Candles need context. Without structure, levels, and trend, they mislead.
- Forcing patterns on low-liquidity or random chop.
- Ignoring HTF bias and trading every micro reversal.
- Entering on the candle close with no plan for retest or invalidation.
- Placing stops inside obvious wicks (easy liquidity).
- Not accounting for session effects (open/close volatility, news).
Quick Trading Tips
Execution Checklist
- • Mark HTF structure, key S/R, OB/FVG, and liquidity pools.
- • Identify the pattern and confirm with a close beyond a meaningful level.
- • Prefer retest entries (break & retest / mitigation) for tighter stops.
- • Place stops beyond the wick/parent range; avoid the obvious equal highs/lows.
- • Take profit near next HTF level; scale out and trail under HL/over LH.
- • If a breakout fails quickly, flip bias or exit—failed breaks move fast.
Candles vs Chart Patterns vs SMC
Combine Perspectives for Higher Probability
Candlestick Signals
- Micro sentiment & immediate rejection/acceptance.
- Fast signals; great for entries/exits.
- Can be noisy without context.
Classical Chart Patterns
- Structure over many candles (flags, triangles, H&S).
- Measured moves and clear boundaries.
- Slower but often cleaner signals.
SMC Confluence
- Bias via BOS/CHoCH, OB/FVG, liquidity & PD arrays.
- Premium/Discount filter avoids chasing.
- Align all three for A-setups.