Candlestick patterns: 17 patterns every forex trader should know

How to read a candlestick

The body runs from the open to the close. A green (or white) body means the price closed higher than it opened; a red (or black) one means it closed lower. The thin lines, called wicks or shadows, show the highest and lowest prices reached. A long wick means price went there and was pushed back.

Every candle covers one period of your chart: one minute, one hour, one day. The same pattern means more on a daily chart, where each candle holds a full day of trading, than on a one-minute chart, where a single order can draw it.

Single-candle patterns

Doji

Indecision. Open and close at almost the same price, usually with wicks on both sides (a dragonfly or gravestone doji has only one). Buyers and sellers ended level. After a strong run it can warn that the move is tiring; on its own it's neutral.

Hammer

Bullish reversal. A small body at the top of the range and a lower wick at least twice the body, after a fall. Sellers pushed price down but buyers drove it back up before the close.

Hanging man

Bearish reversal. The same shape as a hammer, but after a rise. Selling showed up during the session even though the close held up. Needs a weak next candle to mean much.

Inverted hammer

Bullish reversal. A small body at the bottom and a long upper wick, after a fall. Buyers tried to lift price. A strong next candle confirms it.

Shooting star

Bearish reversal. A small body at the bottom and a long upper wick, after a rise. Buyers pushed higher but couldn't hold it, and price closed near the low.

Marubozu

Strong momentum. A long body with no wicks, or almost none. One side was in control from open to close. Often seen at the start of a strong move.

Spinning top

Indecision. A small body in the middle, with wicks above and below. Neither side won the session. Like a doji, it matters most after a strong trend.

Two-candle patterns

Bullish engulfing

Bullish reversal. A green body that completely covers the previous red body, after a fall. Buyers took over everything sellers did the session before.

Bearish engulfing

Bearish reversal. A red body that completely covers the previous green body, after a rise. Sellers wiped out the previous session's gains and more.

Piercing line

Bullish reversal. After a long red candle, a green one opens below its close and closes above the midpoint of its body, but below its open. A weaker version of the bullish engulfing.

Dark cloud cover

Bearish reversal. After a long green candle, a red one opens above its close and closes below the midpoint of its body, but above its open. The bearish mirror of the piercing line.

Harami

Possible reversal. A small body that sits inside the previous long body. This one is bullish; the bearish version follows a rise. The trend's momentum has stalled. Weaker than an engulfing pattern.

Tweezer bottom

Bullish reversal. Two candles with the same low, the first red and the second green. A tweezer top has two matching highs after a rise. Price tested a level twice and was rejected both times.

Three-candle patterns

Morning star

Bullish reversal. A long red candle, a small candle that gaps lower, then a long green candle that closes well into the first. Selling ran out on the middle candle and buyers took over.

Evening star

Bearish reversal. A long green candle, a small candle that gaps higher, then a long red candle that closes well into the first. The bearish mirror of the morning star.

Three white soldiers

Bullish reversal or continuation. Three long green candles in a row, each opening inside the previous body and closing near its high. Steady buying over three sessions.

Three black crows

Bearish reversal or continuation. Three long red candles in a row, each opening inside the previous body and closing near its low. Steady selling over three sessions.

In forex, gaps between candles are rare except over the weekend, because the market trades around the clock. So morning and evening stars usually show up without a real gap: the middle candle is small and sits beyond the first candle's close.

All 17 patterns at a glance

What are candlestick indicators?

People use the phrase for three different things:

• The patterns themselves. Traders often call a hammer or an engulfing candle an "indicator" because it indicates a possible turn. Strictly, they're price patterns, not calculated indicators.
• Pattern-finding indicators. Charting platforms such as TradingView have built-in scripts that mark candlestick patterns on the chart for you, and MT5 users can add custom indicators that do the same. They save time scanning, but they mark every match, including the ones in the middle of nowhere that mean nothing.
• Heikin Ashi candles. A chart type that builds each candle from averages of the current and previous candles' prices, so trends look smoother. Heikin Ashi candles don't show the real open and close, so don't use their prices for entries and stops.

Whichever you use, the pattern is only the trigger. The context around it decides whether it's worth trading.

Some traders also confirm patterns with an oscillator; the Traders Dynamic Index combines momentum, trend and volatility in one window.

How to confirm a candlestick pattern

1. Check the trend before it. A reversal pattern needs something to reverse. A hammer after three green candles isn't a hammer signal.
2. Look for a level. Patterns at support, resistance, a round number or a Fibonacci level carry more weight than patterns in open space. Pivot points give you levels for the day.
3. Wait for the next candle. Most traders want the following candle to move in the pattern's direction, for example closing above the hammer's high, before acting.
4. Use the higher timeframe. A bullish pattern on the hourly chart in a daily downtrend is fighting the bigger flow.
5. Mind the news. A candle drawn by a CPI or NFP release says more about the data than about buyers and sellers. Check the forex news today page before you trade one.

Forex candles depend on your broker's clock

Forex has no single exchange, so each broker decides when its daily candle starts. Many use a server time of GMT+2 in winter and GMT+3 in summer, which keeps the server clock seven hours ahead of New York all year, so the day closes at 5 p.m. New York time and there are five daily candles a week. A broker on GMT shows a small extra Sunday candle instead, and its Monday and Friday candles look different. The same daily pattern can appear on one broker's chart and not on another's. On intraday charts this matters much less.

A worked example: a hammer on gold

Gold has been falling and reaches an area where it bounced last week. A daily candle prints an open of 4,196.00, a low of 4,180.00, a high of 4,205.00 and a close of 4,201.50: a lower wick of 16.00, about 2.9 times the 5.50 body, and a close near the high. That's a hammer at support.

• Entry: a buy stop just above the hammer's high, at 4,206.00, so you're only in if the next candle confirms.
• Stop: just below the hammer's low, at 4,178.00. That's 28 points, or $2,800 per standard lot (100 ounces).
• Size: risking 1% of a $10,000 account is $100, so the lot size is 100 ÷ (28 × 100) = 0.0357, rounded down to 0.03 lots.
• Target: at twice the risk, 4,262.00, or the next resistance level if that's closer.

The XAUUSD lot size calculator does this sum for you, and the risk reward calculator shows the win rate you'd need at that ratio.

Common mistakes

• Trading every pattern. On a five-minute chart you'll see dozens of hammers and dojis a day. Most are noise.
• Ignoring the wick in the stop. The low of a hammer's wick is the level the pattern is based on. A stop above it is inside the pattern.
• Treating patterns as certainties. They tilt the odds a little at best. Risk the same small amount on every trade and let the numbers play out.
• Forgetting spreads on small timeframes. A pattern only a few pips tall can be wiped out by the spread.

Chart patterns built from many candles, such as the head and shoulders, work on the same idea at a larger scale, and price action trading shows how to combine candles with trend and levels.

This is lesson 10 of 20 in the free forex course. Next lesson: Price action.