The candlestick patterns every trader should know

You can read a single candle. The next step is to spot combinations that keep showing up when the market hesitates or turns. Traders call them candlestick patterns. There are dozens of them with colourful names, but a handful covers most of what you need. We will look at the seven most useful ones, and above all at the rule that makes them tradable: context.

The doji: indecision

A doji is a candle whose open and close are at almost the same price. The body shrinks to a line, with wicks of varying length on either side. It says one simple thing: over this period, neither buyers nor sellers won.

On its own, a doji is not a reversal signal. But a doji that appears after a run of big green candles, just below resistance, shows that momentum is drying up. It is a warning, not a sell order.

Hammer and shooting star: rejection

The hammer has a small body at the top of the candle and a lower wick at least twice as long as that body, with little or no upper wick. It forms after a decline: sellers drove price sharply lower, then buyers bought it back up into the close. The colour of the body matters little, the shape and the location matter a lot.

The shooting star is its mirror image: small body at the bottom, long upper wick, and it appears after a rally. Buyers pushed, then the market refused those prices. On gold, for example, a shooting star that tags a recent high around $2,400 and then closes $15 lower tells you that zone was clearly rejected.

Engulfing: one side takes over

A bullish engulfing pattern forms over two candles: a small red candle, then a big green candle whose body completely covers the body of the previous one. In a single period, buyers wiped out all the sellers' work and went further. The bigger the second candle compared with the first, the stronger the message.

A bearish engulfing pattern works the other way round: a small green candle followed by a big red candle that engulfs it. It carries weight at the top of a rally or at a resistance level.

Morning star, evening star and inside bar

The morning star has three candles: a big red candle, a small hesitation candle (often a doji), then a big green candle that closes beyond the midpoint of the first. You can literally see the decline slow down, stop, then reverse. The evening star is the bearish version, at the top of a rally.

An inside bar is a candle that sits entirely within the previous one: its high is lower and its low is higher than those of the mother bar. It is a compression phase. It gives no direction by itself: many traders wait for price to break the high or the low of the mother bar and then follow the move.

Context is non-negotiable

Candlestick patterns are everywhere. On an M5 chart you will find hammers and dojis every hour. If you treat them all as signals, you pile up losses. What turns an ordinary pattern into useful information is where it appears.

• A key level: support, resistance, a round number or a zone already tested.
• A prior move: a reversal pattern needs something to reverse.
• A meaningful timeframe: a pattern on H4 or D1 carries more weight than on M5.
• Confirmation: the next candle moving in the expected direction, or a break of the pattern's high or low.

Confirmation has a cost: by waiting for the next candle, you enter a bit further from the ideal point and your reward-to-risk ratio shrinks. In exchange, you avoid a good share of the patterns that fail straight away. Most traders accept that trade-off, especially early on, when the eye is not yet trained to tell a solid pattern from an ordinary one.

A good exercise: scroll through a D1 chart of EUR/USD and note every pattern you spot. Then look at what happened over the next five candles, separating the patterns that formed on a key level from those that appeared in the middle of nowhere. The difference in results will convince you better than any theory.