Basic candlestick patterns and how to use them properly

Candlestick patterns are a language for describing the tug-of-war between buyers and sellers over a period of
time. They are useful, but only read in context — and context is the part most material leaves out.

1. What a single candle says

• The body — the distance between open and close. A long body means one side dominated.
• The wicks — price levels that were reached and then rejected. A long wick signals opposition
  at that area.
• Where it closed — the most important information. A close near the high shows buyers held
  their gains to the last minute.

2. Four patterns worth using

Hammer and inverted hammer

A small body with one wick at least twice its length. Appearing after a decline at a
support zone, it shows sellers pushed price down and could not hold it
there.

Engulfing

The second candle’s body completely covers the previous one’s, in the opposite direction. The most widely used
reversal pattern, and the most reliable of the two-candle group.

Doji

Open and close almost identical. It expresses indecision, not direction. A doji after a long trend is worth
noting; a doji in the middle of a range means nothing.

Morning star and evening star

A three-candle pattern: a trend candle, a small-bodied candle, then a strong candle the other way. Rarer, but
more reliable.

3. The most important rule

Location decides what a pattern is worth. A hammer appearing at a tested support zone after a
sustained decline is a signal worth attention. The same candle in the middle of an unremarkable range is
noise.

Put another way: candlestick patterns are a confirmation tool, not a search tool. You identify the
area of interest first, then wait for a candle to confirm there.

4. Three common mistakes

• Trading patterns on too low a
  timeframe. On M1 and M5 they appear constantly and most
  are noise. From H1 upwards they mean considerably more.
• Entering before the candle closes. Something that looks like an engulfing candle at minute
  40 can finish entirely differently. Wait for the close.
• Memorising too many patterns. Four used fluently beats thirty recognised vaguely.

5. How to test it for yourself

Pick one pattern, pick one instrument, open the historical data and record 50 occurrences: where the pattern
appeared, what price did afterwards, and what the success rate was once you added a condition about location.

The exercise takes an afternoon and gives you a real number instead of a general belief — and it is the
fastest way to learn which patterns are worth using on the instrument you trade.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.