Candlestick Patterns

What Are Candlestick Patterns?

Candlestick patterns are recognizable formations on a Japanese candlestick chart that provide clues about future price direction. Originating from 18th-century Japanese rice trading, these patterns interpret the psychological battle between buyers and sellers based on the relationship between a candle's open, high, low, and close.

Patterns are classified as single-candle (doji, hammer, shooting star), double-candle (engulfing, harami, tweezer), or triple-candle (morning star, evening star, three white soldiers). Each pattern tells a story about shifting sentiment. For example, a long lower wick on a candle at a support level shows that sellers pushed price lower but buyers fought back aggressively, suggesting demand is strong.

Categories of Candlestick Patterns

Reversal patterns signal a potential change in trend direction. Bullish reversal patterns (hammer, bullish engulfing, morning star) appear at the end of downtrends. Bearish reversal patterns (shooting star, bearish engulfing, evening star) appear at the end of uptrends. The context in which these patterns form is more important than the pattern itself.

Continuation patterns suggest the existing trend will resume after a brief pause. Patterns like rising three methods (in an uptrend) or falling three methods (in a downtrend) show temporary consolidation before the trend continues.

Indecision patterns like the doji and spinning top indicate that buyers and sellers are evenly matched. These patterns often precede significant moves but do not indicate direction on their own. Traders wait for the next candle to confirm which side gains control.

Using Candlestick Patterns Effectively

The most important rule is location matters. A bullish engulfing pattern at a major support level after a prolonged decline is a high-probability reversal signal. The same pattern in the middle of a range, with no technical context, has much less significance.

Volume adds another dimension. A hammer candle on three times average volume carries far more weight than the same pattern on light volume, because it demonstrates genuine buying interest. Combining candlestick analysis with volume, support/resistance, and trend context produces the most actionable signals.