Candlestick patterns have guided traders for centuries, originating from Japanese rice traders in the 1700s. These patterns reveal market psychology and help predict potential price movements. This guide covers the most reliable candlestick patterns for forex trading.
Understanding Candlesticks
Basic Structure
Each candlestick shows four prices:
- Open: Where price started
- High: Highest point reached
- Low: Lowest point reached
- Close: Where price ended
Reading Candlesticks
Bullish Candle (Green/White):
- Close above open
- Buyers won the period
Bearish Candle (Red/Black):
- Close below open
- Sellers won the period
Single Candlestick Patterns
Hammer
Appearance:
- Small body at top
- Long lower shadow (2x body or more)
- Little or no upper shadow
Meaning:
- Sellers pushed price down
- Buyers rejected lower prices
- Potential bullish reversal
Trading:
- Look for at support
- Enter above hammer high
- Stop below hammer low
Inverted Hammer
Appearance:
- Small body at bottom
- Long upper shadow
- Little or no lower shadow
Meaning:
- Buyers attempted to push higher
- Some selling, but buyers present
- Potential bullish reversal
Trading:
- At support after downtrend
- Needs confirmation (next candle bullish)
Shooting Star
Appearance:
- Small body at bottom
- Long upper shadow
- Little or no lower shadow
Meaning:
- Buyers pushed higher
- Sellers rejected higher prices
- Potential bearish reversal
Trading:
- Look for at resistance
- Enter below shooting star low
- Stop above shooting star high
Hanging Man
Appearance:
- Like hammer but after uptrend
- Small body at top
- Long lower shadow
Meaning:
- Sellers starting to enter
- Warning of potential reversal
- Needs confirmation
Doji Patterns
Standard Doji:
- Open equals close (small cross)
- Indecision
- Needs context
Dragonfly Doji:
- Like hammer with no body
- Bullish at support
Gravestone Doji:
- Like shooting star with no body
- Bearish at resistance
Double Candlestick Patterns
Bullish Engulfing
Appearance:
- Small bearish candle
- Larger bullish candle completely covers first
Meaning:
- Buyers overwhelmed sellers
- Strong bullish signal
Trading:
- Best at support
- Enter above engulfing high
- Stop below engulfing low
Bearish Engulfing
Appearance:
- Small bullish candle
- Larger bearish candle completely covers first
Meaning:
- Sellers overwhelmed buyers
- Strong bearish signal
Trading:
- Best at resistance
- Enter below engulfing low
- Stop above engulfing high
Tweezer Bottom
Appearance:
- Two candles with matching lows
- First bearish, second bullish
- Equal or very close lows
Meaning:
- Support level confirmed twice
- Potential bullish reversal
Tweezer Top
Appearance:
- Two candles with matching highs
- First bullish, second bearish
- Equal or very close highs
Meaning:
- Resistance level confirmed twice
- Potential bearish reversal
Piercing Pattern
Appearance:
- Long bearish candle
- Bullish candle opens below, closes above midpoint
Meaning:
- Buyers entering against sellers
- Potential bullish reversal
Dark Cloud Cover
Appearance:
- Long bullish candle
- Bearish candle opens above, closes below midpoint
Meaning:
- Sellers entering against buyers
- Potential bearish reversal
Triple Candlestick Patterns
Morning Star
Appearance:
- Long bearish candle
- Small candle (gap down possible)
- Long bullish candle
Meaning:
- Selling exhaustion
- Indecision
- Buyers take control
- Strong bullish reversal
Trading:
- At support after downtrend
- Enter above third candle high
- Stop below pattern low
Evening Star
Appearance:
- Long bullish candle
- Small candle (gap up possible)
- Long bearish candle
Meaning:
- Buying exhaustion
- Indecision
- Sellers take control
- Strong bearish reversal
Trading:
- At resistance after uptrend
- Enter below third candle low
- Stop above pattern high
Three White Soldiers
Appearance:
- Three consecutive bullish candles
- Each opens within previous body
- Each closes near its high
Meaning:
- Strong buying pressure
- Trend continuation or reversal
Three Black Crows
Appearance:
- Three consecutive bearish candles
- Each opens within previous body
- Each closes near its low
Meaning:
- Strong selling pressure
- Trend continuation or reversal
Pattern Reliability
Conventional Ratings
These ratings are the conventional view, not measured odds. When every common candlestick pattern was tested across ten years of data on five pairs (Forex Trading Strategies, ch. 2), the largest edge was 10.2 points and most patterns sat within five points of the baseline. Treat a pattern as a place to put a stop, not as odds.
| Pattern | Conventional rating | Best Use |
|---|---|---|
| Engulfing | High | Reversals at levels |
| Morning/Evening Star | High | Major reversals |
| Hammer/Shooting Star | Medium-High | At key levels |
| Doji | Medium | With confirmation |
Factors That Improve Reliability
Location:
- At support/resistance
- At Fibonacci levels
- At round numbers
Size:
- Larger patterns more significant
- Relative to recent candles
Confirmation:
- Next candle confirms
- Volume supports
- Other indicators agree
Trading Candlestick Patterns
Step 1: Identify Trend and Levels
Know the context:
- What's the trend?
- Where are key levels?
- Is price at significant area?
Step 2: Wait for Pattern
Don't force patterns:
- Pattern at key level
- Clear formation
- Let pattern complete
Step 3: Confirm
Wait for confirmation:
- Next candle
- Level holds
- Momentum shift
Step 4: Execute
Entry:
- Above pattern high (bullish)
- Below pattern low (bearish)
Stop:
- Beyond pattern extreme
- Gives pattern room
Target:
- Next key level
- R:R based
Candlestick Pattern Entry Methods
Immediate Entry
Enter right after pattern completes:
- Faster entry
- Better price possible
- Risk of false signal
Confirmation Entry
Wait for next candle to confirm:
- More conservative
- Filters some false signals
- May miss some of the move
Retest Entry
Wait for price to test the pattern:
- Best entry price
- Pattern proves itself
- Risk that retest doesn't happen
Common Candlestick Mistakes
Trading Patterns Everywhere
Patterns in the middle of ranges mean little:
- Context is everything
- At levels = meaningful
- Middle of nowhere = skip
Ignoring Pattern Size
Small patterns in volatile market:
- Relative size matters
- Compare to recent candles
- Larger = more significant
No Confirmation
Jumping in before pattern completes:
- Let candle close
- Patience required
- Incomplete patterns fail
Forgetting the Trend
Bullish patterns in downtrends often fail:
- Trade with the trend
- Counter-trend needs extra confirmation
Advanced Tips
Confluence Trading
Combine candlestick patterns with:
- Support/resistance
- Fibonacci levels
- Moving averages
- Indicator signals
Multiple Timeframe Confirmation
Pattern on lower timeframe at higher timeframe level:
- Daily support
- 4-hour engulfing pattern
- A clearer place for the stop
Pattern Psychology
Understand what patterns mean:
- Who's winning (buyers vs sellers)
- Rejection or acceptance of prices
- Commitment level
Key Takeaways
- Candlestick patterns reveal market psychology
- Single, double, and triple patterns each have significance
- Location matters more than the pattern alone
- Always wait for patterns to complete
- Use confirmation to filter some false signals
- Trade patterns with the trend when possible
- No pattern is reliable on its own; location and the stop matter more
What's Next?
Learn about scalping strategy for forex for quick, short-term trades.
This article is for educational purposes only and does not constitute financial advice.