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Important Introduction to Candlestick Patterns
Japanese candlestick charting was first used in Japan a couple of centuries ago, mainly in the commodity market (specifically rice). In recent decades, Steve Nison, an American technician, brought this charting technique to the west.
Having that in mind, most of the candlestick patterns are best used in markets that close on a daily basis, like stocks and commodity futures. Most patterns are either not applicable in the Forex markets or not reliable enough, as Forex is a 24-hour market.
The Doji is one of the most important candlestick patterns. It forms when the opening and closing prices are virtually equal, creating a candle with a very small or no body.
The Doji represents indecision in the market – neither buyers nor sellers were able to gain control. When a Doji appears after a strong trend, it can signal a potential reversal.
[Image: Doji candlestick pattern showing equal open and close]
Image: Doji candlestick pattern
The long-legged Doji has very long upper and lower shadows with the opening and closing price near the middle. This pattern shows extreme indecision as the price moved significantly in both directions during the session but closed near where it opened.
Long-legged Dojis are particularly significant at support or resistance levels, often signaling a potential reversal after a strong trend.
The dragonfly Doji forms when the opening and closing prices are at the high of the session, with a long lower shadow. It looks like a "T" shape.
This pattern is bullish when it appears at support levels. It shows that sellers pushed the price down during the session, but buyers regained control and pushed it back to the opening level.
Dragonfly Doji Interpretation:
At the bottom of a downtrend, it suggests buyers are starting to overcome sellers – a potential bullish reversal signal.
The gravestone Doji is the opposite of the dragonfly. The opening and closing prices are at the low of the session, with a long upper shadow. It looks like an upside-down "T".
This pattern is bearish when it appears at resistance levels. It shows that buyers pushed the price up during the session, but sellers regained control and pushed it back down to the opening level.
The Hammer and Hanging Man have the same appearance – a small body at the upper end of the range with a long lower shadow (at least twice the length of the body). The difference is their location in the trend.
A Hammer forms at the bottom of a downtrend. It's a bullish reversal pattern that indicates sellers pushed the price lower during the session, but buyers stepped in and drove it back up, closing near the high.
Trading the Hammer
Wait for confirmation – a bullish candle following the hammer strengthens the signal. Entry can be taken on the break of the hammer's high, with a stop below the hammer's low.
The Hanging Man has the same shape as the hammer but forms at the top of an uptrend. It's a bearish reversal pattern suggesting that sellers are starting to overcome buyers.
The long lower shadow shows that sellers pushed the price down significantly during the session, even though buyers managed to push it back up by the close. This indicates weakening bullish momentum.
Similar to the Hammer/Hanging Man pair, the Shooting Star and Inverted Hammer have the same shape but different implications based on their trend location.
The Shooting Star forms at the top of an uptrend. It has a small body at the lower end of the range with a long upper shadow (at least twice the body length).
The Inverted Hammer has the same shape as the Shooting Star but forms at the bottom of a downtrend. Despite its appearance, it's actually a bullish reversal pattern.
The long upper shadow shows that buyers attempted to push prices higher. Although sellers pushed it back down by the close, the buying pressure indicates potential trend reversal.
Engulfing patterns are two-candle reversal patterns where the second candle's body completely engulfs the first candle's body. They're among the most reliable candlestick reversal patterns.
The bullish engulfing pattern forms at the bottom of a downtrend. It consists of a bearish candle followed by a larger bullish candle that completely engulfs the prior candle's body.
[Image: Bullish engulfing pattern showing bearish candle engulfed by larger bullish candle]
Image: Bullish engulfing candlestick pattern
The bearish engulfing pattern is the opposite – it forms at the top of an uptrend with a bullish candle followed by a larger bearish candle that engulfs it.
This pattern signals that selling pressure has overwhelmed buying pressure, potentially marking the start of a downtrend.
Tweezer patterns consist of two or more candles with matching highs (tweezer top) or matching lows (tweezer bottom). They indicate strong support or resistance at that level.
A tweezer top forms when two or more consecutive candles have the same high. This suggests strong resistance at that level and potential bearish reversal.
A tweezer bottom forms when two or more consecutive candles have the same low. This suggests strong support at that level and potential bullish reversal.
Candlestick Pattern Reliability
Candlestick patterns are more reliable when:
While candlestick patterns can provide valuable cues, they should always be used in conjunction with trend analysis, support/resistance levels, and other forms of technical analysis. Visit our performance archive to see how we incorporate candlestick analysis into our trading setups.