Candlestick patterns were developed by Japanese rice traders in the 17th century. Adopted by Western technical analysts in the 1990s, they're now a core part of every serious trader's toolkit. Each pattern tells a story about the battle between buyers and sellers during a specific time period.
Single-candle reversal patterns
Doji: A candle where open and close are nearly equal, creating a cross shape. Indicates market indecision. A Doji after a strong trend suggests the trend is losing momentum. Most significant when it appears at key support/resistance.
Hammer: Small body at the top, long lower wick (at least 2x the body). Appears at the bottom of a downtrend. The long wick shows sellers pushed price down, but buyers fought back and closed near the open. Bullish reversal signal.
Hanging Man: Identical shape to a Hammer but appears at the top of an uptrend. Bearish reversal signal — buyers are losing control.
Shooting Star: Small body at the bottom, long upper wick. Appears at the top of an uptrend. Shows that buyers pushed price up aggressively, but sellers took over and drove it back down. Bearish reversal.
Inverted Hammer: Appears at the bottom of a downtrend. Small body at bottom, long upper wick. Bullish reversal signal.
Two-candle reversal patterns
Engulfing Pattern: Bullish Engulfing — a large green candle completely 'engulfs' the body of the previous red candle. Strong bullish reversal at support. Bearish Engulfing — a large red candle engulfs the previous green candle. Strong bearish reversal at resistance.
Tweezer Tops/Bottoms: Two consecutive candles with identical or near-identical highs (Tweezer Top, bearish) or identical lows (Tweezer Bottom, bullish). Shows that price twice rejected the same level, confirming it as resistance or support.
Harami: A small candle contained within the body of the previous larger candle. A Bullish Harami (small green candle inside large red) at support suggests the downtrend is slowing.
Three-candle continuation and reversal patterns
Morning Star: Three-candle bullish reversal. Large red candle (downtrend continues), then a small-bodied candle (indecision — possible gap), then a large green candle closing into the first candle's body. Signals reversal from downtrend to uptrend.
Evening Star: The bearish mirror of the Morning Star. Three-candle bearish reversal at the top of an uptrend.
Three White Soldiers: Three consecutive large green candles with each close near its high. Strong continuation signal in an uptrend — high buying pressure.
Three Black Crows: Three consecutive large red candles. Strong bearish continuation signal in a downtrend.
How to trade candlestick patterns correctly
Candlestick patterns are most reliable when: (1) They appear at key support or resistance levels, (2) They're confirmed by volume (reversal patterns on high volume are more significant), (3) They're supported by other indicators (RSI divergence + bearish engulfing = stronger signal than either alone), (4) They appear on higher timeframes (daily candle patterns are more reliable than 1-minute patterns).
Never trade a pattern in isolation. A shooting star in the middle of empty chart space is meaningless. A shooting star at a major resistance level, with RSI divergence and above-average volume, is a high-probability short opportunity.