A candlestick pattern is one or two candles whose shape shows which side controlled a session and whether that control slipped. The shapes are easy to learn. Reading them well depends on measuring them properly and on where they appear. If bodies, wicks, opens and closes are new to you, start with reading candlestick charts.
What you will learn
- How to measure a candle's body and shadows in pips, so you can judge a pattern by numbers
- What the doji, hammer, shooting star and engulfing pattern show about buyers and sellers
- Why the same candle shape changes meaning with the trend and the price level around it
- How to turn a pattern into a plan with an entry, a stop and a position size
Measure the candle before you name it
Single-candle patterns are defined by proportions: how big the body is compared with the whole range, and how long each shadow (wick) is. Measure in pips or points. Zooming a chart in or out changes how a candle looks, but it does not change the numbers.
Take a one-hour EUR/USD candle that opens at 1.0846, rises to 1.0858, falls to 1.0810 and closes at 1.0855.
- Range: 1.0858 minus 1.0810 is 48 pips.
- Body: 1.0855 minus 1.0846 is 9 pips, about a fifth of the range.
- Lower shadow: 1.0846 minus 1.0810 is 36 pips, four times the body.
- Upper shadow: 1.0858 minus 1.0855 is 3 pips.
During that hour, sellers pushed price 36 pips below the open, then buyers took all of it back and closed 9 pips above the open. That is the shape of a hammer. A common rule of thumb for a hammer or a shooting star is a long shadow at least twice the length of the body, with little or no shadow at the other end. Use it as a filter you apply the same way every time.
The four shapes to learn first
Doji
A doji opens and closes at, or very near, the same price, so its body is a thin line. A workable definition you can apply consistently is a body smaller than a tenth of the candle's range. It shows a session where neither side won.
There are three common variants. A dragonfly doji has a long lower shadow and closes near its high. A gravestone doji has a long upper shadow and closes near its low. A long-legged doji has long shadows on both sides. On its own, a doji says "undecided". It becomes interesting after a long run in one direction, because the side that had been winning failed to move price.
Hammer and shooting star
A hammer has a small body near the top of its range and a long lower shadow, and it forms after a fall. Sellers drove price down, then buyers rejected the low. A shooting star is the mirror image: a small body near the low and a long upper shadow, after a rise. Buyers pushed price up and sellers rejected it.
Engulfing
An engulfing pattern uses two candles. In a bullish engulfing, a down candle is followed by an up candle whose body covers the whole of the first body. A bearish engulfing is the reverse. Compare bodies only, not shadows.
Take two daily candles on a share CFD. Day one opens at $52.40 and closes at $51.60. Day two opens at $51.55 and closes at $52.70. Day two's body runs from $51.55 to $52.70, which covers all of day one's body ($51.60 to $52.40), so this is a bullish engulfing. Had day two closed at $52.10, it would have covered only part of day one and failed the test.
Forex trades around the clock on weekdays, so a new candle there usually opens at or very near the previous close. That makes the close the part to check: a bullish engulfing must close above the first candle's open.
Context decides what the shape means
The same shape gets a different name when the trend before it changes. A hammer shape after a rise is called a hanging man. A shooting star shape after a fall is called an inverted hammer. Before you act on any pattern, run four checks.
- Location. A hammer whose low tags a price where buyers stepped in twice before carries more weight than one in the middle of a range. The next lesson covers these levels.
- Size. A 48-pip hammer after a run of 15-pip candles stands out. A 10-pip hammer in a busy session is noise.
- Timeframe. A daily hammer sums up a full day of trading. A one-minute hammer sums up a minute.
- Confirmation. Many traders wait for the next candle to close beyond the pattern, above a hammer's high or below a shooting star's low. You give up some price in exchange for evidence.
Do candlestick patterns work on their own? A single candle is a weak signal. It carries more weight when it agrees with the level it formed at and the trend around it, which support and resistance and trends and trendlines cover.
Turn a pattern into a plan
Say the EUR/USD hammer above formed at a support level that held twice last week. A simple plan is to buy if price breaks the hammer's high, with a stop below its low.
- Entry: 1.0860, two pips above the 1.0858 high.
- Stop: 1.0805, five pips below the 1.0810 low.
- Risk per unit: 1.0860 minus 1.0805 is 55 pips.
- Account: a $10,000 Classic account, risking 1% per trade, which is $100.
- Size: $100 divided by 55 pips is about $1.82 per pip. One standard lot of EUR/USD is worth $10 per pip, so 0.18 lots gives $1.80 per pip and a loss of $99 at the stop, before trading costs.
The daily loss limit on that account is $500, measured on equity, so a loss here would use about a fifth of the day's allowance. Wider stops need smaller positions; the position size calculator does this sum for any pair.
Check your understanding
A candle has a small body near its low and a long upper shadow, after three days of falling prices. Is it a shooting star?
No. The shape matches, but a shooting star needs a rise before it. After a fall, the same shape is called an inverted hammer, and it shows buyers testing higher prices after the fall.
On EUR/USD, candle one opens at 1.0920 and closes at 1.0900. Candle two opens at 1.0900 and closes at 1.0915. Is this a bullish engulfing?
No. Candle two's body runs from 1.0900 to 1.0915, covering 15 of candle one's 20 pips. To engulf it, candle two needed to close above 1.0920.
Why is a hammer at support worth more than the same hammer mid-range?
At support, the rejection of lower prices happens where buyers stepped in before, so two separate pieces of evidence agree. In the middle of a range, the long lower shadow may be ordinary noise.
Key points
- Measure body and shadows in pips. A hammer or shooting star usually has a shadow at least twice the size of its body.
- A doji shows indecision and matters most after a long move in one direction.
- An engulfing pattern compares bodies only. In forex, check that the second candle closes beyond the first candle's open.
- The same shape changes its name and meaning with the trend before it, so check location, size, timeframe and confirmation.
- Put the stop beyond the pattern's extreme and size the trade from that distance.
Next lesson: Mark support and resistance zones
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