Candlestick patterns

What a candle tells you

A candlestick chart is a method of reading price. Each candle covers one unit of time and records four prices: the open, the high, the low and the close. The body runs from the open to the close, and the thin lines above and below it, the wicks or shadows, reach to the high and the low. A green candle closed above where it opened; a red candle closed below.

Body against wick

A candle shows you who was in control while it formed. Read the body, the wick, and the size of the body relative to the wick. A long body with small wicks means one side pushed price the whole way and kept it there. A small body under a long wick means price was pushed one way and rejected: the far side took it back before the close.

Candles inside candles

Every candle on a higher timeframe is built from the candles below it. A green candle followed by a red candle that closes below the green open adds up, on the next timeframe, to a single red candle with a long upper wick. That is why the same move looks different on each chart: a run of small hourly candles can be one clean pattern on the 4-hour chart and a single long-wicked candle on the daily.

How not to trade them

A pattern on its own is not a trade. The common mistake is to buy because the last two or three candles were green, in the middle of nowhere, against the larger direction. Price reverses, and the stop sits exactly where the late buyers put it.

The patterns worth knowing

An engulfing pattern is two candles where the second body opens inside the first and closes beyond it, covering it completely. A bullish engulfing candle after a decline says buyers took over inside one candle; a bearish engulfing candle after a rise says the same about sellers.

A hammer is a small body at the top of a long lower wick, and it matters at the bottom of a decline: sellers pushed price down and lost it all back before the close. A shooting star is the mirror image, a small body under a long upper wick at the top of a rise.

A doji opens and closes at the same price. The dragonfly doji has all its range below, a long lower wick and nothing above, and reads like a hammer. The gravestone doji has all its range above and reads like a shooting star.

A morning star is three candles at the end of a decline: a large red candle, a small candle or doji, then a large green candle that closes well into the first. An evening star is the same three candles at the end of a rise, with the colors reversed.

A tweezer bottom is two candles that share the same low; a tweezer top is two candles that share the same high. The second candle failing to get past the first is the signal.

Three conditions before you trade one

The same candle is a signal in one place and noise in another, so hold every pattern to three conditions.

• Trend: trade in the direction of the larger trend.
• Area of interest: only count a pattern that forms at a level you already cared about, not in the middle of a range.
• Timing: only count a pattern that forms around the trading sessions, when the volume behind it is real.

On the chart

Replay the candle

Click any candle on the Trade Desk and it replays what was happening as it formed, with the news of that hour and your own trades drawn on the price. That is the quickest way to check whether a pattern you took met all three conditions, or only looked like it did.