Reading candlestick chart patterns is an essential skill for all successful traders.
First, you need to understand what individual candlesticks are telling you.
Then you need to understand what the different combinations of candlestick chart patterns are telling you, when they appear in a sequence together.
In this lesson we’ll teach you how to read candlestick chart patterns and how to interpret these patterns to help you gain the knowledge to become a more successful trader.
What are forex candlestick chart patterns?
There are two different elements to forex chart pattern recognition that you need to become familiar with in order to be able to read and understand trading charts:
- the shape of the candlesticks themselves, and
- the patterns these candlesticks form when they appear together in a certain order
Understand the shape of candlesticks
We know that candlesticks come in different shapes and sizes.
This is because they reflect price behaviour in whatever timeframe you are viewing price action.
All candlesticks show the open price, the closing price, the highest price achieved, and the lowest price for that particular timeframe.
For example:
- if you are viewing price action on a daily trading chart (for a market that has a set open and closing time), the candlesticks will show the opening price and closing price for that one day
- if you are viewing candlesticks on a 15-minute chart, the opening and closing prices will be for that 15-minute period.
Green candlesticks indicate the price opened low, and rose up to close at a higher level, suggesting an upward trend.
Red candlesticks indicate the price closed lower than it opened, indicating downward movement.
Therefore, green candlesticks are referred to as bullish (indicating upward movement) and red candlesticks are indicative of downward price action (or bearish sentiment.)
If you are viewing candlesticks in black and white:
- black or ‘closed’ candlesticks represent red bearish price movement
- white or ‘open’ candlesticks represent green bullish price behaviour.
Candlestick body length
The difference between opening and closing price determines how long the body of the candlestick will be.
If there is a large price difference, the candlestick will be a long one.
For example, in this sequence, there is a series of long green candlesticks, showing us there was a substantial difference in the opening and closing price in this uptrend:
If opening and closing prices are almost identical, the candlestick will look very different, short and squat, with no ‘body’ to them at all.
This type of candlestick is known as a ‘doji,’ which is the Japanese word for ‘simultaneous.’
Here’s a series of dojis on a price chart:
A doji sequence suggests the asset is in a period of consolidation, or a ‘resting’ pattern.
Such sequences are often seen after strong upward or downward trends, and suggest that neither the bulls or the bears are in control.
Therefore, price action remains almost static until a news item or sudden buying or selling pressure sets off the sequence again.
Dojis can be regarded as indicating market indecision.
They are often associated with low trading volumes, or seen in quiet trading periods between major forex market opening hours.
How to interpret candlestick chart patterns
Here are some of the other most common candlestick shapes:
The Japanese word ‘marubozu’ translates to ‘shaven head’ or ‘bald’, as these candlesticks have no head or tail, or upper or lower wick, indicating that open and close prices were identical to the highest and lowest prices in that time period.
Most pro traders will look at these different candlestick shapes and immediately know what they reveal about price action.
For example:
- a hanging man candlestick is frequently seen at the bottom of a downtrend, and is a warning sign that the trend is about to end
- a shooting star is frequently seen at the bottom of a downtrend, and indicates that a trend reversal may follow
- a dragonfly doji, with its very long tail, indicates that although the opening and closing price were identical, price action did fall in that session, but rose again to end the period the same as it opened. This indicates that bears had a go at pushing price action down, but were ultimately unsuccessful by the end of the session.
Therefore, the shape of each individual candlestick tells a ‘story’ about price action in that period.
How many candlestick chart patterns are there?
There are more than 42 officially recognised candlestick chart patterns, although this number swells to over 100 patterns that some authors and websites identify.
However, not all of these chart patterns appear regularly, or are well-known.
You certainly don’t need to remember or memorise all of these, and the names of certain patterns can vary according to your information source.
Having said this, it is worthwhile getting to know the main candlestick chart patterns that I have listed here.
These are the ones that I consider the most important, based on my 15+ years of day trading.
Candlestick chart pattern sequences
Learning to read candlestick trading charts is like learning to read music.
First you need to understand what each individual candlestick or ‘note’ means.
Then you need to understand what the different notes mean in combination on the music score, in order to be able to hear the melody.
Candlesticks form recognisable patterns as they appear one after another.
These patterns form regular sequences which reveals far more about overall market trends than individual candlesticks alone can tell us.
Here are some of the more common and important candlestick chart patterns:
Evening Star
This is a three-candle pattern with one long green bullish candle at the top of an uptrend, then a doji or spinning top at the top of the trend, followed by a large bear candlestick.
It implies a bearish reversal after an uptrend.
Morning Star
The Morning Star pattern features a long red bearish candle at the bottom of a downtrend, then a doji or spinning top, followed by a large green bullish candle.
It is the reverse of an Evening Star, and denotes that the downtrend has ended, and a new uptrend is beginning.
The doji or spinning top at the base of the downtrend can be either bearish (red) or bullish (green) like the one below. The colour of the doji or spinning top does not really matter – it’s the long red and green candlesticks either side of the doji that are really important.
Three Soldiers
The three soldiers pattern develops over three days and is a strong bullish signal after a downtrend.
It consists of three green candles with long bodies and short wicks, which open and close progressively higher than the previous day.
A Three Soldiers pattern implies steady buying pressure, which suggests the start of an uptrend.
Three Black Crows
This three-stick pattern is the reverse of three soldiers.
It consists of three consecutive long red candles with short or non-existent shadows or wicks.
Each session opens at a similar price to the previous day, but bear pressure pushes the price lower and lower with each close.
It suggests a strong downtrend is developing as the bears take charge.
Piercing Line
This is a two-candle pattern which is a reversal signal after a downtrend.
It consists of a long red candle followed by a long green candle.
There is usually a significant gap down between the first red candlestick’s closing price, and the green candlestick’s opening price.
It indicates strong buying pressure, and a reversal after a downtrend.
Hammer
A hammer candlestick at the bottom of a downtrend is a reversal pattern, which suggests the downtrend has ended, and a new uptrend is about to begin.
This easily-recognised candlestick in the shape of a hammer has a small body and a long tail (or shadow) underneath, but no upper wick.
The long lower shadow signifies that the price dropped significantly during the trading period, but buying pressure emerged, pushing the price back up to close near the opening price.
It suggests a potential trend reversal after a period of decline.
Hanging Man Reversal
A Hanging Man is the opposite to a hammer.
It consists of a long green candlestick, followed by a doji or Spinning Top, with a short red body with a long wick or tail below it, followed by another red bearish candlestick, indicating that the uptrend is over.
A Hanging Man reversal pattern appears at the top of an uptrend, and is a warning to traders that the uptrend is about to reverse.
It signals that an uptrend is over and a downtrend is to follow.
There are many more candlestick patterns that you can familiarise yourself with if you wish to continue studying this fascinating topic.
Remember that candlestick price patterns are merely tools for the trader to use, in conjunction with other tools such as indicators.
Candlestick chart patterns don’t guarantee anything
While candlestick price pattern offer valuable clues as to price direction, the market remains a complex beast, influenced by many different factors.
Therefore, it’s always best to use candlestick chart patterns as a guide, not a guarantee that price action will go a certain way.
Once you’ve studied individual candlesticks, and learnt how to read candlestick chart pattersn, you’ll find that interpreting them becomes second nature.
It’s just like learning the ABC – once you known your individual letters, putting them together and reading whole words becomes easy with practice.
My ‘go to’ book about how to read candlestick chart patterns is Louise Bedford’s ‘The Secret of Candlestick Charting.’
However, there are many other good charting books and websites available.
I believe it is time well spent learning all about candlestick chart patterns for any beginner trader.
They form the basis of all technical analysis in forex trading, which ultimately leads to a more successful trading outcome.
Till next time, happy trading!
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Sources
Marketmates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
- Louise Bedford – The Secret of Candlestick Charting https://www.tradinggame.com.au/product/technical-analysis/the-secret-of-candlestick-charting/
- Louise Bedford – Trading Secrets https://www.tradinggame.com.au/product/books/trading-secrets-3rd-edition/
- Christopher Tate – The Art of Trading https://www.tradinggame.com.au/product/trading/the-art-of-trading-2nd-edition/
- TradingView.com TradingView.com/chart
- Investing.com Candlestick patterns
