Candlestick Patterns: Reading Price Action

Anatomy of a Candle

One candle covers one period. On a daily chart that is one session, open to close. On an hourly chart, sixty minutes. The mark itself has two parts and you read them together.

The body is the thick rectangle drawn between the open and the close. A white or green body means the close finished above the open and buyers carried the period. A black or red body means sellers had the better of it. The shadows, sometimes called wicks, are the thin lines above and below the body. They mark the high and the low of the session. A long shadow means price ran well past the open-close range and got pushed back inside it before the bell.

The relationship between body and shadows tells you who held the close. A long white body with short shadows is a session buyers ran from open to close without a serious challenge. A long black body is the opposite. A small body with long shadows on both ends is a session where neither side could finish what they started. That is what indecision looks like on a chart, and you can read it from across the room.

Single-Candle Patterns

The Doji

A doji forms when the open and close land at the same price, or close enough that the body collapses to a thin line. The shape is a cross or a plus sign. The signal is indecision — buyers and sellers fought to a draw. The doji means more after a strong trend than it does inside a quiet range, because in a strong trend a draw is news. After a long advance, a doji says the side in control has stopped advancing.

The way to trade a doji on a serious desk is with rules attached. Name the pattern. Note whether the same candle is also an inside day — high and low both inside the prior session’s range, which is its own piece of information. Set a specific entry trigger above the doji’s high. Write down the stop below the doji’s low. Recognition without rules is just chart-watching, and chart-watching does not pay rent.

One use that gets ignored: a doji on day two of a position you just opened. That candle says the conviction behind your entry is not there. The stock is not confirming the thesis that put you in. Cutting small and looking elsewhere is usually the right answer. The cost of being wrong on day one is a fraction of the cost of being wrong on day ten.

The Hammer

A hammer shows up at the bottom of a downtrend. The body is small and sits at the top of the candle. The lower shadow is long — at minimum twice the length of the body. The story the candle tells is straightforward. Sellers pushed price well below the open. Buyers stepped in at the lows. The close came back up near the high. The lower shadow is the buyers’ counterpunch, drawn on the chart.

Hammers carry the most weight when they print at support levels after a sustained decline. The longer the downtrend that leads in, the more the hammer is worth looking at. A hammer in the middle of a flat range is mostly noise. Confirmation arrives when the next candle closes above the hammer’s high. Without that follow-through, the hammer is a candidate, not a signal.

The Shooting Star

The shooting star is the same shape inverted at the top of an uptrend. Small body at the bottom, long upper shadow. Buyers carried price well above the open, sellers came in heavy near the high, the close finished back near the low. The upper shadow is the failed rally, written down for anyone who cares to read it.

Shooting stars matter most near resistance levels and at the upper Bollinger Band. A shooting star on heavy volume at a tested resistance is a sell signal worth respecting. The same pattern on light volume in the middle of a chart is closer to a shrug.

The Bullish Doji Star Hammer

One of the combinations worth knowing is the bullish doji star hammer — a doji at the bottom of a downtrend with a meaningful lower shadow, blending the indecision of the doji with the rejection signature of the hammer. The candle alone is not the trade. The pattern matters when it prints at a specific technical level — the lower edge of a bear flag, a tested support, the 50-day moving average — and the reversal does not get called confirmed until the next session follows through with a close above the hammer’s high. Candlesticks suggest; confirmation trades. One candle is a sentence, not a paragraph. You do not buy on a sentence.

This is also where Steve Nison’s original work earns its keep. Read his 1991 book and what jumps out is not the catalogue of shapes — every charting site on the internet has those now. What jumps out is his insistence that no candle is read in isolation. He spends entire chapters on confluence: the candle plus the trend, the candle plus the level, the candle plus the volume profile underneath it. Forty years on a screen and Western traders mostly skip those chapters and memorize the shape names. Then they wonder why their hammer entries get knocked out twice a week.

Two-Candle Patterns

Bullish and Bearish Engulfing

An engulfing pattern appears when one candle’s body covers the previous candle’s body completely. Bullish engulfing shows up after a downtrend — a large white candle engulfs a smaller black one, buyers ran sellers over, and it is among the more reliable reversal signals on the menu. Bearish engulfing is the same shape after an uptrend — a large black candle engulfs a smaller white one, sellers did the same in reverse, and it often marks the start of a real decline rather than a pause.

Size difference does the work here. The engulfing body has to be visibly larger than the body it covers. A bare engulf, where the second body just barely exceeds the first, is a weak read. The wider the gap in size, the louder the reversal message.

I traded a clean bearish engulf on NVDA in late August 2023. The stock had run hard into earnings. The print was great, the after-hours pop faded by the next morning, and the regular session tagged a high around 502 before reversing into a long red body that swallowed the previous session’s small white candle on volume that was 60% above the 30-day average. Shorted 200 shares at 487 with a stop above the engulf high at 503. That gave me about 16 handles of risk on a position sized small enough that if I was wrong I would feel it but not bleed. Covered half at 461 the next session, the rest at 442 a week later. Roughly 2.7R on the trade.

Why did it work? Three pieces of context, none of them the candle itself. The engulf printed at a clear level. Volume was loud. The run-up beforehand was extended and tired. Without those three pieces I would have been shorting strength on a candle, and that is how you donate money to the desk on the other side of the trade.

The Harami

The harami — the word means “pregnant” in Japanese — is the engulf turned inside out. The second candle’s body sits entirely inside the previous candle’s body. The signal is that momentum is slowing. After a large bullish candle, a small bearish harami says the rally has lost its push. After a large bearish candle, a small bullish harami says the selling pressure is fading. Haramis are weaker than engulfs. They flag the possibility of a reversal and they need the next candle to back them up before you act.

Three-Candle Patterns

Morning Star and Evening Star

These are the three-candle reversals, and they are among the more dependable formations when they print cleanly. A morning star is bullish: a large black candle, then a small-body candle that gaps lower (the “star”), then a large white candle that closes well into the body of the first. A respectable bottom signal. The evening star is the mirror image at the top — large white candle, small-body star gapping higher, large black candle closing well into the first body.

The middle candle, the star, can be a doji, and when it is, the formation is called a morning doji star or evening doji star and the signal carries more weight. The gap between the star and the first candle matters too. It shows the trend reaching an extreme before the reversal candle arrives.

Three White Soldiers and Three Black Crows

Three white soldiers: three long white candles in a row, each closing higher than the last. Sustained accumulation. Most useful coming out of a consolidation or a decline, where it confirms a change of character.

Three black crows: the bearish twin. Three long black candles, each closing lower. Aggressive distribution. Most often seen near tops, where it tends to mark the end of the prior advance rather than the middle of one.

Combining Candlesticks with Other Indicators

Candlestick reads are cleaner when other tools are pointing the same way. Think of it like a poker hand — one piece of information is a tell, two pieces are a read, three pieces are a decision. Pocket aces preflop is a hand. Pocket aces preflop with a tight player three-betting from the button on a paired board is a different hand entirely, and you play it differently. Same idea on a chart. The candle is the cards in your hand. The level, the volume, the indicator — those are the table.

Run candlestick reads alongside chart patterns and indicators rather than in place of them. A doji on its own says little. A doji at the lower boundary of a symmetrical triangle with RSI near 30 is a setup with a real edge, because three independent readings are pointing at the same level. That is what confluence buys you. Not a guarantee. An honest probability shift.

Common Mistakes

Trading the pattern in isolation. A doji or hammer on its own is not a trade. Context decides — the prior trend, the location relative to support and resistance, what volume is doing under the candle.

Ignoring the timeframe. A doji on a five-minute chart is mostly noise. A doji on a daily or weekly chart is information. Longer periods produce more reliable reads, and that is not a coincidence. More participants have voted on the close.

Mistaking similar shapes. A hammer at the bottom of a decline is bullish. The same shape at the top of an advance is a hanging man, and it is bearish. Without context, the candle is just a candle.

Skipping confirmation. Most candlestick patterns need the next candle to back them up. Acting on the pattern before the follow-through cuts your win rate badly. Wait for the confirmation. The cost of one missed entry is small compared to the cost of a string of unconfirmed reversals.

Read the candle. Then read the chart around it. The candle is one sentence in a longer story, and you do not bet the account on a sentence.

See also: Technical Analysis · Support and Resistance · RSI: The Relative Strength Index · Bollinger Bands · Moving Averages Explained · Understanding Volume