2.7 Candlestick Patterns

Learn the candlestick patterns that genuinely matter, and skip the dozens that are mostly folklore.

Layer 2: Chart Literacy — Chapter 7 Goal: Learn the candlestick patterns that genuinely matter, and skip the dozens that are mostly folklore.

The Core Idea

A candlestick pattern is a single candle or small group of candles that signals a likely directional bias.

There are ~60 named candlestick patterns in trading literature. Most are statistical noise. A small handful have real, replicable edge. This chapter focuses on those.

Why Candlestick Patterns Work (When They Do)

Three reasons:

They visualize order flow. A long upper wick literally shows buyers pushed up but sellers absorbed it.
They concentrate decisions. Multiple candle patterns capture a sequence of buyer/seller exhaustion or acceleration.
They're widely watched. Self-fulfilling — when many traders see the same signal, they react similarly.

Single Candle Patterns Worth Knowing

1. Hammer / Hanging Man

Looks like:

Small body at the top of the candle
Long lower wick (at least 2× the body)
Little to no upper wick

Bullish context (hammer):

Appears after a downtrend
Suggests sellers pushed down, but buyers absorbed and pushed back
Bullish reversal signal

Bearish context (hanging man):

Same shape, but appears after an uptrend
Same mechanic, but bearish interpretation
Sellers showing up at the top, buyers temporarily save it

The key insight: Same candle, different meaning based on context.

2. Shooting Star / Inverted Hammer

Looks like:

Small body at the bottom
Long upper wick (at least 2× the body)
Little to no lower wick

Bearish context (shooting star):

After an uptrend
Buyers pushed up but were rejected hard
Bearish reversal signal

Bullish context (inverted hammer):

After a downtrend
Initial attempt to break higher
Often needs confirmation

3. Doji

Looks like:

Open ≈ Close (very small or no body)
Wicks on both sides

Meaning:

Indecision
Buyers and sellers fought to a tie
Often signals trend exhaustion at extremes
At the end of a strong trend = high-attention signal

Doji Variants

Long-legged doji: Long wicks both sides. Maximum indecision.
Dragonfly doji: Open/close at the top, long lower wick. Strong bullish reversal at bottoms.
Gravestone doji: Open/close at the bottom, long upper wick. Strong bearish reversal at tops.

4. Marubozu

Looks like:

Large body
Little to no wicks (open at one extreme, close at the other)

Meaning:

Maximum conviction
One side dominated the entire period
Bullish marubozu (green, full body) = strong buying
Bearish marubozu (red, full body) = strong selling

Use: Trend strength confirmation, breakout confirmation.

Two-Candle Patterns Worth Knowing

5. Bullish Engulfing

Looks like:

First candle: small bearish (red)
Second candle: larger bullish (green) that "engulfs" the first candle's body

Meaning:

Sellers had control, then buyers overwhelmed them
Bullish reversal signal, especially after a downtrend or at support

Stronger version:

Larger second candle
Higher volume on the second candle
Occurs at a known support level

6. Bearish Engulfing

Mirror image. First green, second red engulfing. After an uptrend, signals reversal.

7. Tweezers Tops / Bottoms

Looks like:

Two candles with matching highs (tweezers top) or matching lows (tweezers bottom)
Wicks at the same level

Meaning:

The market tried that level twice and failed
Reversal signal at trend extremes

Reality: Often present but not the strongest standalone signal. Use as confluence.

Three-Candle Patterns Worth Knowing

8. Morning Star (Bullish Reversal)

Looks like:

First candle: large bearish (downtrend continuing)
Second candle: small body (often a doji), gapping down
Third candle: large bullish, closing into the first candle's body

Meaning:

Selling exhausted (small middle candle)
Buyers take over decisively (large third candle)
Strong bullish reversal at the end of a downtrend

9. Evening Star (Bearish Reversal)

Mirror image. Large green, small/doji, large red. At the top of an uptrend.

10. Three White Soldiers / Three Black Crows

Three White Soldiers (bullish):

Three consecutive large green candles
Each opens within the prior body, closes near its high
Strong bullish continuation/reversal signal

Three Black Crows (bearish):

Three consecutive large red candles
Each opens within the prior body, closes near its low
Strong bearish continuation/reversal signal

Patterns Worth Skipping

These appear in textbooks but don't add edge:

Spinning Top — small body, wicks both sides. Too vague.
Belt Hold — minor signal. Better patterns exist.
Harami — second candle inside the first. Weak edge.
Inside Bar (sometimes useful) — second candle's high/low inside the first's. More useful for breakout entries than as a standalone signal.
Three Inside Up/Down — too complex for what it delivers.
Abandoned Baby — extremely rare. Skip.
Concealing Baby Swallow — fancy name, no edge.

Rule: If a pattern has a weird name and you've never heard of it, it's probably not worth memorizing.

Pattern Strength Modifiers

The same pattern can be strong or weak depending on context.

Strong Context

✅ Occurs at a known support or resistance level
✅ Occurs after an extended move (potential reversal)
✅ Confirmed by higher-than-average volume
✅ Confirmed by higher timeframe context
✅ Larger candles (more conviction)

Weak Context

❌ Occurs mid-trend with no level confluence
❌ Low volume
❌ Contradicted by higher timeframe
❌ Small candles (low conviction)
❌ During lunch (11:30 AM - 1:30 PM ET) — low liquidity, lots of fake signals

Confirmation Rules

Don't trade a candlestick pattern in isolation. Confirmation matters.

What Confirms a Bullish Reversal Pattern

Next candle closes higher (above the pattern's high)
Volume increases on the confirming candle
Pattern occurs at a known support level
Higher timeframe also bullish

What Confirms a Bearish Reversal Pattern

Next candle closes lower (below the pattern's low)
Volume increases on the confirming candle
Pattern occurs at known resistance
Higher timeframe also bearish

Common Mistakes

1. Trading Every Pattern You See

Candlestick patterns appear constantly. Most are noise. Be selective.

2. Ignoring Context

A hammer in the middle of a sideways chop means nothing. A hammer at major support after a downtrend means a lot.

3. Acting Before Confirmation

Many patterns fail. Wait for the next candle to confirm.

4. Wrong Timeframe

Candlestick patterns on the daily chart matter. On the 1-minute chart, they're mostly noise.

5. Memorizing Without Understanding

Memorizing "hammer = bullish" misses the why. Understand the order flow each pattern represents.

Statistical Reality

Bulkowski's research, again:

Pattern	Success Rate	Notes
Three Black Crows	~78%	Strong bearish signal
Three White Soldiers	~78%	Strong bullish signal
Engulfing	~60-65%	Reliable with confirmation
Hammer	~60%	Stronger at support
Evening/Morning Star	~70%	Reliable reversal
Doji	~50-55%	Weak standalone
Inside Bar	~50%	Useful for breakouts, not direction

Patterns alone have ~60% edge at best. Combine with S/R, trend, volume for real edge.

A Useful Mental Framework

For every candle pattern, ask:

What does this candle pattern reveal about order flow?
- Buyers vs. sellers, who won, with what conviction
Is the context right?
- At a level, after a move, with confirmation?
Does higher timeframe agree?
What's the risk/reward if I act on this?

If all four answers are favorable, you might have a trade. If not, move on.

Pattern Recognition Practice

To internalize candlestick patterns:

Open historical charts of stocks you follow
Find each major pattern in real conditions
Note the context that surrounded successes and failures
Mark patterns in real time before they resolve
Track your accuracy

After 2-3 months of this, your pattern recognition becomes intuitive.

A Mental Model

Candlestick patterns are like facial expressions in a conversation:

They convey emotion (fear, greed, exhaustion, confidence)
Without context, they're meaningless
A frown after good news means something different than a frown after bad news
Most expressions are just neutral background
A few signal big emotional shifts

You're not predicting the future. You're reading the emotional state of the market at this candle.

Practical Takeaways

Master ~10 patterns deeply instead of all 60 superficially.
Context determines meaning. Same candle, different outcomes in different contexts.
Confirmation is required. Trade the next candle, not the pattern alone.
Higher timeframe = more reliable patterns. Daily > hourly > 5-min.
Volume confirms patterns — without volume, patterns are weaker.
Combine with S/R and trend. Patterns at major levels = real signals.
Best single candles: hammer, shooting star, engulfing, marubozu, doji at extremes.
Best multi-candle: morning/evening star, three soldiers/crows.

Quick Self-Check

Before moving to 2.8, you should be able to answer:

What's the structure of a hammer? When is it bullish?
What's the difference between a hammer and a hanging man?
What does a doji indicate, and when does it matter most?
What is a bullish engulfing pattern?
What's the structure of a morning star?
What's the difference between strong and weak context for a pattern?
What's typically required to confirm a candlestick pattern?

Previous: 2.6 Chart Patterns Next: 2.8 Gaps