Every day, charts fill with thousands of candles as securities trade up and down. These can give traders information on whether price is appreciating or depreciating, with the length of candles indicating the strength of each move.
While most traders will know the difference between a green candle and a red candle, the exact shape of those candles can tell us more about the security. Candlestick patterns emerge that, if memorised, can indicate bullish or bearish performance in the future. As such, reading and trading candlestick patterns is an important skill that can help identify opportunities on your chart.
Stock traders cannot memorise every single sign the market gives them, and it’s no different with candlestick patterns. Instead, traders can learn a few of these, including the most common and often rewarding bullish/bearish patterns that matter most. Then, if they see them on the chart, with some confirmation from other indicators, they’ll take the trade.
Here you’ll find a selection of the most bullish and bearish candlestick patterns traders should know.
What Is a Candlestick Pattern and How Do Candlestick Charts Work?
Candlestick patterns are older than you think, originating from 18th-century Japan. By some accounts, Japanese candlestick patterns were used to track the country’s rice market. They are part of, and possibly the oldest, technical analysis.
As for what they do, candlesticks turn price action into green or red rectangles on the chart. Depending on the selected timeframe, candlesticks can show how the price performs across minutes, days, months or years.
The natural course of a candlestick starts when the chart moves to a new timeframe interval. Let’s assume a five-minute timeframe for this example. Once opened, the candle will fluctuate up and down, turning green or red. It’s possible for a candle to flash green to red, and red to green, multiple times with its timeframe.
There are three parts of a candle:
- The colour – shows the nature of price action and locks in once a new candle starts.
- The body – the rectangular part of the candle which shows the range between opening and closing prices for the timeframe.
- The wick – Thin sticks above and below the body, showing the highest and lowest prices during the timeframe.
The length of candle bodies and wicks can tell us about the psychology of a market. Generally, short bodies indicate indecision while long ones show strong momentum. Similarly, long wicks mean the candle moved a lot before it settled, showing how volatile the market is.
Between those four price points – open, close, highest, lowest – you can see a tug-of-war between buyers and sellers. The final positioning of the candle, and its colour, tell you who won for the selected timeframe.
Candlestick graph patterns are the distinct shapes the candles form, using different body and wick lengths. Some patterns are single-candle patterns and others are made up of several candles.
Bullish Candlestick Patterns Traders Should Know
Let’s start with the most common bullish candlestick patterns. These show strong price action toward the upside, hinting that buyers are in control and that price may appreciate further.
Bullish Engulfing Pattern
The engulfing patterns are arguably the most famous because they clearly show a weakening trend before a strong, healthy reversal. The bullish engulfing pattern is a two-candle pattern with three steps:
- A small red candle prints on the chart.
- The next candle opens below the red candle’s body.
- Then it flips green, pushes up and closes taller than the red candle’s body.
This shows a textbook shift from bearish to bullish. The candle opened beneath the red one before it, as if it would continue the downtrend, but then buyers stepped in and bought it up, triggering a price reversal.
Hammer Pattern
The bullish hammer candlestick pattern also shows a reversal, but in just one candle. As you might expect from the name, it’s a candle with a long downward wick at the bottom, looking like a handle. The body then sits on the top, looking like the head of a mallet.
If the hammer appears at the end of a downtrend, then it’s highly likely that an uptrend will form instead. The wick shows sell pressure bottoming out, leading to that small but undeniable body at the top of it. Traders often advise waiting for the next candle to close green for confirmation.
Morning Star Pattern
The Morning Star is another clear bullish pattern you should look out for. It’s a three-candle pattern, though the second candle is where most traders notice it forming. The three candles are:
- A bearish candle with a long body, striking downward.
- An undecided sliver body, with some wick above and below it.
- A similar bullish candle with a long body, rising upward.
The body of that second candle should be tiny, a thick horizontal line on the chart. Combined with the upper and lower wicks, it looks like a plus sign or a four-pointed star, hence the name. In trading, these ‘stars’ are usually called Doji candles.
Bearish Candlestick Patterns Traders Should Know
Bearish candlestick patterns instead show that sellers are in control. When that happens, they can exercise enough downward pressure that price action can flip from green to red, possibly through support.
Bearish Engulfing Pattern
The bearish counterpart to bullish engulfing, this one inverts the pattern. That means you’re looking for two candles again, but this time it’s a small-bodied green candle before a taller red candle prints.
That red candle typically calls time on an uptrend. The small bullish candle indicated fading buyer support, then sellers stepped in and smacked the price down and may continue to do so for the near future.
Shooting Star Pattern
The Shooting Star is a single-candle pattern that’s the bearish equivalent of the hammer. It appears at the top of an uptrend, taking the form of a small thick body with a long wick above it. It can have a little wick beneath, or none at all.
The wick shows failed upward momentum, settling into a lower body. Then, if the pattern holds, the next candles may go downward in the short term. As with the hammer pattern, you should wait for the next candle to close red for confirmation.
Evening Star Pattern
The Evening Star pattern is a three-candle formation, essentially the opposite of the Morning Star. This time, the three candles show an arch starting with upward movement, then a downward stall in the middle, then a confirmed downward drop.
Like before, the middle should be an indecisive candle. It’s red, but the body is small, making it a Doji candle that looks like a 'star', as discussed earlier.
Which Trading Candlestick Patterns Matter Most and How Should Traders Use Them?
Traders should avoid trying to learn every single pattern that can appear. Instead, they should memorise several patterns with enough familiarity that they’ll notice them near-instantly when they form on a chart. In short, the patterns that matter most are the ones you can recognise and execute on.
Every individual pattern has its own shape, but one Morning Star will also look slightly different from another. The presence of indecision candles is a great indicator of several, but not all, patterns. There are several types of indecision candles:
- Standard Doji: The plus or ‘star’ sign as discussed previously. Buy and sell pressure is virtually equal on both sides.
- Dragonfly Doji: A thin body with a short upper wick and a long lower wick. Sellers pushed price down, but buyers recovered it before the candle closed.
- Gravestone Doji: Opposite of Dragonfly Doji, a long upper wick with a short body at the bottom. Buyers pushed price up, but sellers erased gains before the candle closed.
- Long-Legged Doji: A Doji with long wicks on either side, indicating not just indecision but high volatility.
- Spinning Top: A small body with longer and similar upper and lower wicks, sometimes showing up several times after a directional move, indicating exhaustion.
When using candlestick patterns for trading, remember that they are just part of the traders’ toolkit and aren't reliable in isolation. They can give insight into the psychology behind buyers and sellers during a moment, whether it’s five minutes or a whole month, but traders should still confirm chart patterns using other indicators.
Existing trends (and apparent exhaustion of those trends) plus support, resistance and next-candle confirmations add valuable context to a candlestick pattern. This helps traders decide if a pattern is meaningful and worth acting upon.
Candlestick Patterns FAQs for Traders
Which Is the Most Powerful Candlestick Pattern?
It’s important to remember that every indicator is fallible, so it’s best to wait for confirmation when using candlestick patterns for trading.
Assuming a candlestick pattern does play out as predicted, traders often find that the engulfing patterns are most powerful and reliable. This is because, true to its name, an action doesn’t just reverse but outperforms the previous candle.
What Is the Two-Candle Rule?
The two-candle rule, sometimes the three-candle rule, is guidance for traders seeking confirmation. Traders are often advised to wait for the next candle, or the next two, to close in accordance with the candlestick pattern that preceded it. Traders should choose one approach and add it to their candlestick patterns cheat sheet.
What Is a God Candle in Stocks?
'God Candle' is slang that originates from high-volatility market conditions, most notably crypto and low-cap markets. It jokingly describes a sudden upward move as divine intervention. A God Candle will far exceed previous candles and happen so fast that it’s all captured in a single candle in a short timeframe interval.
They are most often whale buying, surprise news catalysts or short squeezes. In more professional terms, the God Candle would be a bullish Marubozu. It’s a strong upward move with market-dominating momentum and little to no wick. Bearish Marubozus also exist, representing haemorrhaging price action to the downside.
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