Candlestick Patterns — Reading Market Psychology 🕯️

The single most important rule: A pattern only has significance when it forms at a major structural level.

Why Context is Everything

A Hammer appearing randomly in the middle of a trend = Noise. Ignore it.

A Hammer appearing exactly at a long-term support level = Powerful signal. Trade it.

The difference? Location, location, location.

The Three Elements of Context

Structural Level:

• Support or Resistance
• Supply or Demand Zone
• Order Block
• Fibonacci level (38.2%, 50%, 61.8%)

Trend Context:

• Reversal patterns work best at extremes of trends
• Continuation patterns work best during pullbacks
• Range-bound markets produce false signals

Timeframe:

• Higher timeframes (H4, Daily) = more reliable
• Lower timeframes (M5, M15) = more noise
• Always confirm H4 patterns before execution

Professional Context Example

Low Probability:

• Hammer forms at 1.0875
• No structural level nearby
• Middle of uptrend
• Action: Ignore

High Probability:

• Hammer forms at 1.0850
• Daily support level
• H4 trendline confluence
• 61.8% Fibonacci retracement
• Previous Demand Zone
• Action: High-conviction long entry

Single candlestick patterns that signal sharp rejection of price extremes.

The Hammer (Bullish Reversal)

Found at the bottom of a downtrend or at major support.

Appearance:

• Small body near the TOP of candle's range
• Long lower wick (at least 2x the body length)
• Little to no upper wick
• Green body is stronger than red

Psychology: Sellers pushed price down (long wick), but buyers aggressively stepped in and pushed price back up, closing near the high. Shows strong rejection of lower prices.

The Battle:

• Opening: Sellers in control
• Mid-period: Sellers push down hard
• Final minutes: Buyers overwhelm sellers
• Close: Near the high, showing buyer dominance

Ideal Characteristics:

• Body is 10-20% of total candle height
• Lower wick is 70-80% of total height
• Appears after downtrend or at support

Professional Hammer Example

Setup: GBP/USD drops to 1.2650 (Daily support)

Candle:

• Open: 1.2665
• Low: 1.2640 (sellers push down)
• Close: 1.2660 (buyers push back)
• High: 1.2665
• Hammer confirmed

Trade:

• Entry: 1.2665 (next candle open)
• Stop Loss: 1.2635 (30 pips below hammer low)
• Target: 1.2750 (previous resistance, 85 pips)
• R:R: 1:2.8

Result: Price rallies to 1.2755. +90 pips ✓

The Shooting Star (Bearish Reversal)

Found at the top of an uptrend or at major resistance.

Appearance:

• Small body near the BOTTOM of candle's range
• Long upper wick (at least 2x the body length)
• Little to no lower wick
• Red body is stronger than green

Psychology: Buyers pushed price up (long wick), but sellers aggressively stepped in and pushed price back down, closing near the low. Shows strong rejection of higher prices.

Ideal Characteristics:

• Body is 10-20% of total height
• Upper wick is 70-80% of total height
• Appears after uptrend or at resistance

Professional Shooting Star Example

Setup: EUR/USD rallies to 1.0950 (Weekly resistance)

Candle:

• Open: 1.0935
• High: 1.0965 (buyers push up)
• Close: 1.0940 (sellers push back)
• Low: 1.0935
• Shooting Star confirmed

Trade:

• Entry: 1.0935 (next candle open)
• Stop Loss: 1.0970 (35 pips above high)
• Target: 1.0800 (previous support, 135 pips)
• R:R: 1:3.9

Result: Price drops to 1.0795. +140 pips ✓

The Doji signals market indecision and potential shift in momentum, particularly after a sustained move.

Appearance and Types

Basic Characteristics:

• Open price and Close price are virtually the same
• Very small or non-existent body
• Looks like a cross (+) or inverted T
• Can have wicks of varying lengths

Doji Types:

Standard Doji

• Equal length wicks top and bottom
• Perfect balance

Long-Legged Doji

• Very long wicks both directions
• Extreme indecision and volatility

Dragonfly Doji

• Long lower wick, no upper wick
• Similar to Hammer but with no body
• Bullish at support

Gravestone Doji

• Long upper wick, no lower wick
• Similar to Shooting Star but with no body
• Bearish at resistance

Psychology Behind the Doji

The Battle: Buyers and sellers fought equally hard, resulting in a deadlock. Neither side could gain advantage, indicating loss of conviction in the prevailing trend.

What It Means:

• After uptrend: Buyers are exhausted
• After downtrend: Sellers are exhausted
• In range: Usually meaningless

Trading the Doji

Critical Understanding: A Doji is NOT an entry signal. It's a warning signal.

After Strong Uptrend:

• Doji suggests buying power exhausted
• Wait for subsequent bearish candle to confirm
• Then enter short

After Strong Downtrend:

• Doji suggests selling power exhausted
• Wait for subsequent bullish candle to confirm
• Then enter long

In Sideways Trend:

• Doji often holds little significance
• Market already indecisive

Risk Management with Doji

If you're in a long trade:

• See Doji at major resistance
• Action: Move SL to breakeven or take partial profits
• Don't wait for reversal—protect gains

If you're in a short trade:

• See Doji at major support
• Action: Move SL to breakeven or take partial profits
• Lock in profits before potential reversal

The Engulfing pattern is one of the strongest reversal signals in candlestick analysis.

Bullish Engulfing (Reversal from Down to Up)

Formation:

• Candle 1: Small bearish (red) candle
• Candle 2: Large bullish (green) candle whose body completely covers the previous candle's body

Psychology: Buyers have completely overpowered sellers, absorbing all selling pressure and driving price significantly higher.

Ideal Characteristics:

• Candle 2 is at least 2-3x the size of Candle 1
• Candle 2 opens below Candle 1's low (gap down)
• Candle 2 closes well above Candle 1's high
• High volume on Candle 2 (if available)

Trade Setup: Strong buy signal, with SL below engulfing candle's low.

Professional Bullish Engulfing Example

Setup: EUR/USD at Demand Zone 1.0780-1.0800

Candle 1 (Bearish):

• Open: 1.0795, Close: 1.0785 (10-pip red)

Candle 2 (Bullish Engulfing):

• Open: 1.0782 (opens below previous close)
• Close: 1.0812 (closes above previous open)
• 30-pip green candle fully engulfs 10-pip red

Trade:

• Entry: 1.0812 (on H4 close)
• Stop Loss: 1.0775 (37 pips below low)
• Target: 1.0950 (next Supply Zone, 138 pips)
• R:R: 1:3.7

Result: Price rallies to 1.0960. +148 pips ✓

Bearish Engulfing (Reversal from Up to Down)

Formation:

• Candle 1: Small bullish (green) candle
• Candle 2: Large bearish (red) candle whose body completely covers the previous candle's body

Psychology: Sellers have completely overwhelmed buyers, signaling aggressive selling pressure.

Ideal Characteristics:

• Candle 2 is at least 2-3x the size of Candle 1
• Candle 2 opens above Candle 1's high (gap up)
• Candle 2 closes well below Candle 1's low
• High volume on Candle 2 (if available)

Trade Setup: Strong sell signal, with SL above engulfing candle's high.

Piercing Line & Dark Cloud Cover

Piercing Line (Bullish):

• Found at bottom of downtrend
• Candle 1: Large bearish
• Candle 2: Strong bullish that closes more than halfway up Candle 1's body

Dark Cloud Cover (Bearish):

• Found at top of uptrend
• Candle 1: Large bullish
• Candle 2: Strong bearish that closes more than halfway down Candle 1's body

Candlestick Patterns are visual representations of market psychology, providing high-probability reversal or continuation signals.

Professional Rule: Structure + Pattern = Trade. Never trade a pattern without structure. Never trade structure without a pattern.

Q1: Does the color of the Hammer's body matter?

For a Hammer at support, a green body is slightly stronger. However, the long lower wick is the most important component, as it signals decisive rejection of lower prices. Even a red-bodied Hammer with a strong wick is valid.

Q2: What's the difference between a Doji and a Hammer?

Doji has virtually no body (open = close), indicating indecision—neither side won. Hammer has a small body at the top (long wick below), indicating buyers decisively won after initial selling. Doji = indecision. Hammer = buyer victory.

Q3: Should I place my trade immediately when the pattern forms?

No. You must wait for the candlestick to close completely on your timeframe. Entering before the close is speculative because price can change dramatically in final minutes, invalidating the pattern.