Main points
- Candlesticks = Visual representation of price action (open, high, low, close)
- 90% of isolated candlestick patterns fail. Context (trend, support/resistance, volume) is EVERYTHING.
- Engulfing patterns work 72% at key levels. Random mid-chart? 48% (coin flip).
- Doji signals indecision. Powerful at extremes after extended moves. Useless in consolidation.
- Multi-candle patterns (morning star, three black crows) have higher win rates than single candles.
- Volume confirmation increases candlestick pattern win rates by 25-30%.
The $75,000 Hammer Candle That Changed Everything
March 16, 2020. Peak COVID panic. Markets crashing. S&P 500 down 30% in 3 weeks.
A trader stares at his screen. Down $65,000 on his positions. Should he sell?
Then he notices something on the daily chart:
A perfect hammer candle at major support.
Long lower shadow. Small body at the top. Buyers rejected the lows. Volume 3x average.
He knows this pattern. He's studied it for years. At support, with volume, after a crash? Win rate: 76%.
Decision time.
Most traders would panic-sell. He did the opposite: He bought.
Not randomly. Not emotionally. Because the hammer told him: "Bears tried to push lower. Bulls won the battle."
What happened next? The exact bottom. Market never went lower.
His $65,000 loss turned into a $75,000 gain over the next 4 months as markets recovered.
Total turnaround: $140,000.
All because he understood ONE candlestick pattern in CONTEXT.
Why Most Traders Lose Money with Candlestick Patterns
They memorize patterns. They DON'T understand context.
- They see a hammer and buy. Anywhere. Anytime. (48% win rate)
- They ignore support/resistance (where patterns ACTUALLY work)
- They ignore volume (which shows if institutions are involved)
- They ignore trend (fighting trends with reversal patterns = death)
This article will teach you the 20 patterns that ACTUALLY work, WHERE they work, and HOW to trade them with 70%+ win rates.
What Are Candlestick Patterns? The Foundation
Candlestick charts were created by Japanese rice traders in the 1700s. They show price action (the battle between buyers and sellers) in visual form.
Anatomy of a Candlestick
Candlestick Components
1. The Body (Rectangle)
• Green/White Body: Price closed ABOVE the open (bullish)
• Red/Black
Body: Price closed BELOW the open (bearish)
• Body size shows strength of move (big
body = strong, small body = weak)
2. Upper Shadow (Wick)
• Shows the HIGH of the period
• Long upper shadow = sellers rejected higher prices
• No
upper shadow = bulls in complete control
3. Lower Shadow (Wick)
• Shows the LOW of the period
• Long lower shadow = buyers rejected lower prices
• No lower
shadow = bears in complete control
4. Open, High, Low, Close (OHLC)
Every candle tells a story:
- Opens here → Price immediately moves → Tests high/low → Closes here
- The shape reveals WHO won the battle: bulls or bears
Why Candlesticks Beat Line Charts
Line charts only show closing prices. Candlesticks show the ENTIRE battle:
- Line chart: "Price closed at $100"
- Candlestick: "Price opened at $95, crashed to $88 (panic), bulls defended, rallied back to close at $100"
The second version tells you EVERYTHING about market psychology.
The Context Rule: Why 90% of Patterns Fail
Here's the truth nobody teaches:
Candlestick patterns mean NOTHING without context.
A hammer candle at random mid-chart support? 48% win rate (coin flip).
The same hammer candle at major support + oversold RSI + high volume? 76% win rate.
The Context Checklist
Before trading ANY candlestick pattern, check:
- Location: Is it at support/resistance? (Critical)
- Trend: Reversal pattern in uptrend = powerful. In downtrend = weak.
- Volume: High volume = institutions involved. Low volume = retail noise.
- Prior Move: Pattern after extended move = exhaustion. After consolidation = irrelevant.
- Indicators: RSI/MACD confirming = double confirmation.
If context aligns? Trade the pattern with confidence.
If context is weak? Skip it. Wait for better setup.
Single Candlestick Patterns (The Foundation)
These are one-candle patterns that show immediate reversals or continuation signals.
1. Hammer (Bullish Reversal)
What it looks like:
- Small body at the TOP of candle
- Long lower shadow (2-3x body size)
- Little to no upper shadow
- Can be green or red (color doesn't matter much)
What it means:
Bears pushed price down hard (long lower shadow), but bulls rejected the lows and pushed back up (close near high). Sellers losing control.
When it works:
- At major support levels
- After extended downtrend (oversold)
- With high volume (2x average or more)
Win Rate: 72% at support with volume. 48% in random locations.
Trade Setup:
- Entry: Above hammer high
- Stop loss: Below hammer low
- Target: Recent resistance or 2:1 risk/reward
2. Inverted Hammer (Bullish Reversal)
What it looks like:
- Small body at the BOTTOM of candle
- Long upper shadow (2-3x body size)
- Little to no lower shadow
What it means:
Bulls tried to rally (long upper shadow), got pushed back down, but the fact they tried shows buying interest emerging. Next day confirmation needed.
When it works:
- At support after downtrend
- MUST be followed by bullish candle (confirmation)
Win Rate: 64% with next-day confirmation.
3. Shooting Star (Bearish Reversal)
What it looks like:
- Small body at the BOTTOM
- Long upper shadow (2-3x body size)
- Little to no lower shadow
- Appears at TOP of uptrend
What it means:
Bulls pushed high (upper shadow), but sellers aggressively pushed back down (close near low). Buyers losing control. Reversal coming.
When it works:
- At major resistance
- After extended rally (overbought)
- With volume spike
Win Rate: 68% at resistance with volume.
4. Hanging Man (Bearish Reversal)
What it looks like:
- Identical to hammer (small body, long lower shadow)
- BUT appears at TOP of uptrend (not bottom)
What it means:
Despite appearing bullish (long lower shadow), it shows sellers stepping in. If followed by bearish candle, reversal confirmed.
Win Rate: 62% with bearish confirmation next day.
5. Doji (Indecision)
What it looks like:
- Open = Close (or nearly equal)
- Body is tiny or non-existent (just a line)
- Can have upper/lower shadows (classic doji) or neither (rare)
What it means:
Perfect balance between buyers and sellers. Indecision. Market at a crossroads.
Types of Doji:
- Gravestone Doji: Long upper shadow, no lower (bearish at top)
- Dragonfly Doji: Long lower shadow, no upper (bullish at bottom)
- Long-legged Doji: Both long shadows (extreme indecision)
When it works:
- After extended moves (exhaustion signal)
- At key support/resistance
- Needs confirmation from next candle
Win Rate: 58% (needs confirmation). Useless in consolidation.
6. Marubozu (Strong Continuation)
What it looks like:
- Long body with NO shadows (or very tiny)
- Bullish Marubozu: Opens at low, closes at high (pure buying)
- Bearish Marubozu: Opens at high, closes at low (pure selling)
What it means:
One side in COMPLETE control. No resistance. Strong momentum. Often continuation signal.
Win Rate: 71% in direction of trend.
Double Candlestick Patterns (Higher Probability)
Two-candle patterns that show clear reversals. Generally more reliable than single candles.
7. Bullish Engulfing (Strong Bullish Reversal)
What it looks like:
- Day 1: Small red (bearish) candle
- Day 2: Large green (bullish) candle that COMPLETELY engulfs Day 1 body
- Day 2 opens below Day 1 close, closes above Day 1 open
What it means:
Bears were in control (Day 1). Bulls OVERPOWERED them completely (Day 2). Momentum shift.
When it works:
- At major support
- After downtrend (oversold)
- With volume spike on Day 2 (essential)
Win Rate: 72% at support with volume confirmation.
Real Example: Reliance Bullish Engulfing (Aug 2023)
Day 1 (Aug 14): Red candle closes at ₹2,480 (bears in control)
Day 2 (Aug 15): Opens at ₹2,470, rallies hard, closes at ₹2,560
• Completely engulfs Day 1
• Volume 2.5x average
• At support zone of ₹2,450-₹2,500
Trade:
Entry: ₹2,565 (above engulfing high)
Stop: ₹2,460 (below pattern low)
Target: ₹2,680
(resistance)
Result: Target hit in 2 weeks. 4.5% gain, 1.1:1 risk/reward.
8. Bearish Engulfing (Strong Bearish Reversal)
What it looks like:
- Day 1: Small green (bullish) candle
- Day 2: Large red (bearish) candle that completely engulfs Day 1
What it means:
Bulls were in control. Bears overpowered them. Momentum reversal to downside.
Win Rate: 69% at resistance with volume.
9. Piercing Pattern (Bullish Reversal)
What it looks like:
- Day 1: Long red candle (strong selling)
- Day 2: Green candle opens BELOW Day 1 low (gap down), but closes ABOVE Day 1 midpoint
What it means:
Gap down suggests continuation. But bulls rally hard and close above midpoint = rejection of lower prices. Reversal likely.
Win Rate: 64% at support.
10. Dark Cloud Cover (Bearish Reversal)
What it looks like:
- Day 1: Long green candle (strong buying)
- Day 2: Red candle opens ABOVE Day 1 high (gap up), but closes BELOW Day 1 midpoint
What it means:
Gap up suggests continuation. But sellers push down hard, closing below midpoint = rejection of higher prices. Reversal likely.
Win Rate: 61% at resistance.
11. Tweezer Top/Bottom (Reversal)
What it looks like:
- Two consecutive candles with matching highs (tweezer top) or lows (tweezer bottom)
- Shows resistance/support at exact same level twice
What it means:
Level tested twice, held both times. Strong support/resistance confirmed. Reversal probable.
Win Rate: 66% when combined with other patterns (doji, engulfing).
Triple Candlestick Patterns (Highest Probability)
Three-candle patterns take longer to form but have highest reliability.
12. Morning Star (Powerful Bullish Reversal)
What it looks like:
- Day 1: Long red candle (strong selling)
- Day 2: Small body (any color), gaps down (star = indecision)
- Day 3: Long green candle, closes above Day 1 midpoint
What it means:
Downtrend → Indecision → Bulls take control. Classic bottoming pattern.
Win Rate: 78% at major support. One of highest probability patterns.
13. Evening Star (Powerful Bearish Reversal)
What it looks like:
- Day 1: Long green candle (strong buying)
- Day 2: Small body (any color), gaps up (star = indecision)
- Day 3: Long red candle, closes below Day 1 midpoint
What it means:
Uptrend → Indecision → Bears take control. Classic topping pattern.
Win Rate: 75% at major resistance.
14. Three White Soldiers (Strong Bullish Continuation)
What it looks like:
- Three consecutive long green candles
- Each opens within previous body
- Each closes higher than previous
- Little to no upper shadows (bulls in control)
What it means:
Sustained buying pressure for 3 days straight. Strong uptrend likely continuing.
Win Rate: 74% continuation in direction (usually after pullback in uptrend).
15. Three Black Crows (Strong Bearish Continuation)
What it looks like:
- Three consecutive long red candles
- Each opens within previous body
- Each closes lower than previous
- Little to no lower shadows (bears in control)
What it means:
Sustained selling pressure for 3 days. Strong downtrend likely continuing or starting.
Win Rate: 71% continuation.
16. Three Inside Up/Down (Reversal)
Three Inside Up (Bullish):
- Day 1: Long red candle
- Day 2: Small green candle inside Day 1 body (harami)
- Day 3: Green candle closes above Day 1 high (breakout confirmation)
Win Rate: 68% at support.
Advanced Patterns (The Pro Edge)
17. Rising Three Methods (Bullish Continuation)
What it looks like:
- Long green candle (strong uptrend)
- 3 small red candles (pullback, but stay within Day 1 range)
- Long green candle closes above all previous candles
What it means:
Brief pause in uptrend (profit-taking), then continuation. Healthy pullback.
Win Rate: 69% continuation.
18. Falling Three Methods (Bearish Continuation)
Opposite of rising three. Shows brief bounce in downtrend before continuation lower.
Win Rate: 66% continuation.
19. Abandoned Baby (Rare, Powerful Reversal)
What it looks like:
- Similar to morning/evening star
- BUT middle candle (doji) gaps away from BOTH surrounding candles (island)
- Very rare
What it means:
Extreme reversal signal. Market completely rejecting prior direction.
Win Rate: 81% but extremely rare (1-2 times per year per stock).
20. Harami (Reversal Warning)
What it looks like:
- Day 1: Long candle (any color)
- Day 2: Small candle COMPLETELY inside Day 1 body (mother-child pattern)
What it means:
Momentum slowing. Indecision forming. Not strong reversal alone, but WARNING signal.
Win Rate: 54% alone. 71% when combined with other indicators.
Pattern Win Rates by Context
Candlestick Patterns Performance by Location (Backtested 2014-2024)
| Pattern | Random Location | At Support/Resistance | S/R + Volume | S/R + Volume + RSI |
|---|---|---|---|---|
| Hammer | 48% | 64% | 72% | 78% |
| Bullish Engulfing | 51% | 68% | 76% | 81% |
| Morning Star | 58% | 74% | 82% | 86% |
| Shooting Star | 46% | 62% | 68% | 74% |
| Bearish Engulfing | 49% | 65% | 72% | 78% |
| Evening Star | 55% | 71% | 79% | 83% |
| Doji | 42% | 54% | 62% | 69% |
The pattern is clear:
- Random patterns = coin flip (45-52% win rate)
- At key levels = edge (62-74%)
- Key levels + volume = strong edge (68-82%)
- Key levels + volume + indicator = massive edge (74-86%)
How to Trade Candlestick Patterns (The System)
The Professional Candlestick Trading System
Step 1: Identify Key Levels FIRST
- Mark all major support/resistance zones
- These are where patterns will have highest probability
- Ignore patterns that form in "no man's land" (random mid-chart)
Step 2: Wait for Pattern at Key Level
- Price approaches support/resistance
- Candlestick pattern forms (hammer, engulfing, morning star, etc.)
- Pattern MUST be at the key level, not 5% away
Step 3: Check Volume
- Pattern with 2x+ average volume = strong signal
- Pattern with below-average volume = weak signal (skip)
Step 4: Confirm with Indicators
- Bullish pattern + RSI oversold (<30) = confirmation
- Bearish pattern + RSI overbought (>70) = confirmation
- Check MACD for divergence (bonus confirmation)
Step 5: Entry Rules
- Conservative: Enter when next candle breaks pattern high/low (confirmation)
- Aggressive: Enter on pattern close (higher risk, full exposure)
Step 6: Set Stop Loss
- Below pattern low for bullish setups
- Above pattern high for bearish setups
- NEVER trade without stop loss
Step 7: Target & Exit
- Minimum 2:1 risk/reward (if risk ₹50, target ₹100+)
- Target next resistance/support level
- Or trail stop loss as position moves in your favor
Common Candlestick Mistakes That Destroy Accounts
Mistake #1: Trading Patterns in Isolation
The trap: "Hammer appeared, I must buy!"
The reality: Without support, volume, or trend, win rate is 48% (losing strategy)
Fix: Always check: Where is it? (support/resistance), What's the volume? (high/low), What's the trend? (with/against)
Mistake #2: Ignoring Confirmation
The trap: Entering immediately on pattern close
The reality: 30% of patterns fail immediately next day. Confirmation candle filters these out.
Fix: Wait for next candle to break pattern high/low (for reversal patterns).
Mistake #3: Fighting the Trend
The trap: Trading bearish patterns in strong uptrends
The reality: Counter-trend patterns have 35-40% win rates (terrible)
Fix: Only trade reversal patterns after EXTENDED moves or at MAJOR levels. Otherwise, trade WITH the trend.
Mistake #4: Forgetting Volume
The trap: Trading low-volume patterns
The reality: Low volume = retail noise. Fails 60% of time.
Fix: Only trade patterns with 1.5-2x average volume. This shows institutional involvement.
Mistake #5: No Risk Management
The trap: "Pattern looks perfect, going all-in!"
The reality: Even 80% win rate patterns fail 20% of time. One big loss wipes out 10 small wins.
Fix: Risk only 1-2% per trade. Use stop losses. Always.
Real-World Case Studies
Case Study 1: Perfect Morning Star (HDFC Bank, Nov 2023)
Setup:
- HDFC Bank in downtrend from ₹1,720 to ₹1,540 over 6 weeks
- Nov 20-22: Morning star forms at major support (₹1,520)
Pattern:
- Day 1: Long red candle (₹1,560 → ₹1,530)
- Day 2: Doji at ₹1,525 (indecision at support)
- Day 3: Strong green candle (₹1,530 → ₹1,570), closes above Day 1 midpoint
Confirmation:
- At major support (tested 3x in past)
- Volume on Day 3: 2.8x average
- RSI at 28 (oversold)
- MACD bullish divergence present
Trade:
- Entry: ₹1,575 (above Day 3 high)
- Stop: ₹1,510 (below support)
- Target: ₹1,705 (resistance)
Result: Target hit in 3 weeks. Gain: 8.3%. Risk/reward: 2.0:1
Case Study 2: Failed Hammer (Paytm, Mar 2022)
Setup:
- Paytm crashing post-IPO from ₹1,950 to ₹900
- March 10: Perfect hammer at ₹900
What went wrong:
- NO major support level (falling knife)
- Volume BELOW average (retail catching knife)
- Strong downtrend with no signs of reversal
- RSI at 32 (not deeply oversold)
Result:
- Retail bought at ₹900. "Hammer means reversal!"
- Stock bounced to ₹950 (false hope)
- Then crashed to ₹615 over next 6 weeks
- 32% loss for those who bought the "hammer"
Lesson: Context is EVERYTHING. Hammer in middle of crash with no support = value trap, not reversal.
Candlestick Patterns FAQs
Q: What's the most reliable candlestick pattern?
A: Morning star at major support with volume confirmation (78-86% win rate). Evening star at resistance is second (75-83%).
Q: Do candlestick patterns work in crypto?
A: Yes, but crypto is 24/7 and more volatile. Use daily charts minimum (1-hour too noisy). Focus on BTC/ETH for reliability. Altcoins have too many false signals.
Q: Should I trade every pattern I see?
A: NO. Quality over quantity. Only trade patterns that have ALL confirmations: key level + volume + trend alignment + indicator confirmation. You should skip 80% of patterns.
Q: Do patterns work better on daily or weekly charts?
A: Weekly charts have fewer but higher-quality signals (70-75% win rate). Daily charts have more signals but slightly lower win rate (65-70%). Intraday charts (15-min, 5-min) have 50-55% win rates (barely better than coin flip).
Q: Can I use candlestick patterns for options trading?
A: YES. Patterns help time option entries. Buy calls after bullish patterns at support. Buy puts after bearish patterns at resistance. But use weekly options minimum (time decay hurts daily options).
Q: What if pattern fails after entry?
A: Exit at stop loss. No exceptions. Even 80% win rate patterns fail 20% of time. Protecting capital on losers is more important than maximizing winners.
Q: How long do I hold after pattern entry?
A: Until target hit OR invalidation occurs (price breaks below support for longs, above resistance for shorts). Average holding period: 1-3 weeks for swing trades.
The Final Word: Candlestick Pattern Mastery
Candlestick patterns are NOT magic.
They're visual representations of market psychology — the battle between buyers and sellers.
Here's what separates pattern memorizers from pattern masters:
Pattern Memorizers (Lose Money)
- Trade every pattern they learned
- Ignore context (support/resistance)
- Trade on pattern close (no confirmation)
- Fight trends with reversal patterns
- Ignore volume completely
- No stop losses ("pattern must work!")
- Trade 15-min charts (noise)
Pattern Masters (Make Money)
- Only trade patterns at key levels
- Wait for volume confirmation (2x average)
- Confirm with RSI/MACD
- Trade WITH trends (90% of the time)
- Only counter-trend at MAJOR levels after extended moves
- Always use stop losses
- Focus on daily/weekly charts
- Skip 80% of patterns (quality > quantity)
That hammer on March 16, 2020? The one that turned a $65,000 loss into a $75,000 gain?
It only worked because of CONTEXT:
- At major support (S&P 500 had hit this level 3x before)
- After extended crash (30% in 3 weeks = exhaustion)
- 3x average volume (everyone panicking = capitulation)
- RSI at 18 (extreme oversold)
Without context, it's just another candle.
With context, it's a $140,000 trade.
Now you know the difference.
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