Each candlestick records the battle between buyers and sellers in a single period. Learning to read these patterns gives you an edge on entries and exits. These are the patterns that matter for swing trading.
Understanding Candlestick Anatomy
Candlestick Components
Body: The filled/hollow part showing open-to-close range
- Green/White body: Close above open (bullish)
- Red/Black body: Close below open (bearish)
Wicks/Shadows: Lines above and below the body
- Upper wick: Distance from body to high
- Lower wick: Distance from body to low
What Candles Tell You
- Long body: Strong conviction in direction
- Short body: Indecision or consolidation
- Long upper wick: Sellers pushed price down from highs
- Long lower wick: Buyers pushed price up from lows
Single Candlestick Patterns
The Hammer (Bullish)
Appearance: Small body at top, long lower wick (2x body length), little or no upper wick
Meaning: Sellers pushed price down but buyers fought back to close near highs
Where to Find It: At the bottom of downtrends, at support levels
How to Trade:
- Identify hammer at support or after downtrend
- Wait for next candle to confirm (closes above hammer high)
- Enter with stop below hammer low
The Shooting Star (Bearish)
Appearance: Small body at bottom, long upper wick, little or no lower wick
Meaning: Buyers pushed price up but sellers took control to close near lows
Where to Find It: At the top of uptrends, at resistance levels
How to Trade:
- Identify shooting star at resistance or after uptrend
- Wait for next candle to confirm (closes below shooting star low)
- Exit longs or enter shorts
The Doji (Indecision)
Appearance: Open and close are nearly the same, creating cross-like pattern
Types of Doji:
- Standard Doji: Equal upper and lower wicks
- Gravestone Doji: Long upper wick (bearish at top)
- Dragonfly Doji: Long lower wick (bullish at bottom)
Meaning: Balance between buyers and sellers, indecision
How to Trade: Wait for next candle to determine direction. Doji at extremes often precedes reversals.
The Marubozu (Strong Momentum)
Appearance: Long body with no wicks (or very small wicks)
Meaning: Complete dominance by buyers (bullish) or sellers (bearish)
How to Trade:
- Bullish Marubozu: Strong buy signal, expect continuation
- Bearish Marubozu: Strong sell signal, expect continuation
Two-Candlestick Patterns
Bullish Engulfing
Appearance: Red candle followed by larger green candle that engulfs the red body
Meaning: Buyers overwhelmed sellers, potential reversal
Requirements:
- First candle is bearish
- Second candle opens below first close
- Second candle closes above first open
- Second candle body engulfs first
How to Trade:
- Find at support or after downtrend
- Enter on close of engulfing candle or next day open
- Stop below the pattern low
- Target next resistance
Bearish Engulfing
Appearance: Green candle followed by larger red candle that engulfs the green body
Meaning: Sellers overwhelmed buyers, potential reversal
How to Trade:
- Find at resistance or after uptrend
- Exit longs or enter shorts
- Stop above the pattern high
Piercing Pattern (Bullish)
Appearance: Red candle followed by green candle that opens below the red low but closes above the red midpoint
Meaning: Buyers stepping in despite opening weakness
How to Trade: Similar to bullish engulfing but less powerful
Dark Cloud Cover (Bearish)
Appearance: Green candle followed by red candle that opens above the green high but closes below the green midpoint
Meaning: Sellers taking control despite opening strength
How to Trade: Exit longs or prepare for shorts
Three-Candlestick Patterns
Morning Star (Bullish Reversal)
Appearance:
- Long red candle (downtrend continues)
- Small body candle (indecision/doji)
- Long green candle (reversal confirmed)
Meaning: Sellers exhausted, buyers taking control
How to Trade:
- Find after significant downtrend
- Enter on close of third candle
- Stop below pattern low
- Strong reversal signal
Evening Star (Bearish Reversal)
Appearance:
- Long green candle (uptrend continues)
- Small body candle (indecision/doji)
- Long red candle (reversal confirmed)
Meaning: Buyers exhausted, sellers taking control
How to Trade:
- Find after significant uptrend
- Exit longs on third candle
- Strong reversal signal
Three White Soldiers (Bullish Continuation)
Appearance: Three consecutive long green candles, each opening within previous body and closing higher
Meaning: Sustained buying pressure
How to Trade: Strong bullish signal, look for entries on pullback
Three Black Crows (Bearish Continuation)
Appearance: Three consecutive long red candles, each opening within previous body and closing lower
Meaning: Sustained selling pressure
How to Trade: Exit longs, strong bearish signal
Context Matters Most
Where Patterns Appear
The same pattern means different things in different locations:
Hammer at support: High probability reversal signal Hammer in middle of range: Less significant Hammer at resistance: Likely not valid
Trend Context
In uptrend: Bullish patterns more reliable, bearish patterns may be pullbacks In downtrend: Bearish patterns more reliable, bullish patterns need strong confirmation
Volume Confirmation
High volume on pattern: More significant, higher probability Low volume on pattern: Less reliable, wait for confirmation
Trading Candlestick Patterns
Entry Rules
- Identify pattern at significant level
- Wait for confirmation (next candle)
- Check volume (higher is better)
- Enter with clear stop (below/above pattern)
Stop Loss Placement
Reversal patterns: Stop beyond the pattern extreme
- Hammer: Stop below hammer low
- Shooting star: Stop above shooting star high
- Engulfing: Stop beyond engulfing pattern
Position Sizing
Calculate position size based on stop distance, not how exciting the pattern looks.
Common Candlestick Mistakes
Mistake 1: Trading Patterns in Isolation
Problem: Seeing hammer and buying without context Solution: Consider location, trend, and volume together
Mistake 2: Not Waiting for Confirmation
Problem: Entering on pattern appearance alone Solution: Wait for next candle to confirm
Mistake 3: Ignoring Pattern Size
Problem: Trading small, insignificant patterns Solution: Look for patterns with meaningful candle sizes
Mistake 4: Overcomplicating
Problem: Looking for obscure patterns Solution: Master the basics (hammer, engulfing, doji, star)
Candlestick Pattern Quick Reference
| Pattern | Type | Signal | Reliability |
|---|---|---|---|
| Hammer | Single | Bullish reversal | High at support |
| Shooting Star | Single | Bearish reversal | High at resistance |
| Doji | Single | Indecision | Medium |
| Bullish Engulfing | Double | Bullish reversal | High |
| Bearish Engulfing | Double | Bearish reversal | High |
| Morning Star | Triple | Bullish reversal | Very High |
| Evening Star | Triple | Bearish reversal | Very High |
From Patterns to Performance
Context, location, trend, and volume do more work than the pattern itself. Wait for confirmation before entering, and focus on setups at support and resistance. Master hammers, engulfing patterns, doji, and stars before branching out.
Log your pattern-based trades in SwingFolio and tag each entry by setup type. Over time, you will see which patterns produce your best win rates.