How to Read Candlestick Charts: Patterns Every Forex Trader Should Know
Candlestick charts are the most popular way to view price in forex. Each candle packs four pieces of information into one simple shape, and with a little practice you can read the balance between buyers and sellers at a glance. This guide covers how candles are built, what they tell you, and the patterns worth knowing, along with the context that makes them useful.
Anatomy of a candlestick
Each candle represents one period of time: one minute, one hour, one day or any timeframe you choose. It shows four prices:
- Open – the price at the start of the period.
- High – the highest price reached.
- Low – the lowest price reached.
- Close – the price at the end of the period.
The thick part of the candle is the body, covering the range between open and close. The thin lines above and below are the wicks (or shadows), showing the high and low.
- A bullish candle closes higher than it opened. It is usually green or white.
- A bearish candle closes lower than it opened. It is usually red or black.
What candles tell you
Body size
A long body shows strong, one-sided pressure during the period. A small body shows indecision, with buyers and sellers roughly balanced.
Wick length
Long wicks show rejection. A long lower wick means sellers pushed price down but buyers pushed it back up before the close. A long upper wick shows the opposite. Wicks at important levels are often more meaningful than the colour of the candle.
Where the candle closes
A close near the high of the candle shows buyers were in control at the end of the period. A close near the low shows sellers were in control.
Single-candle patterns
Doji
A doji has a very small body, with open and close almost the same. It shows indecision. After a strong move into a key level, a doji can warn that momentum is fading. In the middle of a range it means very little.
Hammer and hanging man
Both have a small body near the top of the candle and a long lower wick, at least about twice the body length. After a decline, it is called a hammer and suggests buyers are stepping in. After a rally, the same shape is called a hanging man and can warn of weakness.
Shooting star and inverted hammer
These have a small body near the bottom and a long upper wick. After a rally, a shooting star suggests buyers were rejected at higher prices. After a decline, an inverted hammer can hint at a turn upward, though it usually needs confirmation.
Marubozu
A candle with a large body and little or no wick. It shows strong commitment in one direction and often appears at the start of a breakout.
Multi-candle patterns
Bullish and bearish engulfing
A bullish engulfing pattern is a small bearish candle followed by a larger bullish candle whose body completely covers the first. It shows buyers overwhelming sellers. A bearish engulfing pattern is the reverse. These are among the most widely watched reversal patterns, especially at support and resistance.
Pin bar
Price action traders often use the term pin bar for any candle with a long wick and small body that “pins” a level, such as a hammer at support or a shooting star at resistance. The long wick shows a failed attempt to push through the level.
Inside bar
An inside bar is a candle whose high and low are both within the range of the previous candle. It shows contraction and a pause. Traders often wait for price to break out of the larger candle’s range and trade in that direction.
Morning star and evening star
A morning star is a three-candle bullish reversal: a strong bearish candle, a small indecisive candle, then a strong bullish candle that closes well into the first candle’s body. The evening star is the bearish version at the top of a move.
Context matters more than the pattern
A candlestick pattern on its own is weak information. The same hammer can be a strong signal or meaningless noise depending on where it appears. Patterns become more useful when:
- They form at a meaningful level, such as support and resistance, a pivot point, a Fibonacci level or an order block.
- They agree with the larger trend. A bullish pattern at support in an uptrend is stronger than one against a strong downtrend.
- They appear on higher timeframes. A pattern on the daily chart usually carries more weight than one on a 5-minute chart.
- The next candle confirms them. Many traders wait for the following candle to move in the expected direction before entering.
A simple way to trade candlestick patterns
- Mark key support and resistance levels on the 4-hour or daily chart.
- Wait for price to reach one of those levels.
- Look for a clear rejection pattern, such as a pin bar or engulfing candle.
- Enter after the pattern closes, or when the next candle breaks the pattern’s high (for buys) or low (for sells).
- Place the stop loss beyond the wick of the pattern. Read more in our guide on where to place a stop loss.
- Set a target at the next level, and check the ratio with the risk reward calculator.
- Size the trade with the lot size calculator.
Common mistakes
- Trading every pattern you see. Most patterns in the middle of nowhere are noise.
- Entering before the candle closes. A candle can look like a hammer halfway through and close as something completely different.
- Ignoring the timeframe. Low timeframes produce many more false signals.
- Not testing. Go back through your charts and see how a pattern actually performed on your pairs before trusting it with money.
Key takeaways
- Each candle shows the open, high, low and close for one period.
- Body size shows strength. Wicks show rejection.
- Engulfing patterns, pin bars and inside bars are among the most useful patterns.
- Patterns work best at key levels, with the trend, and on higher timeframes.