You see a hammer candle at support. You buy. Price drops another 5%. You see a doji at resistance. You short. Price rockets higher. You curse candlestick patterns and swear they're useless. Meanwhile, another trader sees the exact same patterns and makes money. Same patterns. Different results. The difference? Context. Confirmation. Execution. Candlestick patterns work—but only when you understand what they actually tell you, where they work, and how to trade them properly. Most traders use them wrong. Here's how to use them right.
The Truth About Candlestick Patterns
They're Not Magic
Candlestick patterns aren't secret codes that predict future price. They're snapshots of market psychology. They show you what buyers and sellers did in a specific timeframe. That's it. Whether they predict what happens next depends entirely on context.
A hammer at a major support level after a 20% decline? That's meaningful. Buyers stepped in. Reversal possible.
A hammer in the middle of a consolidation range? Meaningless. Noise.
Same pattern. Different context. Different outcome.
They Need Confirmation
Backtesting shows that candlestick patterns have a win rate around 75% when combined with proper confirmation. Alone? Maybe 50-55%—barely better than a coin flip.
What doesn't work:
- Seeing a pattern and entering immediately
- Trading patterns against the trend
- Ignoring volume and market context
- Setting stops at pattern extremes without room for noise
What works:
- Waiting for confirmation after the pattern completes
- Trading patterns in the direction of the dominant trend
- Confirming with volume, support/resistance, and indicators
- Giving the trade room to breathe
Some Patterns Are Better Than Others
Not all candlestick patterns are created equal. Forty years of backtesting data on 127 patterns reveals significant differences in reliability.
Top performers:
- Morning Star: ~75% success rate
- Bullish Engulfing: ~73% success rate
- Three Inside Up: ~76% win rate in specific conditions
- Hammer (with confirmation): ~63% success rate
Weaker patterns:
- Doji variants: 50-55% (basically neutral)
- Harami patterns: 52-58% (slight edge at best)
- Single candle patterns: Generally less reliable than multi-candle patterns
Lesson: Focus on the patterns with proven edge. Ignore the rest.
The High-Probability Patterns
Pattern 1: Bullish Engulfing
What it looks like:
- Candle 1: Small bearish candle (red)
- Candle 2: Large bullish candle (green) that completely engulfs candle 1's body
What it means: Sellers were in control (candle 1). Buyers took over aggressively (candle 2). The shift was decisive, not gradual. Bullish momentum building.
Where it works best:
- At major support levels
- After a pullback in an uptrend
- At the end of a downtrend (potential reversal)
- When volume expands on the engulfing candle
How to trade it:
Entry:
- Wait for the engulfing candle to close
- Don't anticipate mid-candle—wait for confirmation
- Enter on a pullback to the engulfing candle's midpoint or on a break above its high
Stop loss:
- Below the engulfing candle's low
- Or below the support level the pattern formed at
Target:
- Next resistance level
- Or 2:1 reward-to-risk ratio minimum
Example:
Stock XYZ has been in a downtrend from $60 to $50. At $50, there's major support from previous price action.
Day 1: Small red candle closes at $50.20 Day 2: Large green candle opens at $49.80, rallies to $52, closes at $51.50—engulfing day 1 completely.
This is your bullish engulfing. Enter on a pullback to $50.50-$51. Stop below $49.80. Target $55 (next resistance).
Why it works: The pattern shows a clear shift from sellers to buyers. The small red candle represents the last gasp of the downtrend. The large green candle shows buyers taking control with force.
Pattern 2: Bearish Engulfing
What it looks like:
- Candle 1: Small bullish candle (green)
- Candle 2: Large bearish candle (red) that completely engulfs candle 1's body
What it means: Buyers were in control (candle 1). Sellers took over aggressively (candle 2). The uptrend is losing steam. Reversal possible.
Where it works best:
- At major resistance levels
- After a rally in a downtrend
- At the end of an uptrend (potential reversal)
- When volume expands on the engulfing candle
How to trade it:
Entry:
- Wait for the engulfing candle to close
- Enter on a pullback to the engulfing candle's midpoint or on a break below its low
Stop loss:
- Above the engulfing candle's high
- Or above the resistance level the pattern formed at
Target:
- Next support level
- Or 2:1 reward-to-risk ratio minimum
Example:
Stock ABC rallied from $80 to $100. At $100, there's major resistance from previous highs.
Day 1: Small green candle closes at $99.80 Day 2: Large red candle opens at $100.20, drops to $96, closes at $97—engulfing day 1 completely.
This is your bearish engulfing. Enter on a pullback to $98-$99. Stop above $100.20. Target $90 (next support).
Pattern 3: Morning Star (Bullish Reversal)
What it looks like:
- Candle 1: Large bearish candle (downtrend continues)
- Candle 2: Small candle with small body (indecision)—can be bullish, bearish, or neutral
- Candle 3: Large bullish candle that closes well into candle 1's body
What it means: Strong downtrend (candle 1). Pause/indecision (candle 2). Strong bullish reversal (candle 3). The downtrend is exhausted. Buyers taking control.
Where it works best:
- At the end of a sustained downtrend
- At major support levels
- When volume is lowest on candle 2 and highest on candle 3
How to trade it:
Entry:
- Wait for candle 3 to close and confirm the pattern
- Enter on a pullback to candle 3's midpoint or on a break above its high
- Most conservative: Wait for a pullback after candle 3 completes
Stop loss:
- Below the low of candle 2 (the star)
- Or below the support level
Target:
- 50% retracement of the prior downtrend
- Or 2:1 reward-to-risk ratio
Example:
Stock DEF dropped from $120 to $100 over three weeks.
Day 1: Large red candle closes at $102 (downtrend continues) Day 2: Small doji candle at $101.50 (indecision—sellers exhausted?) Day 3: Large green candle opens at $101, rallies to $108, closes at $107
This Morning Star signals reversal. Enter on pullback to $104-$105. Stop below $101. Target $110.
Why Morning Star is reliable: It captures the transition from bearish → indecision → bullish in three clear candles. The middle candle (star) represents the point of maximum bearish exhaustion. The third candle confirms buyers have taken over.
Pattern 4: Evening Star (Bearish Reversal)
What it looks like:
- Candle 1: Large bullish candle (uptrend continues)
- Candle 2: Small candle with small body (indecision)
- Candle 3: Large bearish candle that closes well into candle 1's body
What it means: Strong uptrend (candle 1). Pause/indecision (candle 2). Strong bearish reversal (candle 3). The uptrend is exhausted. Sellers taking control.
Where it works best:
- At the end of a sustained uptrend
- At major resistance levels
- When volume confirms the reversal (drops on candle 2, expands on candle 3)
How to trade it:
Entry:
- Wait for candle 3 to close and confirm the pattern
- Enter on a pullback to candle 3's midpoint or on a break below its low
Stop loss:
- Above the high of candle 2 (the star)
- Or above the resistance level
Target:
- 50% retracement of the prior uptrend
- Or 2:1 reward-to-risk ratio
Pattern 5: Hammer (Bullish Reversal at Support)
What it looks like:
- Small body at the top of the candle's range
- Long lower shadow (at least 2× the body length)
- Little to no upper shadow
- Can be bullish or bearish body color (doesn't matter much)
What it means: Price pushed lower during the session. Buyers rejected those lower prices and pushed back up. The lower shadow shows sellers tried—buyers overwhelmed them. Support found.
Where it works best:
- At major support levels
- After a decline (not in the middle of nowhere)
- When the lower shadow is clearly defined (not a messy wick)
- When volume is above average (shows commitment)
How to trade it:
Entry:
- Wait for the hammer to close (don't anticipate)
- Wait for confirmation: next candle breaks above the hammer's close or high
- Enter on the break or on a pullback to the hammer's close
Stop loss:
- Below the hammer's low (the bottom of the shadow)
Target:
- Next resistance level
- Or 2:1 reward-to-risk ratio
Critical: Don't enter immediately on the hammer. Wait for confirmation. Backtesting shows hammers have a ~63% success rate with confirmation, significantly less without it.
Example:
Stock GHI fell from $80 to $70. At $70, there's major support.
Session opens at $72, drops to $68 (long lower shadow), rallies to close at $71.50. This is a hammer.
Next day: Price opens at $71.80, breaks above $71.50. Enter long. Stop below $68. Target $75.
Why hammers work: They show rejection of lower prices. The market tried to go lower, couldn't hold there, and bounced back. The long lower shadow represents buyers stepping in aggressively at that level.
Pattern 6: Shooting Star (Bearish Reversal at Resistance)
What it looks like:
- Small body at the bottom of the candle's range
- Long upper shadow (at least 2× the body length)
- Little to no lower shadow
- Can be bullish or bearish body color
What it means: Price pushed higher during the session. Sellers rejected those higher prices and pushed back down. The upper shadow shows buyers tried—sellers overwhelmed them. Resistance found.
Where it works best:
- At major resistance levels
- After a rally (not in the middle of consolidation)
- When the upper shadow is clearly defined
- When volume is above average
How to trade it:
Entry:
- Wait for the shooting star to close
- Wait for confirmation: next candle breaks below the shooting star's close or low
- Enter on the break or on a pullback to the shooting star's close
Stop loss:
- Above the shooting star's high (the top of the shadow)
Target:
- Next support level
- Or 2:1 reward-to-risk ratio
Critical: Like hammers, shooting stars require confirmation. Don't short immediately upon seeing the pattern.
The Golden Rules of Candlestick Trading
Rule 1: Context is King
A bullish engulfing pattern in the middle of a consolidation range is noise. The same pattern at major support after a 15% decline is gold.
Before trading any candlestick pattern, ask:
Where is price in the bigger picture?
- Near support? Bullish patterns work better
- Near resistance? Bearish patterns work better
- Middle of range? Patterns are less reliable
What's the trend?
- Uptrend: Focus on bullish continuation patterns
- Downtrend: Focus on bearish continuation patterns
- Range: Fade the extremes with reversal patterns
What's the volatility?
- Low volatility: Patterns are more reliable
- High volatility: Patterns are less reliable (need wider stops)
Rule 2: Wait for Confirmation
The pattern must complete before you enter. Not before. Not during. After.
What counts as confirmation?
For bullish patterns:
- Next candle breaks above the pattern's high
- Next candle closes higher with volume
- Price pulls back to the pattern area and holds
For bearish patterns:
- Next candle breaks below the pattern's low
- Next candle closes lower with volume
- Price pulls back to the pattern area and rejects
Example:
You see a bullish engulfing form. The green candle is currently at $52, engulfing the previous red candle at $50.
Don't enter now. Wait.
The candle closes at $52. Still don't enter.
Next candle opens at $51.50, drops to $51. Don't enter yet—it's pulling back.
The candle rallies to $52.50, breaking the engulfing candle's high of $52. NOW you can enter.
You waited for the pattern to complete AND for confirmation. That's how you trade candlesticks properly.
Rule 3: Volume Matters
Candlestick patterns with volume expansion are more reliable than patterns on low volume.
Bullish patterns:
- Volume should expand on the bullish signal candle
- Shows buyers are stepping in with size
Bearish patterns:
- Volume should expand on the bearish signal candle
- Shows sellers are stepping in with size
Indecision candles (dojis, spinning tops):
- Volume should contract
- Shows the move is exhausted—nobody wants to buy or sell at these prices
Example:
A hammer forms at support.
- Scenario A: Volume is 2× the average. Buyers committed. Reversal likely.
- Scenario B: Volume is 0.5× the average. Weak rejection. Reversal less likely.
Rule 4: Use Multiple Timeframes
A hammer on the daily chart is more significant than a hammer on the 5-minute chart. A Morning Star on the weekly chart? That's major.
Best practice:
- Identify patterns on higher timeframes (daily, 4-hour)
- Time your entries on lower timeframes (hourly, 15-minute)
- Look for alignment across timeframes
Example:
Daily chart shows a bullish engulfing at support. 4-hour chart shows a hammer forming at the same level. Hourly chart breaks above the hammer's high.
Three timeframes aligned. High-probability setup.
Rule 5: Combine with Support and Resistance
Candlestick patterns + support/resistance = edge.
Bullish patterns + support:
- Bullish engulfing at support = high probability
- Hammer at support = high probability
- Morning Star at support = very high probability
Bearish patterns + resistance:
- Bearish engulfing at resistance = high probability
- Shooting star at resistance = high probability
- Evening Star at resistance = very high probability
Why it works: Support and resistance are where buyers and sellers have historically stepped in. Candlestick patterns show you what they're doing this time. Together, they're powerful.
Rule 6: Combine with Other Indicators
Candlestick patterns work best when confirmed by other indicators.
MACD:
- Bullish engulfing + MACD bullish crossover = stronger signal
- Bearish engulfing + MACD bearish crossover = stronger signal
RSI:
- Bullish pattern at support + RSI oversold = stronger signal
- Bearish pattern at resistance + RSI overbought = stronger signal
Moving averages:
- Bullish pattern at rising 50-day MA = stronger signal
- Bearish pattern at declining 50-day MA = stronger signal
Don't overload: 2-3 confirmations is enough. More than that is analysis paralysis.
Candlestick Pattern Traps
Trap 1: Trading Patterns Against the Trend
Setup: Downtrend. You see a hammer. You buy.
Reality: The downtrend resumes. You get stopped out.
Lesson: Reversal patterns work best when the trend is exhausted (after a long move) or at major levels. Counter-trend trading in the middle of a trend is expensive.
Trap 2: Anticipating Patterns
Setup: The current candle is forming a bullish engulfing. You buy immediately.
Reality: The candle reverses and closes red. It wasn't an engulfing at all. You're now in a losing trade.
Lesson: Never enter before the pattern completes. Wait for the candle to close. Wait for confirmation. Patience pays.
Trap 3: Ignoring Time of Day
Setup: You see a perfect bullish engulfing at 9:45 AM (first 15 minutes of market open).
Reality: It was a false signal driven by overnight order flow and opening noise.
Lesson: The first 15-30 minutes of trading are chaotic. Candlestick patterns during this time are less reliable. Wait for the market to establish a real direction.
Trap 4: Forgetting the Overall Market
Setup: You see a bullish engulfing in an individual stock.
Reality: The overall market is crashing. Your stock gets dragged down regardless of its pattern.
Lesson: Trade candlestick patterns in the direction of the overall market. If the market is bearish, focus on bearish patterns or don't trade. If the market is bullish, focus on bullish patterns.
Trap 5: Overtrading Patterns
Setup: You see a hammer. Then a doji. Then another hammer. You trade them all.
Reality: You're overtrading. Commission costs pile up. Quality suffers.
Lesson: Only trade A+ patterns. Perfect location. Perfect confirmation. Perfect context. Pass on everything else.
Practical Candlestick Trading Checklist
Before entering any candlestick pattern trade, run through this checklist:
Pattern Quality:
- [ ] Is the pattern clearly formed? (no squinting)
- [ ] Is the body size proportional? (not too small, not too large)
- [ ] Are the shadows well-defined? (not messy wicks)
- [ ] Has the candle closed? (confirmation complete)
Context:
- [ ] Is price at a key support or resistance level?
- [ ] Is the pattern aligned with the dominant trend?
- [ ] Is this pattern in a location where similar patterns worked before?
- [ ] Is volatility normal? (not too high, not too low)
Confirmation:
- [ ] Has the next candle confirmed the signal?
- [ ] Is volume confirming the move?
- [ ] Are other indicators (MACD, RSI, MA) aligned?
- [ ] Are multiple timeframes aligned?
Risk Management:
- [ ] Is my stop placement logical? (beyond the pattern extreme)
- [ ] Is my target at least 2:1 reward-to-risk?
- [ ] Is my position size correct for the stop distance?
- [ ] What's my maximum loss if stopped out?
Market Conditions:
- [ ] Is the overall market supporting this trade?
- [ ] Am I trading during active hours? (avoid lunch session, first/last 15 minutes)
- [ ] Are there upcoming news/events that could disrupt the setup?
- [ ] Am I calm and focused? (not emotional, tired, or distracted)
If all boxes are checked: Enter. If any box is unchecked: Pass.
Advanced Techniques
Pattern Inside a Pattern
Sometimes you'll find multiple patterns forming at the same level.
Example:
Daily chart shows a bullish engulfing at support. Inside that engulfing, the 4-hour chart forms a hammer. The hourly chart breaks above both patterns.
This is pattern confluence—multiple signals aligned. Higher probability.
Failed Pattern as a Signal
Sometimes the failure of a pattern is itself a signal.
Example:
A perfect bullish engulfing forms at support. You wait for confirmation. Price breaks below the engulfing's low instead of above its high. The pattern failed.
The opportunity: The failure is bearish. Everyone who bought the pattern is now trapped. Their stops are above the pattern. Consider a short position with a stop above the engulfing's high.
Why it works: Failed patterns trap traders. Trapped traders forced to exit fuel moves in the opposite direction.
Measured Moves from Patterns
Some patterns project price targets.
Example:
A bullish engulfing forms at $100. The engulfing candle's range is $98-$102 (4 points). Target: Entry at $101 (break above engulfing high) + 4 points = $105.
Or: Use the height of the pattern as a measuring stick for the projected move.
This works best with clear, well-defined patterns like engulfing candles and Morning/Evening Stars.
Key Takeaways
- Candlestick patterns aren't magic—they're snapshots of market psychology
- Patterns need confirmation, context, and proper execution to work reliably
- Focus on high-probability patterns: Morning Star (~75% win rate), Bullish Engulfing (~73%), Hammer with confirmation (~63%)
- Always wait for the pattern to complete before entering—no anticipation
- Trade patterns at support/resistance for the highest probability
- Wait for confirmation after the pattern: next candle break, volume expansion, or pullback
- Volume matters—patterns with volume expansion are more reliable
- Use multiple timeframes: identify patterns on higher timeframes, time entries on lower timeframes
- Combine with support/resistance and other indicators (MACD, RSI, moving averages)
- Avoid common traps: trading against the trend, anticipating patterns, ignoring market context
- Use a practical checklist before entering any candlestick trade
- Consider advanced techniques: pattern confluence, failed patterns, measured moves
- Remember: location, context, and confirmation matter more than the pattern itself
Candlestick patterns give you a window into market psychology. They show you when buyers and sellers are shifting. But patterns alone don't make money. Smart traders use patterns as one piece of a complete trading approach—combined with context, confirmation, risk management, and discipline.
The pattern is the signal. Everything else determines whether that signal becomes profit or loss.
Trade patterns wisely. Not blindly.
ChartMini automatically identifies candlestick patterns, checks them against key support/resistance levels, and alerts you only when high-probability setups with proper confirmation appear.