Some candle shapes have well-known names: the doji, the hammer, the engulfing pattern and others. Each describes a tug of war between buyers and sellers. What matters is knowing what it describes, and when it means nothing.
What you will learn
Recognize five of the best-known candlestick patterns and what each describes.
Understand why where a pattern appears matters more than its shape.
See why a pattern alone is not enough, and can fail.
The lesson as a short video · 27 seconds · Watch on YouTubeIn this lesson
These names come from an old tradition of reading candles, and each describes what happened over one or two sessions. Do not treat them as signals. Treat them as short descriptions of the market at one moment.
DojiOpen and close almost equal: a stand-off
HammerLong lower wick: the price fell and came back
Shooting starLong upper wick: the price rose and came back
Bullish engulfingA green body covers the red one before it
Bearish engulfingA red body covers the green one before it
Five well-known patterns. The stocks are invented and the shapes drawn to illustrate.
DojiThe open and close are about the same price, often with long wicks. The session ended in a stand-off.
HammerA small body on top and a long lower wick. Sellers pushed the price down; buyers brought it back before the close.
Shooting starThe mirror of the hammer: a small body at the bottom and a long upper wick. Buyers lifted the price; sellers pushed it back.
EngulfingTwo candles: the second body is larger, covers the first and has the opposite color. It describes the other side taking over a full session.
ExampleA candle for an invented stock: it opened at 12.00, fell to 11.20, closed at 12.10, with a high of 12.15. The body is only EGP 0.10; the lower wick is EGP 0.80, eight times the body. That is a hammer: the price fell about 6.7% during the session and still closed above its open.
Location matters more than shape
The same shape can mean something in one place and nothing in another. A hammer that appears after a long fall, at a zone the price bounced from before, describes buyers showing up where you might expect them. The same hammer in the middle of a quiet sideways drift usually says nothing.
A hammer after a long fall
It has context, and the next candle closed higher
The same shape in the middle of a sideways drift
No context: it usually says little
The same hammer shape twice. Context is what gives the shape meaning.
The candle after the pattern matters too. Many people who use patterns wait for the next session to back up the reading, for example by closing above the hammer. Waiting reduces surprises, but it also means you see the move a little later.
Watch outNo candlestick pattern works every time. How patterns perform varies with the market, the period and the context. In a thinly traded stock, a single trade can draw a hammer or a shooting star that means nothing.
Look for a pattern on a real chart
Open the candle chart of any stock and look for a hammer or an engulfing pattern. Ask yourself: where did it appear, and what happened in the next session?