Trading Candlestick Patterns
- What Are Trading Candlestick Patterns and How to Read Them?
- Candlestick Features
- Types of Candlestick Patterns
- Bullish Candlestick Patterns
- Bearish Candlestick Patterns
- Advanced Candlestick Patterns
- Candlestick Pattern Failures and False Signals
- Statistical Evidence and Success Rates of Candlestick Patterns
- Final Word – Trade with AvaTrade
What Are Trading Candlestick Patterns and How to Read Them?
Candles have served humans as sources of light (and sometimes fragrance) for centuries, ever since they were invented. In the financial markets, their purpose can arguably be said to be similar; they light up the path of the asset price and can help traders to detect the good smell of profits. Candlesticks provide comprehensive price information at any time. While line charts represent a smoothed line of closing prices, candlesticks show the opening, closing, high and low prices of any time period. The opening and closing price will be represented by the body of a candlestick, while the extreme (high and low) prices will be represented by wicks. Usually, a candle will be coloured green if the closing price is higher than the opening price; and red, if the closing price is lower than the opening price.
Because of the amount of information they provide, candlesticks form the basis of technical analysis. The size and shape of a candlestick tell an important price action story. This is why traders look for candlestick patterns when trading. A candlestick pattern can be a single or a series of multiple candlesticks that give a comprehensive picture of market sentiment. Depending on where they form on a chart, candlestick patterns help traders to understand the price action of the underlying financial asset to pick out potentially lucrative trading opportunities.
Candlestick Features
When analysing chart patterns, the following factors help to put the prevailing price action in context:
- Body Length
The length of a candlestick body represents the distance between the closing and opening prices during a particular time period. Long bodies imply a strong directional movement, while short bodies are an indication of indecision among investors in the market. - Wick Length
Candlestick wicks show the high and low prices achieved during a particular time period. In essence, they show how volatile prices were during that time period. Wick length is analysed relative to body position. For instance, a candlestick with a long lower wick shows that bears tried to push the price lower, but bulls resisted their pressure and drove the price higher. The prior trend is also taken into account when interpreting candlestick patterns. The broader context must be considered because candlestick patterns do not form in isolation.
Types of Candlestick Patterns
Candlestick patterns are classified according to the types of signals they provide as well as the number of candlesticks that constitute any particular pattern. Thus, there are bullish and bearish patterns, reversal and continuation patterns, as well as single candlestick patterns, dual candlestick patterns and triple candlestick patterns. When analysing candlestick patterns, it is important to understand the basic candlesticks that explain market psychology. These include:
- Spinning Tops
Spinning tops have small bodies but very long lower and upper wicks. The small body implies that there is little difference between the opening and closing prices, while long wicks imply that prices reached extremes in both directions. Spinning tops show that buyers and sellers had a tussle within the time period, with neither group gaining any particular advantage.
- Marubozu
Marubozu candlesticks have long bodies but have no wicks. This means that a green Marubozu will have a similar open and low price as well as a similar close and high price. A green Marubozu is an indication that bulls were in complete control during that particular time period. On the other hand, a red Marubozu will have a similar open and high price as well as a similar close and low price. A red Marubozu indicates that bears were in complete control during that time period.
- Doji
Doji candlesticks have long wicks but virtually non-existent bodies. This means that opening and closing prices are practically similar. Doji candlesticks denote that neither buyers nor sellers were able to gain an edge during any particular time period. Still, there are different types of doji candlesticks that may provide different alternative price action stories, depending on the position of the wicks.
Bullish Candlestick Patterns
Bullish candlestick patterns occur when prices drift lower and they signal that prices are about to turn or continue higher.
Here are some of the most common bullish candlestick patterns:
Single Candlestick Patterns
These are bullish candlestick patterns that may be described as ‘lone rangers’ because only one candlestick provides the signal. The most common bullish candlestick patterns are:
- Hammer
The hammer candlestick has a small body at the upper end of the trading range and a long lower wick. It forms during a downtrend and indicates that sellers tried to push the prices lower, but buyers stepped in to drive prices to near the opening price. The sellers ‘literally’ hammered out a bottom in the market. The hammer candlestick is an indication that buyers are ready to take charge of subsequent time periods.
- Inverted Hammer
The inverted hammer candlestick has a small body at the lower end of the trading range and a long upper wick. It forms during a downtrend and indicates that buyers have tried to drive the price higher, but sellers stepped in to push it lower. Still, sellers lacked the momentum to take out the low of the time period. The inverted hammer thus signals that buyers could be buoyed by the weakness of the sellers and may take control in subsequent time periods.
Dual Candlestick Patterns
These are candlestick patterns that require two consecutive candlesticks to provide trading signals. Here are some of the most common bullish dual candlestick patterns:
- Tweezer Bottoms
A tweezer bottom will form after a decline in prices and consists of two candlesticks with bodies at the upper end of the trading range and long lower wicks of almost similar lengths. The first candlestick is usually red, while the second one is usually green. The tweezer bottom candlestick pattern indicates that sellers initially pressured prices lower but faced resistance from buyers who pushed prices higher. The sellers tried again but they were finally overpowered by buyers who pushed prices higher than the opening price.
- Bullish Engulfing Pattern
A bullish engulfing pattern is a 2-candlestick formation that will form during a downtrend. The first candlestick will be a bearish one and the second one will be a bullish candlestick that will ‘engulf’ the body of the first one. This means that the open and close prices of the first candlestick will fall within the trading range of the second candlestick. A bullish engulfing pattern indicates that sellers drove prices lower during the first candlestick, but buyers completely overwhelmed them during the second candlestick, as they pushed prices beyond the high of the first candlestick.
Triple Candlestick Patterns
These are candlestick patterns that require three consecutive candlesticks to provide trading signals. Here are some of the most common bullish triple candlestick patterns:
- Morning Star
The morning star is a 3-candlestick pattern that forms in a downtrend as follows: the first candle is bearish; the second candle has a small body, and the third candle is bullish and closes beyond the midpoint of the first candle. The morning star indicates that sellers were in control during the first candlestick, but there was indecision during the second candlestick; the battle was eventually won by buyers on the third candlestick, as they pushed prices higher.
- Three White Soldiers
The three white soldiers pattern forms when there are three consecutive bullish candlesticks in the market. Each candlestick opens within the body of the preceding candlestick and closes beyond its high price. The first candlestick is known as the reversal candlestick, with the following two candlesticks confirming a bullish momentum in the market.
Bearish Candlestick Patterns
Bearish candlestick patterns form in an uptrend or when prices edge higher. They signal that prices are about to turn or continue lower.
Here are some of the most common bearish candlestick patterns:
Single Candlestick Patterns
Here are some of the most common bearish single candlestick patterns:
- Shooting Star
The shooting star candlestick has a small body at the lower end of the trading range and a long upper wick. It forms during an uptrend and indicates that buyers tried to drive prices higher, but sellers stepped in to pressure prices lower to near the opening price. The shooting star candlestick is a sign that sellers are ready to be in control during the succeeding time periods.
- Hanging Man
The hanging man candlestick has a small body at the upper end of the trading range and a long lower wick. It forms during an uptrend and indicates that sellers tried to pressure the price lower, but buyers stepped in to support it higher. However, the buyers could only push it to near the open price. Therefore, the hanging man signals that sellers are outnumbering buyers and prices may be pressured lower in subsequent time periods.
Dual Candlestick Patterns
Here are some of the most common bearish dual candlestick patterns:
- Tweezer Tops
A tweezer top will form in an uptrend and consists of two candlesticks with bodies at the lower end of the trading range and long upper wicks of almost similar lengths. The first candlestick is bullish, while the second one is bearish. The tweezer top candlestick pattern indicates that buyers initially pushed prices higher, but sellers managed to pressure the prices lower. Another attempt by buyers to push the price higher was completely thwarted by short sellers who pressured the prices lower than the open price.
- Bearish Engulfing Pattern
A bearish engulfing pattern is a 2-candlestick formation that will form in an uptrend. The first candlestick is bullish, while the second one is a bearish candlestick that will ‘engulf’ the body of the first one. A bearish engulfing pattern indicates that buyers pushed the prices higher during the first candlestick, but sellers overpowered them during the second candlestick, pressuring the prices lower beyond the low of the first candlestick.
Triple Candlestick Patterns
Here are some of the most common bearish triple candlestick patterns:
- Evening Star
The evening star is a 3-candlestick pattern that forms in an uptrend as follows: the first candle is bullish; the second candle has a small body, and the third candle is bearish and closes beyond the midpoint of the first candle. The evening star indicates that buyers were in control during the first candlestick, followed by indecision during the second candlestick; the sellers eventually took charge in the third candlestick and pressured the prices lower.
- Three Black Crows
The three black crows pattern forms when there are three consecutive bearish candlesticks in the market. Each candlestick opens within the body of the preceding candlestick and closes beyond its low price. The first candlestick is known as the reversal candlestick, with the following two candlesticks serving as confirmation of bearish momentum in the market.
Advanced Candlestick Patterns Traders Should Know
While basic candlestick patterns like Doji and Engulfing patterns are widely recognised, more advanced formations provide additional insight into market sentiment.
Below, we explore two powerful yet often overlooked candlestick patterns: Rising and Falling Three Methods and Abandoned Baby.
Rising and Falling Three Methods – Continuation Patterns
The Rising Three Methods and Falling Three Methods are reliable continuation patterns that indicate a temporary pause in a trend before resumption.
- Rising Three Methods (Bullish Continuation)
- Appears in an uptrend.
- Consists of a long bullish candle, followed by three or more small-bodied bearish candles that stay within the range of the first candle.
- The pattern concludes with another strong bullish candle, confirming the uptrend’s continuation.
Why it Works: The brief retracement reflects weak selling pressure, allowing buyers to regain control.
- Falling Three Methods (Bearish Continuation)
- Appears in a downtrend.
- Begins with a long bearish candle, followed by three or more small-bodied bullish candles that stay within the range of the first candle.
- Ends with another strong bearish candle, confirming the continuation of the downtrend.
Why it Works: The small bullish candles indicate weak buying momentum, giving sellers the upper hand.
Key Takeaway: This pattern works best in trending markets and is more effective when supported by strong volume with the final confirmation candle.
Abandoned Baby – A Rare but Powerful Reversal Signal
The Abandoned Baby pattern is a rare yet highly reliable reversal formation, appearing at both market tops and bottoms.
- Bullish Abandoned Baby
- Occurs at the end of a downtrend.
- Features a large bearish candle, followed by a small-bodied Doji (with a gap), and then a strong bullish candle.
- The gap between the Doji and the two surrounding candles indicates a sharp sentiment shift from sellers to buyers.
- Bearish Abandoned Baby
- Appears at the end of an uptrend.
- Forms with a strong bullish candle, followed by a Doji that gaps away from the first candle, and ends with a strong bearish candle.
- The pattern signifies buyer exhaustion and a shift toward bearish control.
Key Takeaway: The Abandoned Baby pattern is particularly effective in volatile market conditions. Its reliability increases when confirmed by higher volume on the third candle.
Distinguishing between the Abandoned Baby and the Morning Star patterns.
The Abandoned Baby has a clear price gap between the Doji and adjacent candles, whereas the Morning Star often does not.
Candlestick Pattern Failures and False Signals
While candlestick patterns provide valuable insights into price action, they are not foolproof.
Many traders fall into the trap of blindly trusting patterns without considering market context. This section explores why patterns fail, how to filter out false signals, and ways to enhance accuracy.
Why Do Candlestick Patterns Fail?
Even the most well-known candlestick patterns can fail due to market noise, liquidity issues, or misleading price movements. Below are the primary reasons for pattern failures:
- False Breakouts and Market Noise
- Scenario: Candlestick patterns often fail when the price momentarily breaks key levels before reversing.
- Example: A bullish engulfing pattern might look promising but could be part of a larger downtrend fake-out.
- Solution: Use confirmation indicators, such as RSI divergence, to validate the breakout.
- Lack of Volume Confirmation
- Scenario: Patterns without volume support are more likely to fail.
- Example: A Rising Three Methods pattern forming on low volume may not signify a real trend continuation.
- Solution: Check for higher volume on the breakout candle to confirm pattern validity.
- Trading Single Candlesticks in Isolation
- Scenario: A Doji or Hammer alone is not enough to signal a reversal. It must appear in the right market context.
- Solution: Always pair candlestick patterns with other technical indicators or market structures, e.g. support and resistance levels.
How to Filter False Signals and Improve Accuracy
Instead of relying solely on candlestick formations, traders should incorporate filters to improve signal quality. Below are three key filtering techniques:
- Multi-Timeframe Analysis
- Checking higher timeframes prevents falling for weak setups.
- Example: If a 15-minute chart shows a bullish pattern but the 4-hour timeframe is in a downtrend, the pattern is likely weak.
- Best Practice: Look for alignment across multiple timeframes before taking trades.
- Confluence with Support and Resistance or Trendlines
- Candlestick patterns are more reliable at key support or resistance levels.
- Example: A Bullish Engulfing pattern at a major support zone is more significant than one in the middle of a range.
- Best Practice: Draw support/resistance levels and use them to validate candlestick signals.
- Using Momentum Indicators for Validation
- Momentum indicators can confirm whether a pattern signals genuine strength or weakness.
- Best Indicators to Use:
- RSI Divergence – A Bullish Reversal pattern is stronger if the RSI shows bullish divergence.
- MACD Crossover – If a Bearish Engulfing pattern forms while MACD lines cross downward, the signal is stronger.
- Best Practice:
Use RSI, MACD, or Stochastic Oscillator to confirm trade setups.
Key Takeaways: Smarter Trading, Not Just Pattern Recognition
- Patterns fail due to false breakouts, low volume, and lack of context.
- Never trade patterns in isolation – always check market conditions.
- Use multi-timeframe analysis, key price levels, and momentum indicators to confirm signals.
Final Tip: Avoid over-reliance on candlestick patterns. Trading success comes from a combination of price action, indicators and risk management.
Statistical Evidence and Success Rates of Candlestick Patterns
While candlestick patterns are widely used by traders, their effectiveness varies based on market conditions and asset classes.
Instead of relying on anecdotal evidence, let’s explore data-driven insights on candlestick pattern success rates.
Empirical Data on Candlestick Pattern Success
Several quantitative trading studies have analysed the historical performance of candlestick patterns in forex, stocks, and futures markets. Here are some notable findings:
| Candlestick Pattern | Success Rate – Bullish Reversal | Success Rate – Bearish Reversal | Notes |
| Bullish Engulfing | ~63% | ~53% | More effective after a downtrend, especially with volume confirmation. |
| Bearish Engulfing | ~59% | ~61% | Works better in trending markets rather than ranging markets. |
| Morning Star | ~78% | ~58% | High probability in forex when appearing near support levels. |
| Evening Star | ~72% | ~65% | Stronger signal if confirmed by RSI or MACD divergence. |
| Hammer / Inverted Hammer | ~60% | ~50% | Requires confirmation from the next candle to be reliable. |
| Abandoned Baby | ~80% | ~79% | One of the most reliable reversal patterns, but it occurs rarely. |
Data Source: Studies from Thomas Bulkowski’s “Encyclopedia of Candlestick Charts” and quantitative trading research on forex price action.
What Affects Pattern Success?
Even with high-probability patterns, certain factors impact their effectiveness:
- Timeframe Matters
- Candlestick patterns tend to work better on higher timeframes such as 4-hour, Daily and Weekly than lower ones like 5-minute and 15-minute.
- Example: A Bullish Engulfing pattern on the daily chart carries more weight than on a 5-minute chart.
- Market Type Affects Reliability
- Trending markets – Continuation patterns, e.g. Rising Three Methods, perform better.
- Ranging markets – Reversal patterns, e.g. Doji and Morning Star, are more reliable.
- High-volatility markets – False signals are more common, requiring extra confirmation.
- Impact of News and Fundamental Factors
- Candlestick patterns alone cannot predict major fundamental events.
- Example: A perfect Bearish Engulfing pattern may fail if unexpected economic data like Non-Farm Payrolls reverses the trend.
How to Use This Data in Your Trading Strategy
- Prioritise patterns with historically high success rates, for example, Abandoned Baby and Morning Star.
- Use patterns on higher timeframes for more reliability.
- Combine candlestick patterns with confluence factors, such as support/resistance, volume, RSI and MACD.
- Be cautious during major news events, as price action can override technical patterns.
Main Candlesticks Patterns FAQ
- Which candlestick pattern is most reliable?
Candlestick patterns are the most popular type of charting patterns and for good reason. Every minor and major top and bottom in the markets is marked by a chart pattern. The problem is identifying those patterns and finding the ones which are most reliable. Among the easiest to identify is the doji, which looks much like a plus sign and often comes at the end of a trend. Another easy to identify and reliable pattern is the engulfing pattern, which is a two candle pattern that has the second candle completely engulfing the first, indicating a reversal in trend.
- Do candlestick patterns work?
Traders certainly believe candlestick patterns work. That’s obvious by even the most cursory look in any trading forum, where various candlestick patterns and strategies abound. But do candlestick patterns really work? The truth is that they do work, but not all the time. The trader’s job then is to understand early when the candlestick pattern is working and either enter a trade or stick with an already opened trade, or exit their trade to minimize losses. Candlestick patterns work as long as trader’s put in the work to understand them.
- What is the most powerful candlestick pattern?
The most powerful candlestick pattern according to many traders is known as the Pinocchio bar or simply “Pin bar.” It can occur at either tops or bottoms and goes by different names depending on where it occurs on a chart. These names include Hammer, Inverted Hammer, Shooting Star and the Hanging Man. In each case the candlestick is defined by a large wick and a small body and it comes at the end of either an up move or down move and signals market exhaustion.
Final Word – Trade with AvaTrade
Trading with candlestick patterns is an invaluable skill that can help any trader to significantly boost their trading accuracy. They can provide invaluable market sentiment information as well as serve as confirmation tools for signals generated by other types of price analyses.
It is important to research the numerous candlestick patterns available and the market psychology behind their formation to take advantage of more trading opportunities in the market.
Sign up for a free AvaTrade demo account to learn how to identify and accurately trade candlestick patterns in the financial markets without risking any capital.
** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.
