Candlestick charts explained: the key reversal patterns
Every candle tells the story of a fight between buyers and sellers. Learn to read candles and use pin bars, engulfing patterns, dojis and morning stars in the right places.
Candlesticks were invented by Japanese rice traders centuries ago, and today almost every trader uses them. The reason is simple: one candle shows at a glance who won during that period.
Anatomy of a candle
Every candle has four prices: open, close, high and low.
- Body: the distance from open to close. A green candle closed above its open; a red one below.
- Wick: the highest and lowest prices reached.
A long lower wick means sellers pushed price down but buyers rejected it. That simple logic underlies every pattern.
Key patterns
Pin bar: a small body with a long wick at least twice its size. A pin bar with a long lower wick at support signals rejection and a possible move higher.
Bullish and bearish engulfing: the second candle's body covers the whole body of the previous one. A bullish engulfing at the end of a decline means buyers have taken control.
Doji: open and close almost equal, a sign of indecision. On its own it is not a signal, but after a long trend it is a warning.
Morning and evening star: a three-candle pattern of a large trend candle, a small hesitant candle and a large opposite candle. One of the more reliable reversal patterns.
Inside bar: a candle fully inside the previous candle's range; compression before a move.
The most important rule: location
A pin bar in the middle of nowhere means little. The same pin bar at support, a demand zone or the 61.8% Fibonacci level can be the best entry of the week. In our method, the candle is confirmation, not the main reason to enter.
Common mistakes
- Trading a candle that has not closed yet
- Ignoring the trend and the higher timeframe
- Expecting every pattern to work
Practise on higher timeframes such as the 4-hour and daily charts, where there is less noise.
📘 This article summarises ideas from our book "Fibonacci Chart Strategy", with 22 chapters and 137 real before-and-after examples. To get the book, message us on Telegram @fibonacci_chart.
Got a question? Ask us on Telegram support @fibonacci_chart, and follow our daily analysis on the Telegram channel.
Trading financial markets involves risk. This article is educational and is not investment advice.
Forex and CFD trading carries a high level of risk due to leverage and you may lose more than your initial capital. Content on this site is educational and not investment advice.
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