The Nasdaq Composite fell 2.1% on Friday, October 16, and finished the week down 4.5%, ending a four-week winning streak. Each of those five sessions left its own candle on a daily chart, and with candlestick patterns explained in plain terms, you can read a week like that one session at a time. Every candle records four prices, and the shape they make shows how far price traveled during the session and how much ground it gave back. Read those shapes as ordinary sentences and the pattern names stop sounding like code. Test data on how often each pattern holds up then shows how far to trust it.
Quick answer: Candlestick patterns are shapes formed by one to three candles, each showing a period’s open, high, low and close. The body shows the move between the open and the close, and the wicks show the extremes price reached and then gave back. Named patterns describe a shift in control, and in long-run tests the common ones play out as named about 59% to 79% of the time.
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The Nasdaq 100, the S&P 500 and other major benchmarks can be traded as index CFDs, with candlestick charts for every timeframe [CONFIRM: indices and chart timeframes offered].
What One Candlestick Records
Each candle covers one period, such as an hour, a day or a week, and records four prices. The thick body runs between the open and the close. The thin lines above and below it, called wicks or shadows, mark the highest and lowest prices traded. A candle that closed above its open is usually drawn green or white, and one that closed below its open is drawn red or black.
Color describes that one session. A green daily candle can still close lower than the day before, if the market opened with a gap down and then climbed part of the way back during the day.
Candlestick Patterns Explained Through Five Basic Shapes
Most candles can be read as a short sentence about the session, and almost every named pattern is built from these five shapes.
| Shape | What happened in the session | Plain-English reading |
|---|---|---|
| Long green body, short wicks | Opened near the low and closed near the high | Buyers were in charge for most of the session |
| Long red body, short wicks | Opened near the high and closed near the low | Sellers were in charge for most of the session |
| Small body near the top, long lower wick | Fell well below the open, then recovered | Sellers pushed hard and the push didn’t hold |
| Small body near the bottom, long upper wick | Rose well above the open, then fell back | Buyers pushed hard and the push didn’t hold |
| Tiny body with wicks on both sides (doji) | Closed almost exactly where it opened | Neither side finished ahead |
Shape definitions follow Thomas Bulkowski’s identification guidelines for the hammer and shooting star at ThePatternSite.
The same shape can carry a different name depending on what came before it. A small body with a long lower wick after a fall is called a hammer. The identical candle after a rise is called a hanging man, and it’s read as a possible sign that buying is tiring.
Reading One Hammer Candle Step by Step
The figures in this example are for illustration. A share has slid lower for six sessions and now trades near $62. Today’s daily candle looks like this:
| Price point | Level |
|---|---|
| Open | $61.90 |
| High | $62.45 |
| Low | $59.80 |
| Close | $62.35 |
Measured against Bulkowski’s hammer guidelines. Share figures are illustrative.
Measure the Three Parts
- Body: $0.45, the distance between the $61.90 open and the $62.35 close. It’s green, which means the session finished above where it started.
- Lower wick: $2.10, the distance between the open and the $59.80 low. That’s more than four times the body, past the two to three times Bulkowski uses as the guide for a hammer.
- Upper wick: $0.10, which puts the close within 10 cents of the high.
Put It Into Words
Sellers pushed the share 3.4% under its open during the session. Buyers took all of it back and a little more, and the stock finished within 10 cents of its best price of the day. After six weak sessions, that’s the first day where selling pressure was visibly absorbed.
Know What Would Change the Reading
The candle describes one session. Many traders wait for the next one to confirm it, for example a close above the hammer’s $62.45 high. A later close under $59.80 would mean the low that buyers defended has given way. Our article on support and resistance explains why a hammer that forms at a level where the share has turned before tends to get more attention than one in open space.
How Reliable Are Candlestick Patterns?
Candlestick patterns are moderately reliable, and the common ones in Thomas Bulkowski’s tests played out as named between 59% and 79% of the time.
| Pattern | Candles | Played out as named | Overall performance rank (1 is best, of 103) |
|---|---|---|---|
| Hammer | 1 | Bullish reversal 60% of the time | 65 |
| Shooting star | 1 | Bearish reversal 59% of the time | 55 |
| Bullish engulfing | 2 | Bullish reversal 63% of the time | 84 |
| Bearish engulfing | 2 | Bearish reversal 79% of the time | 91 |
| Morning star | 3 | Bullish reversal 78% of the time | 12 |
Figures from Thomas Bulkowski’s pattern statistics at ThePatternSite for the hammer, shooting star, bullish engulfing, bearish engulfing and morning star.
Bulkowski notes that the hammer’s 60% isn’t far from the 50% a coin toss would give. The rank column is a separate test of how price performed after the pattern. Bearish engulfing reverses 79% of the time and still ranks 91st on that measure. The morning star needs three candles to form and ranks 12th.
Why Context Changes What a Candle Means
The Trend It Forms In
A reversal pattern needs something to reverse. A hammer is defined by the downtrend before it, and a shooting star by the uptrend. The same shape in the middle of a sideways range describes a busy session and little else.
The Timeframe
A weekly candle usually folds five daily candles into one. The Nasdaq’s week to October 16 held Friday’s 2.1% fall and four other sessions, each with its own shape, and a weekly chart shows all five as a single open, high, low and close. An hourly candle covers far less trading, and patterns on short timeframes form and fail more often.
Scheduled News
Candles on the day of an inflation report or a central bank decision often have long wicks, because price can swing hard in both directions within minutes. Our article on rate-cut days looks at how those sessions tend to unfold across markets.
What the Indicators Say
A candle uses all four prices from one session, and indicators like RSI use closing prices across many sessions. When a hammer forms while RSI sits in the low 30s, the two are describing the same weakness from different angles, and our guide to moving averages, RSI and MACD shows what each one measures.
Common Ways Candlestick Patterns Get Misread
- Naming a candle before it closes: a long lower wick at midday can disappear by the close, and the pattern only exists once the session ends
- Reading color as direction: a green candle after a gap down can still be a lower close than the day before
- Giving every candle a name: most candles are ordinary sessions, and patterns stand out because they’re uncommon
- Treating a pattern as an instruction: a 60% pattern fails four times in ten, which is why many traders decide in advance where the idea is wrong
Key Takeaways
- Each candle records four prices, and its body and wicks show where price traveled and what it gave back.
- With candlestick patterns explained as plain sentences, most shapes describe who controlled the session.
- A pattern’s name depends on the trend before it, and the same shape can mean different things in different places.
- In Bulkowski’s tests, common patterns played out as named between 59% and 79% of the time.
- Many traders wait for the next candle to confirm a pattern and decide in advance where the idea fails.
Frequently Asked Questions
What do the colors on a candlestick chart mean?
Green or white candles closed above their open, and red or black candles closed below it. The color describes that one session only. A green candle can still close lower than the previous day, if the market gapped down at the open and recovered part of the way, which is why traders read color alongside the prior close.
What is the most reliable candlestick pattern?
In Thomas Bulkowski’s tests, bearish engulfing reversed most often of the common patterns, at 79% of the time, though it ranked only 91st of 103 for how price performed afterward. The morning star reversed 78% of the time and ranked 12th. Every pattern fails some of the time, and context like trend and location changes the odds.
What timeframe is best for candlestick patterns?
Daily candles are the most common starting point, because each one covers a full session and patterns form slowly enough to read. Weekly candles filter out more noise and suit longer holding periods. Hourly and shorter candles produce many more patterns, and a larger share of them fail, especially around scheduled news releases.
Do candlestick patterns work in forex and crypto?
Candlestick patterns can be read on any market with an open, high, low and close, including forex and crypto. Forex trades 24 hours a day on weekdays, which means daily candles depend on the chosen closing time. Crypto is highly volatile and trades through weekends, and its candles often show long wicks that make patterns form and fail quickly.