Candlestick Patterns: How to Read Forex Candlestick Charts

At a glance

One candle

Open, high, low, close

Bullish candle

Closes above the open

Doji

Open ≈ close: neutral alone

Reversal patterns

Need a prior trend

What is a candlestick chart?

A candlestick chart shows price as a series of candles, one for each period: one hour on a 1-hour chart, one day on a daily chart. Each candle shows four prices for that period: the open, the high, the low and the close. Candlestick charts trace back to Japanese rice trading. StockCharts, citing Steve Nison, describes a rice trader named Homma from the town of Sakata as a legendary figure in their development, and Nison’s book Japanese Candlestick Charting Techniques introduced them to many Western traders.

How to read a candlestick

• Body: the thick part, from the open to the close.
• Bullish candle: the close is above the open, so the price rose during the period.
• Bearish candle: the close is below the open, so the price fell.
• Wicks (shadows): the thin lines above and below the body, reaching the period’s high and low.

Platforms use different colours: green and red, white and black, or others. A long body shows a large move from open to close; long wicks show that the price moved far from the open and close during the period but came back.

Common candlestick patterns

Pattern	Shape	Where it is read as a possible reversal
Doji	Open and close almost equal; thin body	Neutral on its own; read with the prior trend
Hammer	Small body near the top, lower wick about twice the body or more	After a decline
Shooting star	Small body near the bottom, upper wick about twice the body or more	After a rise
Bullish engulfing	A rising body that completely covers the previous falling body	After a decline
Bearish engulfing	A falling body that completely covers the previous rising body	After a rise

Doji. The open and close are equal or nearly so. Price moved during the period but ended where it started: neither buyers nor sellers ended in control. On its own a doji is neutral.

Hammer. After a decline, sellers push the price well below the open, but buyers bring it back near the top of the range by the close. The same shape after a rise is called a hanging man.

Shooting star. After a rise, buyers push the price well above the open, but it closes back near the low of the range.

Engulfing patterns. In a bullish engulfing, a rising candle’s body completely covers the body of the falling candle before it. A bearish engulfing is the reverse. A bullish engulfing at a new high, after a long rise, is not a reversal pattern; there is no downtrend to reverse.

Context and confirmation

A candlestick pattern describes one to three periods. The same shape can mean different things in different places:

• Prior trend: a reversal pattern needs a trend to reverse.
• Location: a hammer at a well-defined support zone tells a different story from one in the middle of a range: support and resistance.
• Confirmation: references such as StockCharts ChartSchool treat reversal patterns as needing confirmation within one to three periods, such as a further move in the new direction. Without it, the pattern is only a sign of hesitation.

Limits of candlestick patterns

• No forecast: a pattern summarises past trading; the next candle can go either way.
• Definitions vary: sources differ on how small a doji’s body or how long a hammer’s wick must be.
• Timeframe: patterns on low timeframes form often and reflect short-term noise.
• Forex specifics: the forex market trades almost continuously from Monday to Friday, so a daily candle usually opens near the previous close; the main exception is a gap at the weekly open. Patterns defined by gaps between candles therefore appear less often than on stock charts. The daily candle’s closing time also depends on the broker’s server time, so the same day can produce different candles on different platforms.

If used, candlestick patterns belong inside a written plan with a stop and position size set before entry: stop loss, trading plan.