A candlestick shows four prices for one period: the open, the high, the low and the close. The body is the range between the open and the close, and the thin lines above and below it, called wicks or shadows, show how far the price travelled before it came back. A candlestick pattern is a shape made by one or two candles that traders have given a name, such as the hammer, the engulfing candle or the doji. The names are useful shorthand for what the candles say about the balance between buyers and sellers during the period.
This guide describes several common patterns, explains how to read each one in context, and shows why a single candle is only a clue. The reading depends on where the pattern appears, how large it is and what follows it. Giving a pattern a name does not make it reliable.
What does a single candle show?
A single candle summarises one period, and its shape shows who had the upper hand during it. A long lower wick means sellers pushed the price down, but buyers recovered most of the move. A long upper wick means the reverse. A very small body, called a doji, signals indecision rather than a clear direction.
Read each candle against the candles around it, not in isolation. A large body after several small ones signals a change in pace. A candle's size also depends on the stock's normal movement, so a wide range for a usually quiet stock can matter more than the same range for a volatile one. Compare each candle with the recent average range before you draw conclusions from its shape.
Colour conventions vary. Many platforms show rising periods in one colour and falling periods in another, and some let you reverse them, so confirm the settings before you read anything into the colours. Timeframe matters just as much. A candle on a daily chart summarises a full day, while the same shape on a five-minute chart describes a very small event. Check the timeframe before you interpret the shape.
What are a hammer and an engulfing pattern?
A hammer has a small body at the top of the range and a long lower wick, and it appears after a decline. Traders read it as a possible bullish reversal, because sellers pushed the price lower but failed to hold those levels.
An engulfing pattern is a two-candle shape in which the second candle's body covers the first candle's body and points the other way.
The wick-length rule for a hammer is a convention, not a law, and context matters more. A hammer at a known support level, or after a long decline, is more meaningful than one inside a choppy range. For the engulfing pattern, a second candle that is large relative to the first is more convincing, and volume on the second candle adds to the reading if your data shows it. A bullish engulfing appears after a fall, and a bearish engulfing appears after a rise.
A hanging man looks almost identical to a hammer but appears after a rise, where traders read it as a warning rather than a reversal signal. That is a useful reminder that the same shape can mean different things depending on what came before it.
The table below uses invented daily prices for a bullish engulfing pattern. The figures are illustrative only.
| Day | Open | High | Low | Close | What it shows |
|---|---|---|---|---|---|
| Day 1 (down day) | 52.0 | 52.5 | 49.5 | 50.0 | A falling body from 52.0 to 50.0 |
| Day 2 (up day) | 49.2 | 53.0 | 49.0 | 52.8 | Opens below the prior close and closes above the prior open |
The second day's body, from 49.2 up to 52.8, covers the first day's body, from 50.0 up to 52.0. That is the engulfing shape. It says buyers took control during the second day, but it does not say whether that control will last. A trader who uses the pattern would look for a follow-through close above the high of the engulfing candle, or above a nearby level of resistance, before treating the signal as stronger.
What does a doji tell you?
A doji has an open and a close at nearly the same price, so its body is very small or absent. It shows that buyers and sellers were roughly balanced during the period. A doji after a strong trend can signal that momentum is stalling, but it does not say which way the price will break next.
Dojis come in several forms. A long-legged doji has long wicks on both sides. A dragonfly doji has a long lower wick and almost no upper wick, while a gravestone doji is the reverse. Each one carries the same basic message: the period ended close to where it began, after large swings in between.
Many traders treat a doji as a prompt to wait for the next candle rather than as a signal in its own right. A doji inside a quiet, sideways market is common and carries little information. A doji at the end of a long run, followed by a candle that breaks the other way, is more interesting. The sequence of candles usually matters more than any single shape.
Why do candlestick patterns disappoint?
Candlestick patterns are easy to see and easy to name, so they appear on charts very often. Many do not lead to the move their names imply. Their performance depends on the market, the timeframe and the context, and the evidence from careful testing is mixed.
A pattern works best alongside the trend, the levels and the volume, not as a trigger on its own.
The main problem is selection. A trader who looks at enough charts will find many hammers, and the ones that seemed to work are the ones remembered. Test a pattern on past data using the same rules every time, and count every occurrence, including the ones that failed. A pattern that looks sharp on a handful of examples can look ordinary across hundreds.
Set the stop before you enter, and keep the position small, because a single pattern cannot be trusted with much capital. This guide does not cite a particular study. The backtest guide describes the common errors that appear when chart patterns are tested, and those errors apply directly to candlesticks.
Common mistakes
Trading the name instead of the context. A hammer in the middle of nowhere is a shape, not a signal.
Ignoring the timeframe. A pattern on a five-minute chart and the same pattern on a weekly chart describe different events.
Finding a pattern on every candle. If you can always find one, you are looking for it rather than reading the market.
Checklist
- Confirm the timeframe and the colour convention on your chart.
- Compare the candle's body and wicks with the last ten candles.
- Check whether the pattern appears at a level, after a clear trend or inside a range.
- Wait for the next candle to confirm the direction the pattern suggests.
- Check volume on the pattern's candles, if your data shows it.
- Set the invalidation level before you act.
- Record each pattern and its outcome so you can judge the method on your own data.
Key takeaways
A candlestick shows the open, high, low and close for one period, and a pattern made from one or two candles is named shorthand for the balance between buyers and sellers. Hammers, engulfing candles and dojis are clues, most useful at known levels and after clear trends. They are not reliable signals on their own, and their record depends on how they are tested.
This guide is for general information, not financial advice. See the disclaimer.