What Are Candlestick Patterns?
Candlestick patterns are recurring formations in price charts that indicate potential trend reversals or continuations. Each candle shows four data points: open, close, high, and low. From their shape and sequence, patterns emerge that reflect market psychology.
Reversal Patterns
Hammer and Hanging Man
Hammer (bullish): small body, long lower wick at the end of a downtrend. Hanging Man (bearish): same shape at the end of an uptrend. With sentiment: a Hammer at support is stronger when >65% of retail traders are short (contrarian bullish).
Engulfing Pattern
Bullish Engulfing: large green candle completely engulfs the previous red candle. Bearish Engulfing: the opposite. One of the most reliable reversal patterns, especially on daily charts at key S/R zones.
Doji
Open and close are nearly identical. Shows indecision. Becomes meaningful only at important levels with confirmation from the next candle. Variants: Standard Doji (maximum indecision), Gravestone Doji (bearish), Dragonfly Doji (bullish).
Morning Star and Evening Star
Three-candle patterns. Morning Star (bullish): large red candle, small gap-down candle, large green candle covering 50%+ of the first. Evening Star (bearish): the reverse. Rare but highly reliable on daily/weekly charts.
Continuation Patterns
Three White Soldiers (bullish): three consecutive green candles with progressively higher closes. Three Black Crows (bearish): three consecutive red candles. Marubozu: candle with no wicks — pure buying or selling pressure.
Combining with Sentiment Data
The strongest setups occur when candlestick patterns align with sentiment extremes. Bullish Engulfing at support + >70% retail short = double confirmation for long. Doji + large 24h sentiment shift on Sentmo = the Doji confirms indecision, the shift shows likely direction.
Common Mistakes
Using patterns on timeframes below daily (unreliable). Ignoring context (a Hammer mid-trend means nothing). Ignoring confirmation (a Doji alone is not a trade). Trying to track too many patterns (focus on 3-4 you truly understand).