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Key Takeaways
- Candlestick patterns combine the shapes and relative positions of completed OHLC bars, from single-candle doji to multi-candle formations.
- Reversal patterns use the preceding trend to establish their traditional reading; continuation patterns organize a pause within that trend.
- A pattern is only complete when its final candle closes, and many traders wait for a breakout past the pattern extreme before acting.
- Define the pattern, mark its price levels and choose the event that activates the trade.
- Connect the price setup with options activity, strike positioning and the selected contract’s payoff.
What are candlestick patterns?
Candlestick patterns are named arrangements of the open, high, low and close across one or more completed candles, from a single doji to five-candle continuation formations. Each pattern is defined by body and shadow lengths, the bodies’ relative positions and any gaps between candles, and traders use those shapes to mark the price levels that plan a trade.
Common candlestick patterns: a cheat sheet
| Pattern | Candles | Defining Relationship |
|---|---|---|
| Doji | 1 | Open and close equal or close under the selected body rule |
| Hammer / Hanging Man | 1 | Small body near the high and a long lower shadow; preceding trend distinguishes the names |
| Shooting Star / Inverted Hammer | 1 | Small body near the low and a long upper shadow; preceding trend distinguishes the names |
| Engulfing | 2 | The second, opposite-direction body covers the first body |
| Harami | 2 | A smaller second body lies inside the first body |
| Morning / Evening Star | 3 | A small middle body separates the initial directional candle from the opposing recovery candle |
| Rising / Falling Three Methods | Usually 5 | Smaller countertrend candles sit between two larger trend-direction candles |
Each named formation has its own detailed conditions. Follow the dedicated entry for its exact geometry and worked example.
Formula
Real body = |close − open|; upper shadow = high − max(open, close); lower shadow = min(open, close) − low; body ratio = real body / (high − low)- Use body and shadow lengths together with absolute OHLC levels, gaps and the relationships between consecutive candles.
- For a positive range, body ratio measures the fraction occupied by the real body. A ratio near one means small combined shadows relative to that range.
- Shadow rules are comparative: a hammer needs a lower shadow at least twice the real body.
Worked Example
XYZ falls for three sessions toward prior support near $49. The third candle opens at $50.30 and closes at $49.30. The next candle has O $49.20, H $51.90, L $49.00 and C $51.75. Its 2.4M shares compare with a 1M average across the previous 20 completed sessions, giving 2.4× relative volume.
- Prior candle real body: $50.30 − $49.30 = $1.00
- Signal candle real body: $51.75 − $49.20 = $2.55
- Engulfing test: open $49.20 < prior close $49.30 and close $51.75 > prior open $50.30
- Pattern high used as the trigger reference: $51.90
The second body engulfs the first. For an intrabar breakout plan, set the next-session trigger at $51.91 and the stop at $48.99, a $2.92 risk per share when the entry fills at the trigger. The following candle reaches $52.90 and closes at $52.70, so a plan that waits for a close above the $51.90 high triggers as well, at that session’s close.
How candlestick bodies and shadows are measured
Each candle has a real body between open and close and shadows extending to the high and low. Real body = |close − open|. Upper shadow = high − max(open, close). Lower shadow = min(open, close) − low.
For high greater than low, body ratio = real body / (high − low). This describes body size relative to the candle’s own range. A wide candle and a narrow one share a ratio whenever their bodies fill the same share of their ranges, so read the dollar range for the size of the move.
A Doji has an equal or near-equal open and close. Its shadows can be unequal. A hammer and hanging man share their geometry; a decline precedes the hammer and an advance precedes the hanging man. Either body color is possible.
Bullish engulfing pattern example
The prior down body spans $49.30 to $50.30. The next up body spans $49.20 to $51.75, covering it completely. Its high is $51.90 and its low is $49.
The scenario supplies 2.4M shares against a 1M average over the previous 20 completed sessions. Relative Volume is therefore 2.4×.
A next-session intrabar plan uses a $51.91 trigger and a $48.99 stop. A fill at the trigger puts $2.92 per share at risk, and that distance sets the size. A fill above the trigger widens the risk, so size from the actual fill.
The following candle also closes at $52.70 above the pattern high. A rule that waits for that completed close activates later than the intrabar rule.
How traders use candlestick patterns
Locate the pattern relative to Support and Resistance. State the chart interval and session, then mark the pattern’s high and low.
Select the trigger, invalidation and target before sizing the trade. For a reversal setup, identify the preceding local trend; add a larger-trend filter when it is part of the plan.
Once the trigger, invalidation and target are set, Options Flow shows whether the large orders in the ticker’s contracts agree with the pattern, and the Options Profit Calculator turns those three prices into an option payoff.
Limitations of candlestick patterns
- Trade the pattern after its final candle closes. Before then, a forming candle can change shape and lose the pattern.
- Identify the preceding trend before naming a reversal. The same shape after an advance and after a decline can carry a different name, and without a prior move it has no reversal reading.
- Fix the chart interval and session in the plan. A pattern on a daily chart may not exist on an hourly chart, and regular-hours candles differ from candles that include extended hours.
- Write the geometry into the rule: how small a body counts as a doji and how long a shadow makes a hammer, so every screen and backtest reads the same candle the same way.
- Build the trade from the pattern’s price levels. The trigger, invalidation and target come from levels the trader defines, and the stop beyond the pattern extreme handles a pattern that fails.
Bottom line
Candlestick patterns turn the shape of one or more completed candles into price levels you can plan around. Read each pattern at a defined price level and in its preceding trend, state the interval and shape rules, and act only on a separate trigger with a set invalidation and target.
Clear answers
Frequently Asked Questions
Sources and Further Reading
How entries are sourced, calculated and updated: editorial methodology.