Candlestick Patterns: 5 to Learn First

There are dozens of named candlestick patterns, and most beginners try to memorise all of them at once. That is backwards. Five shapes cover most of what a daily chart can tell you about who won the session, and each of them only means something in the right place on the chart. This guide covers those five, then follows two real hammers from signal to outcome: one that worked and one that did not.

Start with one candle

Anatomy of a single candlestick showing open, high, low, and close with the rectangular body and wicks labeled.

Each candle has four prices. The body runs from open to close and is green when the close is higher, red when it is lower. The thin lines above and below, the wicks, show the high and low of the session. The wicks are where the story is. A long lower wick means sellers drove price down during the session and buyers pushed it most of the way back before the close. A long upper wick means the opposite.

So before naming any pattern, ask three questions of the last candle: how big is the body compared with the whole range, where did it close within that range, and which wick is longer?

The five shapes worth learning first

Hammer candlestick: small body at the top of the range with a long lower wick rejecting the low.

Bullish engulfing pattern: a green candle whose body fully engulfs the preceding red candle body.

The right-hand column matters more than the shape. A hammer in the middle of a sideways range is just a candle with a long wick. The same candle after a sharp fall, at a level where buyers stepped in before, is a question worth asking. The bearish shapes, the shooting star and its relatives, get their own guide in bearish candlestick patterns.

A hammer that worked: Alphabet, October 2023

Alphabet (GOOGL) closed at 138.81 on October 24, 2023 and reported quarterly results after the bell. The next morning it opened at 128.16 and closed at 125.61, down 9.51%, on more than three times its 20-day average volume. It slipped again to 122.28 on October 26.

On October 27 the stock traded down to 120.21, 13.4% below the pre-earnings close, and then recovered to finish at 122.17. The numbers of that candle:

It passes the shape test: a lower wick 2.76 times the body and a short upper wick. It also sits in the right place, after a fast drop. What it did not have yet was proof. That came on October 30, when GOOGL closed at 124.46, above the hammer's high of 123.31. By November 10 it closed at 132.59, 6.5% above the confirmation close. Someone entering on confirmation with a stop just under the hammer's low was risking 4.25 a share, about 3.4%.

A hammer that failed: Boeing, May 2022

Boeing (BA) gives the counter-example, and it matters because it passed every test the Alphabet candle did. After a slide that took it from 176.92 on April 22 to the high 140s, it printed a hammer on May 2, 2022: open 148.02, high 149.45, low 143.38, close 148.61. The lower wick (4.64) was almost eight times the body (0.59). The next day it closed at 153.58, above the hammer's high. Confirmed.

Four sessions later, on May 9, it closed at 133.31, well below the hammer's low. By May 12 it closed at 123.14. A buyer at the 153.58 confirmation close with a stop under 143.38 lost about 6.6% on the trade. A buyer without a stop was down 19.8% three days later and still had no signal telling them what to do.

A pattern is a reason to take a small, defined risk. It is not a reason to believe.

Confirmation, and what it costs

Waiting for the next candle to close beyond the pattern filters out many false starts, but it has a price. On Alphabet, the confirmation close was 2.3 above the hammer's close, so waiting cost part of the move. On Boeing, confirmation arrived and the trade still failed. Confirmation raises the odds a little; it does not change the fact that you need an exit.

Three things tend to strengthen a pattern, and all of them are visible before you act:

• Location: Is it at a level where price reversed before? The guide to support and resistance covers how to mark those zones.
• Participation: Was volume above its recent average? Alphabet's hammer came on 1.46 times average volume; the session after it on less.
• Room: How far is the next obstacle compared with the distance to your stop? If the nearest resistance is closer than your stop, the trade is poor even if the pattern is perfect.

The other three, briefly

Doji candlestick: open and close nearly equal with wicks on both sides, indicating indecision.

A doji says the session ended where it started. After ten green candles in a row, that stalemate is news. Inside a choppy range, where every other candle looks like that, it is not. Treat a doji as a pause and let the following candle tell you which side won.

Marubozu candlestick: a full-body candle with almost no wicks, indicating one-sided conviction.

A marubozu is the opposite of indecision: one side controlled the session from open to close. It is most informative when it breaks out of a range, and least informative after a long run, when it can mark the last buyers arriving late.

The shooting star mirrors the hammer and belongs at the top of a rally. The bearish guide walks through a real one on AMD in March 2024.

Building recognition

Knowing the definitions takes an afternoon. Seeing them quickly on a live chart, in context, takes repetition. Pick one pattern, find twenty real examples, and write down for each one where it formed, whether it was confirmed, and what happened over the next five sessions. You will find that the location column in the table above decides more outcomes than the shape does. A quick way to get those repetitions is a game of guessing the next candle on historical charts, where the answer is hidden until you commit.