Candlestick Patterns Every Forex Trader Should Know

Candlestick charts originated in Japan, where rice traders used similar diagrams centuries ago, and they became widespread in Western markets from the early 1990s. Today they are the default chart type on most forex platforms because they make the balance between buyers and sellers easy to see at a glance.

This lesson covers how to read a single candle, the most common patterns, and why context matters more than the pattern itself.

Anatomy of a candlestick

Each candle shows four prices for its period:

• Open: the first traded price
• High: the highest price reached
• Low: the lowest price reached
• Close: the last price

The body is the rectangle between open and close. A bullish candle (often green or white) closes above its open; a bearish candle (often red or black) closes below it. The thin lines above and below the body are wicks (or shadows). They show prices that traded but did not hold by the close.

Reading a candle is about asking who was in control. A large body with small wicks suggests one side dominated. Long wicks suggest a fight in which one side pushed price far but could not keep it there.

Single-candle patterns

Doji

The open and close are almost equal, leaving a very small body. A doji shows indecision. After a strong trend, it may suggest momentum is pausing, but on its own it signals neither direction.

Hammer and hanging man

Both have a small body near the top of the range and a lower wick at least about twice the size of the body.

• After a decline, it is called a hammer: sellers drove price down, but buyers pushed it back up.
• After a rally, the same shape is called a hanging man and may warn that selling pressure is appearing.

Shooting star and inverted hammer

Both have a small body near the bottom of the range and a long upper wick.

• After a rally, it is a shooting star: buyers pushed higher but sellers rejected the move.
• After a decline, it is an inverted hammer, which may hint at buying interest.

Multi-candle patterns

Note that forex trades almost continuously from Monday to Friday, so the price gaps between candles that some stock-market definitions require are rare. Most forex traders apply these patterns to candle bodies instead.

Context is everything

The same candle can mean different things in different places. A hammer that forms at a well-tested support zone, or at a Fibonacci retracement level that lines up with that support, tells a clearer story than a hammer in the middle of a range. A shooting star at major resistance after an extended rally is more noteworthy than one during a quiet session.

Useful questions to ask:

1. Is the pattern at a meaningful level? (See Support and Resistance.)
2. Does it agree with the higher-timeframe trend?
3. Is the candle large relative to recent candles?
4. Did the next candle confirm it?

Worked example: trading a hammer with defined risk

Assume, for illustration, that EUR/USD falls to a support zone and forms a daily hammer with a low of 1.0780 and a close of 1.0810.

• Entry: 1.0810, at the close of the hammer
• Stop-loss: 1.0770, 10 pips below the hammer's low
• Stop distance: 1.0810 − 1.0770 = 0.0040 = 40 pips

Now size the position. Assume a $10,000 account and a 1% risk limit:

• Maximum risk: $10,000 × 1% = $100
• Risk per pip: $100 ÷ 40 pips = $2.50 per pip
• On EUR/USD with a USD account, one standard lot is worth about $10 per pip, so $2.50 ÷ $10 = 0.25 standard lots (2.5 mini lots)

If the hammer fails and price hits the stop, the loss is about $100 plus costs such as spread. The Position Size Calculator runs this calculation for any pair.

Common mistakes

• Trading patterns in isolation. Without location and trend context, most patterns are noise.
• Using very low timeframes. On 1-minute charts, patterns form constantly and mean little.
• Ignoring confirmation. Waiting for the next candle reduces false signals but worsens the entry price; decide your approach in advance.
• Memorizing dozens of names. Understanding what the body and wicks show is more useful than knowing every pattern label.
• Assuming a reversal is guaranteed. Every pattern fails regularly, so define your stop before you enter.

Summary

Candlesticks show the open, high, low and close of each period. Bodies reveal who controlled the period; wicks reveal rejected prices. Common patterns include the doji, hammer, shooting star, engulfing patterns and morning or evening stars. Patterns are most informative at key levels and in line with the broader trend, but none of them predicts price with certainty. Combine them with a planned stop and sensible position size. Next, Chart Patterns look at larger formations built from many candles.