How to Read Candlestick Charts and Key Patterns

To read a candlestick chart, treat every candle as a summary of one period of trading. The thick body shows where price opened and closed, and the thin wicks show the highest and lowest prices reached. A bullish candle closed above its open; a bearish candle closed below it. Candlestick patterns such as the doji, the hammer and the engulfing pattern are recurring shapes of one to three candles, and they only mean something in context: where they form, what came before them, and whether the next candles confirm them.

The method comes from Japanese rice traders of the 18th century.

The anatomy of a candlestick

Every candle is built from four prices, often written as OHLC:

Open: the first price of the period.
High: the highest price traded.
Low: the lowest price traded.
Close: the last price when the period ended.

The body runs from the open to the close; the upper wick (or shadow) reaches up to the high and the lower wick down to the low. Colours are only a setting; what matters is whether the close sits above or below the open.

Each candle covers one timeframe, from five minutes on M5 to a full day on D1, and a shape on the daily chart carries far more weight than on M1, where it may be noise.

What the shape of a candle tells you

Read each candle as the result of a contest between buyers and sellers:

A long body with short wicks: one side controlled the whole period.
A small body: neither side gained much ground by the close.
A long upper wick: price was pushed higher, then rejected.
A long lower wick: price was pushed lower, then bought back.

Example: an H1 candle on EURUSD opens at 1.1520, rises to 1.1548, dips to 1.1505 and closes at 1.1540:

Body: 1.1540 − 1.1520 = 20 pips, bullish because the close is above the open.
Upper wick: 1.1548 − 1.1540 = 8 pips.
Lower wick: 1.1520 − 1.1505 = 15 pips.
Full range: 1.1548 − 1.1505 = 43 pips, which equals 20 + 8 + 15.

The body is just under half the range (about 47%) and the lower wick almost twice the upper one: buyers won the hour, but only after absorbing a 15-pip dip.

The doji: a market in balance

A doji forms when the open and close are equal or almost equal, so the body shrinks to a thin line, a sign of balance between buyers and sellers. The main variants:

Standard doji: short wicks on both sides.
Long-legged doji: long wicks on both sides.
Dragonfly doji: a long lower wick, with the open and close near the high.
Gravestone doji: a long upper wick, with the open and close near the low.

On its own a doji is not a signal. After a long rise it says the buyers' push has slowed, which may mean a reversal or only a pause, so wait for the next candle.

The hammer and its relatives

A hammer has a small body near the top of its range, a lower wick at least twice the length of the body, and little or no upper wick. It matters after a decline: sellers drove price down, but buyers pushed it back up before the close.

Example: after a fall, a EURUSD candle opens at 1.1500, drops to 1.1470, closes at 1.1508 and peaks at 1.1510. The body is 8 pips, the lower wick 30 pips (more than three times the body) and the upper wick 2 pips: a textbook hammer.

The same shape changes its name with its location:

Hanging man: the same shape after a rise, a warning sign.
Inverted hammer: a long upper wick and a small body near the low, after a decline.
Shooting star: the same long upper wick, but after a rise.

Forex traders often call these candles pin bars, and many wait for confirmation, such as the next candle closing above the hammer's high.

Engulfing patterns

The bullish engulfing pattern is a two-candle reversal signal after a decline: a small bearish candle followed by a larger bullish candle whose body covers the whole body of the first. The bearish engulfing pattern is its mirror image after a rise.

Example: one candle opens at 1.1530 and closes at 1.1515, a 15-pip bearish body. The next opens at 1.1514 and closes at 1.1538, a 24-pip bullish body that covers the entire span from 1.1515 to 1.1530.

In forex a new candle usually opens at or near the previous close, so textbook gaps are rare; judge the pattern by its bodies and its location. An engulfing candle at tested support after a clear decline means far more than one in the middle of a sideways range.

How to read candles in context

A pattern is a clue, not an instruction. Before acting on any candle, ask:

Where is it? Patterns at clear support or resistance, or at round numbers, carry more weight.
Has it closed? A hammer with ten minutes left can still close as something else.
What does the higher timeframe say? A bullish pattern on M15 against a strong downtrend on H4 is a weak signal.
Is there news? Around major economic releases, long wicks often reflect sudden spikes rather than a real change in sentiment.

Combining candles with a trend tool or an oscillator, explained in our guide to technical indicators, helps filter out weak signals.

Reading candlesticks on IKLIL MARKETS

The IKLIL MARKETS platform runs in the browser on computer and phone and installs as an app. Its charts offer three chart types including Japanese candlesticks, nine timeframes from M1 to MN, twelve drawing tools and 22 indicators. Practise on EURUSD or gold in a free demo account with 10,000 virtual USD, and place your stop loss where the pattern would be proven wrong, for example just below the low of a hammer.

A note on risk

Candlestick patterns describe what price has done; they do not predict what it will do, and every pattern fails some of the time. CFDs are traded with leverage, so losses can grow quickly and you can lose your whole balance. Size every trade with a plan, see risk management, trade only money you can afford to lose, and read the risk disclosure.