7 Candlestick Patterns Every Investor Should Know

Bullish Patterns: Signals of Potential Upturns

These form after downtrends, suggesting buyers are gaining control and prices may rise.

Hammer

A hammer has a small body near the top and a long lower shadow (at least twice the body length), with little to no upper shadow. It appears at a downtrend’s bottom.

Why Bullish? Sellers push prices down intra-period (long lower shadow), but buyers step in strongly, driving the close near the open. This buying pressure overcomes selling, indicating exhaustion of bears and potential reversal. For the asset, it means downward momentum is fading; watch for confirmation with a bullish next candle before buying.

Bullish Engulfing

This two-candle pattern starts with a small red body, followed by a larger green one that completely engulfs the prior candle’s body.

Why Bullish? The first candle shows mild selling, but the second opens lower (gap down) before buyers dominate, pushing the close above the previous open. This shift from selling to aggressive buying signals bulls taking over. It implies the asset’s downtrend is reversing, offering a buy signal for upward potential.

Morning Star

A three-candle reversal: a long red candle, a small-bodied one (gapped down, like a doji), and a long green candle closing above the first’s midpoint.

Why Bullish? The first shows strong selling; the second reflects indecision with minimal net change; the third sees buyers erase losses. Selling pressure subsides as buyers regain control, pointing to a trend shift. For the asset, it signals hope after a bleak downtrend, ideal for entering long positions.

Bearish Patterns: Warnings of Downturns

These appear after uptrends, indicating sellers might dominate and prices could fall.

Shooting Star

Similar to an inverted hammer: small body at the bottom, long upper shadow (twice the body), short lower shadow. Forms at uptrend peaks.

Why Bearish? Buyers push prices high intra-period (long upper shadow), but sellers fight back, closing near the open. This rejection of highs shows weakening bulls. It means the asset’s upward momentum is stalling; consider shorting if confirmed by a bearish follow-up.

Bearish Engulfing

A small green body engulfed by a larger red one in an uptrend.

Why Bearish? The first suggests mild buying, but the second opens higher before sellers overwhelm, closing below the prior open. This selling surge overtakes buying, signaling a peak and potential downtrend. For the asset, it warns of impending declines—time to sell or short.

Evening Star

Mirror of morning star: long green, small-bodied gapped up, then long red closing below the first’s midpoint.

Why Bearish? Strong buying first, indecision second, then sellers erase gains. Bulls lose steam as bears take charge. It indicates the asset’s uptrend is reversing, prompting exits from longs.

Indecision Patterns: Watch for Breaks

Doji

Open and close nearly equal, forming a cross with varying shadows. Neutral alone but key in reversals.

Why Indecision? Equal buying and selling pressures result in no net change. It shows market hesitation; in trends, it can precede reversals (e.g., after uptrend, bearish signal). For the asset, pause and watch the next candle for direction.

Mastering candlestick patterns equips you with insights into market psychology—spotting when buyers overpower sellers for potential reversals or when indecision signals a brewing shift. Yet, no pattern stands alone; pair them with support/resistance, volume, or trendlines for reliable decisions, avoiding false signals in choppy markets.