How to Read Candlestick Patterns: A Beginner’s Guide to Price Action Trading

 Introduction  :

Candlestick charts have powered traders’ decisions for over a century. Their visually intuitive formations reveal **market psychology**—where buyers and sellers battle. In this guide, you’ll discover:

- Core candlestick chart anatomy  

- The **Top 7** patterns every trader needs  

- Real-world examples with screenshots  

- A **step-by-step** trade setup using candlesticks  

- Pro tips for confirmation & risk management  

By the end, you’ll know **how to read** and **act on** patterns such as 

Doji

Hammer

Engulfing 

Rising star

to improve your **price action trading**.

## 1. Candlestick Chart Anatomy  

Each candlestick conveys four price points:

| Element | Definition |

|--------------|-------------------------------------|

| **Open** | Price at period start |

| **Close** | Price at period end |

| **High** | Highest price reached |

| **Low** | Lowest price reached |

- **Body** (rectangle) shows open↔close direction:  

  - **Green/white** = bullish (close > open)  

  - **Red/black** = bearish (close < open)  

- **Wicks/Shadows** show intraperiod highs and lows.  

---

## 2. Top 7 Essential Patterns

### 2.1 Doji  

- **Appearance:** Open ≈ Close → tiny body  

- **Psychology:** Indecision; buyers/sellers balanced  

- **Use:** At support/resistance, signals potential reversal  

- **Example:**  

    

  _Alt text: “EUR/USD daily Doji candlestick at support”_

---

### 2.2 Hammer & Hanging Man  

 Pattern | Hammer | Hanging Man 

 **Shape**  Small body, long lower wick , Same as Hammer but in uptrend 

**[Signal**   Bullish reversal at downtrend end | Bearish reversal at uptrend end 

**Validation**  Close above entry candle’s midpoint| Confirm with volume increase |

---

### 2.3 Bullish & Bearish Engulfing  

- **Bullish Engulfing:** Large green bar engulfs prior red bar → strong buy signal  

- **Bearish Engulfing:** Large red bar engulfs prior green bar → sell signal  

- **Tip:** Confirm with close beyond prior candle’s high/low.

### 2.4 Morning Star & Evening Star  

- **Morning Star** (bullish):  

  1. Long red candle  

  2. Small indecision candle (star)  

  3. Long green candle closing into 1st candle’s body  

- **Evening Star** (bearish): reverse setup.  

- **Use:** Excellent reversal markers on daily charts.

### 2.5 Shooting Star & Inverted Hammer  

**Pattern**

Shooting Star (bearish) 

 Inverted Hammer (bullish) 

**Wick** 

Long upper wick | Long upper wick at downtrend bottom |

**Body**   

Small body below midpoint | Small body above midpoint |

**Confirmation** 

Close below the star’s low | Close above star’s high |

## 3. Real-World Trade Setup Example

### 3.1 Chart Setup  

- **Instrument:** BTC/USD 4-hour  

- **Indicators:** 20-EMA, RSI (14)  

### 3.2 Pattern Identification  

1. Spot a **Hammer** at \$30,500 resting on 20-EMA support.  

2. Confirm with **RSI** rising from oversold (<30).  

### 3.3 Entry & Exit  

- **Entry:** Close above Hammer’s high (\$30,800)  

- **Stop-Loss:** Below Hammer’s low (\$30,200)  

- **Target:** Next resistance at \$33,000 (1:2 risk-reward)  

```text

Trade Example:

Entry: 30,800

Stop: 30,200 (60-point risk)

Target: 33,000 (220-point reward)

---

4. Confirmation & Risk Management

Volume: Look for above-average volume on pattern candle.

Multiple Timeframes: Validate pattern on a higher TF (daily).

Risk Positioning: Risk max 1–2% per trade.

Trailing Stops: Use moving average or swing lows to lock profits.

5. Pro Tips for Consistent Success:

1. Never trade patterns in isolation—always seek confirmation (volume, indicators, support/resistance).

2. Journal every trade: record pattern, setup, outcome to refine strategy.

3. Avoid low-liquidity instruments: candlestick signals work best on high-volume assets.

4. Combine with market context: use fundamental news filters on major announcements.

6. Internal & External Resources:

🔗 Read our primer: What Is Technical Analysis?What Is Technical Analysis?

🔗 Advanced guide: Top 5 Technical Indicators.  Top 5 Technical indicators every Trader should know . Top 5 Technical Indicators

📚 Further reading: Investopedia Candlestick Patterns. Investopedia Candlestick Patterns

“Explore our next guide on Top 5 Indicators Every Trader Should Know”

Top 5 Indicators Every Trader Should Know”

Conclusion:

Candlestick patterns translate market sentiment into visual cues. By mastering these Top 7 patterns, confirming with volume and RSI, and managing risk, you elevate your price action trading from guesswork to a disciplined edge. Practice on a demo account, journal your setups, and refine your entries.

Stay tuned for our next guide on combining candlesticks with fundamental news events in 2025!

Published: June 28, 2025