Candlestick charts are the default view for most FX traders, and candlestick "patterns" with names like hammer, engulfing and doji fill many beginner courses. Some of those names describe real features of price action. Many of the claims attached to them are far stronger than the evidence supports. This guide explains how a candle is built, what the common formations describe, and how to use them as context without treating them as signals. Illustrative only.
Anatomy of a candle
Each candle summarises one time period, for example one hour, with four prices: open, high, low and close. The thick part is the body, spanning open to close. The thin lines above and below are wicks (shadows), reaching to the period's high and low. A candle that closes above its open is usually drawn in one colour (often green or white) and one that closes lower in another (red or black); the colours are a platform setting.
The information is simple: how far price travelled, where it finished within that range, and how much it moved and then retreated. A long wick means price went there and was pushed back during the period. A long body with small wicks means price moved mostly in one direction.
Common single-candle shapes
- Doji. Open and close nearly equal, so the body is tiny. It shows indecision or a stalemate in that period. By itself it says little; it matters only relative to what came before.
- Hammer and hanging man. Small body near the top with a long lower wick. Sellers pushed price down and buyers brought it back. After a decline, textbooks call it a hammer (potential reversal); after a rise, a hanging man. The shape is identical, the name changes with context, which shows how much of the interpretation is in the story told about it.
- Shooting star and inverted hammer. The mirror image: a long upper wick and a small body near the low.
- Marubozu. A body with almost no wicks. Price moved in one direction from open to close, often during strong news.
Common multi-candle formations
- Engulfing. A candle whose body completely covers the previous candle's body in the opposite direction. It shows that one period's move reversed the previous period's.
- Inside bar. A candle contained within the previous candle's range, marking a pause or compression.
- Morning and evening star. Three-candle sequences with a small middle candle between two large opposite ones.
- Three white soldiers or three black crows. Three consecutive strong candles in one direction.
What the evidence says
Studies of candlestick patterns across markets have generally found weak or inconsistent predictive value once transaction costs are considered, and results depend heavily on how patterns are defined. That is unsurprising: patterns are defined by eye, there are dozens of them, and with enough patterns and enough charts you will always find examples that worked. Looking only at the successes is the classic trap discussed in confirmation bias, and a reason to test rules properly as in backtesting honestly.
Candles also depend on the arbitrary time boundary. A forex candle "closes" at a time set by your platform's server clock, and the same hour of price movement can form a different shape if the boundary shifts by 30 minutes. The market does not know where your candles start. Daily candles in particular differ between brokers depending on whether they close at 5 pm New York or in another time zone, which interacts with session structure and with weekend gaps.
Where candles genuinely help
Used as description rather than prediction, candles are valuable:
- Rejection. A long wick at a level shows that price was tested and refused during that period. Combined with a zone, as in support and resistance zones, it informs where you might place a stop beyond the extreme.
- Volatility at a glance. Candle size is a quick read of range, which ATR quantifies.
- Close location. Where a candle closes in its range tells you who controlled the end of the period, especially on higher time frames.
- Cleaner entries and stops. Waiting for a candle to close before acting reduces reaction to intra-period noise.
A reasonable process
- Start with the broader picture: trend, range and key zones, per multi-timeframe analysis.
- Treat a candle shape as one piece of information, ideally at a level you identified in advance.
- Define exactly what qualifies, such as "body engulfs previous body and closes beyond the prior high", so the rule is testable.
- Decide the stop from market structure, then size the position from that distance using position sizing. The pattern never gets to decide how much you risk.
- Record each occurrence, wins and losses, in your journal and check the real hit rate and expectancy after enough samples.
Summary
Candlesticks are an efficient way to display price, and their shapes describe what happened within a period. They do not carry reliable predictive power on their own, and the vivid names make them seem more authoritative than they are. Learn the vocabulary because everyone uses it, but base decisions on tested rules, sensible stops and controlled risk. This is education only and not a recommendation.