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Module 5 · Lesson 4 of 8A candlestick packs four prices into one shape. Certain shapes appear often enough to have names. This lesson explains the most common ones and, importantly, how little they mean without context.
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Each candle covers one period (a minute, an hour, a day). It records four prices: open, high, low and close. The thick part is the body, which runs from open to close. The thin lines are wicks (or shadows), which reach to the high and low. The chart-reading lesson covers the basics. Here we focus on what the shapes can suggest.
The story in a candle is about who won the period. A long body means one side dominated. A long wick means price went somewhere and was pushed back, so there was rejection. A tiny body means open and close were close together, so neither side won.
Hypothetical hourly gold candle: open $2,000, high $2,012, low $1,996, close $2,010. The body spans $2,000 to $2,010 (a $10 body, bullish because it closed above the open). The upper wick is $2 long ($2,012 minus $2,010) and the lower wick is $4 long ($2,000 minus $1,996). Buyers won the hour, with small rejection at both ends.
These patterns use one candle. They are only weak hints on their own.
| Pattern | What it looks like | What it may suggest |
|---|---|---|
| Doji | Open and close almost equal, wicks either side | Indecision. Neither buyers nor sellers won. |
| Hammer | Small body at the top, long lower wick (about twice the body or more) | Sellers pushed price down but buyers drove it back. Possible rejection of lower prices after a fall. |
| Shooting star | Small body at the bottom, long upper wick | Buyers pushed price up but sellers drove it back. Possible rejection of higher prices after a rise. |
| Marubozu | Long body, little or no wicks | One side controlled the whole period. Strong momentum. |
| Spinning top | Small body, wicks on both sides | Indecision, similar to a doji. |
A hammer and a hanging man look identical. The difference is only context: after a fall it is called a hammer, after a rise a hanging man. That alone should tell you the shape cannot do the work by itself.
Patterns that use several candles show a shift in control over time, so many traders find them slightly more informative.
Hypothetical daily gold candles. Day 1: open $2,040, close $2,030 (bearish, body $10). Day 2: open $2,028, close $2,052 (bullish, body $24). Day 2's body covers all of Day 1's body, so it is a bullish engulfing candle. If it appears right after a fall to a known support zone, a trader may take it as a mild sign that sellers are tiring. If it appears in the middle of nowhere, it may mean very little.
The most important rule of candlestick reading is that location beats shape. A hammer at a well-tested support zone after a decline is more interesting than the same hammer in the middle of a sideways range. Ask three questions:
Confirmation costs a little of the move but filters out some false signals. Honest testing of any pattern across many charts usually shows that it works sometimes and fails sometimes. That is why the stop-loss and position size matter more than the pattern name.
A candle pattern describes what has just happened. It can hint at a shift in sentiment, but price may carry on in the original direction. Every signal can fail.
A pattern on a daily chart reflects a whole day of activity by many participants, so it generally carries more weight than the same shape on a 1-minute chart, which can be noise. Patterns on very short charts also appear far more often, which tempts people into overtrading.
Common mistakes
Candles are a language for describing sentiment, and they help you read the chart quickly. Use them alongside levels and trend, size positions so one failed signal is survivable, and remember leveraged products can lose money quickly.
Start with the doji, hammer, shooting star, engulfing pattern and inside bar. Understanding what each says about buyers and sellers is more useful than memorising dozens of names.
Sometimes, and not always. They describe sentiment and can help frame decisions, but any pattern can fail. Context and risk management matter more than the pattern itself.
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