Candlestick Psychology & Patterns
Rejection and what it tells you
A long lower wick means price fell, buyers rejected those lows, and pushed the close back up. This is not random — it records buyers defending a price. The longer the wick, the more conviction buyers showed in rejecting that level.
Absorption and exhaustion
When large exciting candles shrink to base candles after a sustained move, momentum is being absorbed by the other side. Recognising this exhaustion helps you avoid chasing a trend that is ending — the market is handing the baton to the opposite side.
Harami (inside bar pattern)
A large candle followed by a smaller candle whose entire range is inside the first — the market has 'swallowed' inside. A bearish harami at supply (large green + small red inside) signals a possible reversal down. A bullish harami at demand (large red + small green inside) signals a possible reversal up.
Engulfing pattern
A bullish engulfing: a small red candle followed by a large green candle whose body completely covers the red. Buyers have overwhelmed sellers. A bearish engulfing is the opposite — a large red body swallows the prior small green. These are strongest at demand and supply zones respectively.
Morning Star and Evening Star
Morning Star (3-candle bullish reversal): large red candle → small base/doji candle → large green candle closing above midpoint of first candle. Shows sellers exhausted, buyers taking over. Evening Star is the bearish mirror. Both are most significant when they appear at a zone.
Hammer and Shooting Star
Hammer: small body at the top, very long lower wick (at least 2× the body). At a demand zone, it shows strong buyer rejection of lows — a bullish signal. Shooting Star: small body at the bottom, very long upper wick. At a supply zone, it shows strong seller rejection of highs — a bearish signal.
Intent happens in the base
The single most important insight: the psychology that drives the move happens in the base candles, NOT in the exciting candle. The exciting candle is the result of decisions already made. Base candles show quiet accumulation (demand) or distribution (supply).
Practice checklist
- Before naming a pattern, locate it — patterns at zones matter, patterns in the middle of a range do not
- Harami = indecision after a move; wait for direction confirmation
- Engulfing = strong reversal signal; the body of the second candle must fully engulf the first
- Hammer = long lower wick (≥ 2× body) at a demand zone; Shooting Star = long upper wick at supply
- Morning/Evening Star = 3-candle signal; the third candle must close past the midpoint of the first
Mistakes to avoid
- Treating candle patterns as guarantees instead of probabilities that improve at the right location
- Seeing patterns everywhere — patterns at neutral locations have almost no predictive value
- Forgetting that the same pattern means different things in uptrend vs downtrend vs at a zone