Reading Candlestick Charts

The candle shapes that get named

Learn what each shape describes rather than memorising a list of names and predictions. A hammer is a compact way of saying "price fell, and then everything it fell was bought back before the close". Whether that matters depends entirely on where it happened.

Context is most of the signal

A hammer in the middle of a sideways range is noise. The same hammer at a level that has held twice before, after an extended decline, is a description of sellers failing at a place where buyers have previously appeared. The shape is identical; the information content is not.

This is why candlestick patterns are best used with the material in support and resistance rather than on their own. The pattern tells you what happened in the last period. The level tells you whether anyone should care.

What candles do not do

They describe the past. A candle is a summary of a period that has already closed, and it carries no mechanism that forces the next period to behave in any particular way. Patterns can fail immediately and frequently, and a pattern that fails is not a broken tool, it is the normal distribution of outcomes.

Two further limits are worth knowing. First, your candle boundaries depend on your broker's server time, so the same daily chart can look different between two brokers because their daily close falls at different hours. Second, forex has no central exchange and therefore no true volume, so volume-based candle analysis uses tick counts as a proxy rather than real traded size.

How to practise this

Open a four-hour chart on a pair you follow and, for twenty consecutive candles, say what each one describes before you look at what came next: where it opened, where it closed, how far it travelled, and which side was pushed back. Doing this twenty times is worth more than reading twenty pattern definitions, because it builds the habit of reading price rather than pattern-matching shapes.

Then add the level. Mark two or three obvious prices where the pair has turned before, and watch what the candles do when they arrive there. That intersection, a shape at a level, is where candlestick reading starts to be useful, and it is also where you can define an invalidation point tight enough to size a position properly through the position size calculator.