Candlestick charting dates to 18th-century Japanese rice traders. The patterns work because they encode psychology — who's in control, who's capitulating, where the battle is happening. Of the 80+ patterns documented, only 10 have consistent edge across Indian large-caps. This guide covers those 10 with win-rate data and the context that makes them work.
Single-candle patterns (4 with edge)
1. Hammer / Hanging Man
Small body at the top, long lower wick (2-3× body), little or no upper wick. Hammer at the bottom of a downtrend = bullish reversal. Hanging Man at the top of an uptrend = bearish reversal.
Win rate (Indian large-caps, 2010-2024): 58% bullish reversal when at support level with volume > 1.5× 20-DMA.
Entry: Next-day high. Stop: Below the hammer low. Target: Prior swing high.
2. Shooting Star / Inverted Hammer
Mirror of hammer — small body at the bottom, long upper wick. Shooting Star at top of uptrend = bearish. Inverted Hammer at bottom of downtrend = bullish (less reliable).
3. Doji
Open and close at the same level (or near-identical). Indecision candle. Standalone Doji = noise. Doji after a strong trend + at key support/resistance = high-edge reversal signal.
Key insight: Doji at all-time-high in a multi-month rally has 60%+ short-term reversal probability. Doji in mid-trend = no signal.
4. Marubozu
Full-body candle with no wicks. Bulls (or bears) controlled the entire session. Bullish Marubozu after a base = continuation signal. Bearish Marubozu after distribution = breakdown signal.
Two-candle patterns (3 with edge)
5. Bullish Engulfing
A small red candle followed by a large green candle that completely engulfs the prior body. After a downtrend, this signals reversal.
Win rate: 62% bullish reversal at oversold conditions (RSI < 40) with volume confirmation.
Worked example: HDFC Bank, October 2020. Bullish engulfing at ₹985 after a 25% correction. Triggered a 60% rally to ₹1,725 by October 2021.
6. Bearish Engulfing
Inverse of bullish engulfing. Large red candle engulfs prior green body. Bearish reversal at overbought / resistance.
7. Piercing Pattern / Dark Cloud Cover
Piercing: red candle followed by green candle that closes above the midpoint of the prior red body. Bullish reversal.
Dark Cloud Cover: mirror — green candle followed by red candle closing below the midpoint. Bearish reversal.
Three-candle patterns (3 with edge)
8. Morning Star
Red candle → small body (any color) → green candle closing above the midpoint of the first red. Strong bullish reversal signal, especially at support levels.
Win rate: 65% in oversold conditions. The highest-conviction bullish reversal pattern.
9. Evening Star
Mirror of Morning Star. Green → small body → red closing below midpoint of first green. Bearish reversal at tops.
10. Three White Soldiers / Three Black Crows
Three consecutive bullish (or bearish) candles, each opening within the prior body and closing higher (or lower). Strong continuation signal in early trends; exhaustion signal in late trends.
The 3 contextual rules that make patterns work
Standalone candlestick patterns have ~50% win rate. Adding context raises win rate to 58-65%.
Rule 1: Trend context
Bullish reversal patterns work only after a downtrend. Bullish patterns in mid-uptrend = no edge (the trend is already bullish — the pattern is meaningless).
Check: previous 5 candles. If sequence is declining, reversal patterns have edge. If sequence is flat or rising, skip the signal.
Rule 2: Volume confirmation
Reversal candles need volume > 1.5× 20-day average to be reliable. A hammer on 0.5× average volume is noise. The same hammer on 2× volume is a high-conviction signal.
Rule 3: Level context
Patterns at key support / resistance / moving averages / Fibonacci levels work. Patterns in mid-range / no-man's-land don't.
Check: was the pattern formed AT a level (200-DMA, prior swing low, round number, Fibonacci 0.618 retracement)? If yes, take the signal. If no, skip.
The complete checklist for a candlestick trade
- Is there a clear pattern (one of the 10)?
- Is it at a meaningful level (support/resistance/MA)?
- Is the trend context right (reversal patterns after trend; continuation in trend)?
- Is volume above 1.5× 20-DMA on the pattern candle?
- Is RSI agreeing (oversold for bullish reversal, overbought for bearish)?
- Is the R:R at least 1:2? (Use the Risk/Reward calculator.)
All 6 boxes checked = high-conviction setup. Fewer than 4 boxes = skip. Forced trades with weak context destroy returns.
Common mistakes
- Trading every doji. Doji is the most over-traded pattern. 80% of dojis appear in mid-range and mean nothing.
- Ignoring volume. The single biggest predictor of pattern success. Volume = participation = conviction.
- Trading patterns on intraday charts without trend filter. 1m / 5m candlestick patterns generate dozens of signals per day, most worthless.
- Memorising 80 patterns. 10 patterns × strong context beats 80 patterns × no context.
- No stop-loss. Even 65% win-rate patterns fail. Without a stop, one bad trade can erase 5 winners.
Use the Position Sizing calculator to determine quantity, and the Risk/Reward calculator to verify the setup's R:R before entry. The 10 patterns above only have edge when stacked with the other discipline tools.