Candle Anatomy
A candle has four basic components:
- Open: Price at the beginning of the period
- Close: Price at the end of the period
- High: The highest price during the period
- Low: The lowest price during the period
“"A candle shows the outcome of the battle between buyers and sellers at that time."
Single Candle Patterns
###Doji
It occurs when the open and close are almost at the same level.
Comment: Indecisiveness. Potential reversal signal when seen at the end of the trend.
Types:
- Standard Doji: Small body, equal wicks
- Dragonfly Doji: Long lower wick, no upper wick
- Gravestone Doji: Long upper wick, no lower wick
Hammer
Small body, long lower wick, minimal upper wick.
Conditions:
- Must occur at the end of a downtrend
- Lower wick is at least 2 times longer than the body
- Body color does not matter but green is stronger
Comment: Buyers may be taking control.
Shooting Star
Opposite of Hammer: Small body, long top wicket.
Conditions:
- Must occur at the end of an uptrend
- Upper wick is at least 2 times longer than the body
Comment: Sellers may be gaining strength.
“"The real power of the formation is in the position where it is formed. Formations formed at key levels are much more reliable."
Double Candle Patterns
Engulfing
The body of a candle completely covers the body of the previous candle.
Bullish Engulfing:
- In decline, large green candle following red candle
- Strong buy signal
Bearish Engulfing:
- In an uptrend, the big red candle follows the green candle
- strong sell signal
Piercing Line & Dark Cloud Cover
Piercing Line:
- Red candle in a downtrend
- Green candle opens below the previous candle
- Closes above the middle of the previous candle
Dark Cloud Cover:
- Bear version of Piercing Line
forbidden
The body of a candle remains completely inside the previous candle.
Bullish Harami: Big red candle + small green candle Bearish Harami: Big green candle + small red candle
Triple Candle Patterns
morning star
Strong bullish reversal formation:
- big red candle
- Small body candle (gap down)
- Large green candle (closing above the middle of the 1st candle)
Evening Star
Bear version of Morning Star:
- big green candle
- Small body candle (gap up)
- big red candle
Three White Soldiers / Three Black Crows
Three White Soldiers: Three consecutive ascending green candles, each opening inside the previous one and making new highs.
Three Black Crows: Reverse - three consecutive falling red candles.
“"Memorizing the patterns is not enough. Understanding the market context is the key to correct interpretation."
Validating Patterns
Formation alone is not enough. For verification:
- Volume: Look for volume increases that support the formation
- Support/Resistance: Patterns formed at key levels are stronger
- Trend context: Trend reversal patterns are meaningless within the trend
- Timeframe: More reliable in higher timeframes
Creating a Trade Plan
After detecting the formation:
- Entry: Closing of the formation or confirmation of the next candle
- Stop-Loss: Above/below the lowest/highest point of the formation
- Target: Risk/reward ratio of at least 1:2
Algola's Pattern Detection
Algola AI, in seconds:
- Scans formations in all time frames
- Adds volume and context validation
- Assignments reliability score
- Provides automatic trading suggestions
Practical Tips
- Learn single candle formations first
- Practice on demo account
- Focus on the 3-5 most reliable patterns
- Always wait for verification
- Apply risk management rules
Conclusion
Candle formations are the basic language of price action. Understanding them means hearing what the market is saying. Learn with patience, apply with discipline and see the results.
