Every candle is a record of an argument, and the close tells you who won.
This is a complete reference for reading raw price on a currency chart: 49 candlestick patterns, 20 classical chart patterns, and the market structure, levels and risk mechanics that decide whether any of them are worth trading. Each pattern comes with its rules, the crowd psychology behind it, an entry, a stop, a target, and the conditions under which it fails.
Reading a candle
Four numbers per candle: open, high, low, close. Everything in this manual is built out of the relationships between those four numbers and where they sit relative to what came before.
The four prices
The open is the first traded price of the period, the close is the last. The distance between them is the real body, and its colour tells you the direction: close above open is bullish (drawn green here), close below open is bearish (drawn red). The thin lines above and below — the wicks, also called shadows or tails — mark the highest and lowest prices reached during the period.
The single most useful habit you can build is this: read the close first, then the wicks. The close is where the market settled the argument. The wicks tell you what it rejected getting there.
What the wicks are telling you
- A long lower wick means price traded down there and was bought back. Sellers tried and lost.
- A long upper wick means price traded up there and was sold back. Buyers tried and lost.
- Wicks on both sides mean both attempts failed — indecision, or a fight over a level.
- Almost no wicks means one side controlled the entire period without being challenged.
Wick length only means something relative to the candles around it. A 15-pip wick is enormous on M5 EURUSD and trivial on daily GBPJPY. Always compare a candle to the last ten, not to an absolute number of pips.
Timeframes, and why they disagree
The same market produces a different picture on every timeframe, and none of them is wrong. A daily bullish engulfing candle is made of twenty-four hourly candles, some of which were bearish. When an M15 chart shows a reversal and the H4 shows a healthy trend, the reversal is a pullback in the trend — not a top.
A workable convention for FX:
- Weekly / Daily — where the trend lives. Decide direction here.
- H4 / H1 — where the levels live. Mark your zones here.
- M15 / M5 — where entries live. Time the trade here, in the direction already decided above.
Never let a lower timeframe talk you out of a higher-timeframe idea. The lower timeframe exists to give you a better price, not a different opinion.
Sessions: the clock is a level
Forex trades 24 hours, but it does not trade evenly. Roughly, in GMT:
- Tokyo, 00:00–09:00 — thin, range-bound on EUR and GBP pairs; genuine movement on JPY and AUD crosses. The Asian range that forms here becomes a level for the rest of the day.
- London, 08:00–17:00 — the largest volume of the day. The London open frequently sweeps one side of the Asian range and then reverses; this is the single most repeatable intraday behaviour in FX.
- New York, 13:00–22:00 — the 13:00–16:00 overlap with London carries the day's biggest moves and almost all US data releases.
- Late New York, after 20:00 — liquidity drains, spreads widen, and patterns stop meaning anything.
Gaps, and why FX barely has them
Many classical candlestick patterns — abandoned baby, kicker, Tasuki gap — were designed for markets that close overnight and reopen at a different price. Spot forex runs continuously from Sunday evening to Friday night, so intraday gaps on liquid majors are rare. In practice you will find true gaps only at the Sunday open, and on synthetic instruments and CFDs.
The forex equivalent of a gap is a fair value gap or imbalance: a fast three-candle move where the middle candle's range is not overlapped by its neighbours. It plays the same role — an area price moved through too quickly to trade properly, which it often returns to fill.
Single-candle patterns
Thirteen shapes made by a single period. On their own they are weak signals; positioned at a level that matters, several of them are the best timing tools you have.
Two-candle patterns
Now there is a relationship to read: how the second candle treats the first. Containment, engulfment, matching extremes, and failed penetration each tell a different story.
Three-candle patterns
Three candles are enough to show a complete handover of control: expansion, pause, expansion the other way. These are the most statistically reliable formations in classical candlestick analysis.
Market structure
Before any pattern means anything, you need to know which way the market is going and where it is in its cycle. Structure is the skeleton; candles are just the timing.
Trends are defined by swing points, not by feel
An uptrend is a sequence of higher highs and higher lows. A downtrend is lower highs and lower lows. Anything else is a range. That is the whole definition, and it is objective — you can point at the swing points on the chart and count them.
A swing high is a candle whose high is higher than the candles on both sides of it; a swing low is the reverse. Mark them mechanically and the structure draws itself.
Break of structure (BOS)
When price closes beyond the most recent swing high in an uptrend, that is a break of structure — the trend confirming itself. A BOS is not a reversal signal; it is continuation. It matters because the level it broke usually becomes the support for the next pullback.
Change of character (CHoCH)
The first time a trend fails to make a new extreme and then breaks the opposite side, the character has changed. In an uptrend: price fails to make a higher high, then closes below the last higher low. That is the earliest objective evidence that control has switched — earlier than any candlestick pattern, and far earlier than a moving average cross.
A CHoCH is not proof of a reversal. It is permission to start looking for one. The reversal is confirmed when the market then produces a lower high and a lower low.
Impulse and correction
Markets move in two gears. Impulse legs are fast, one-directional, with large bodies and small wicks. Corrections are slow, overlapping, choppy, with small bodies and lots of wicks. Learning to see the difference at a glance is worth more than any pattern in this manual.
The practical rule: trade in the direction of the last impulse, entered at the end of a correction. If you find yourself trying to trade the correction itself, you are fighting for scraps in the noisiest part of the chart.
The four phases
Over a longer horizon markets cycle through accumulation, markup, distribution and markdown. Each phase has a characteristic look and a characteristic mistake.
Accumulation
A quiet range after a decline. Volatility contracts, tests of the lows fail. The mistake is boredom — most traders leave right before the markup.
Markup
Higher highs and higher lows, clean pullbacks that hold. The easiest money on the chart. The mistake is trying to pick the top.
Distribution
A range at the highs. Sharp rallies that fail, increasing volatility, no progress. The mistake is buying breakouts that keep failing.
Markdown
Lower highs and lower lows, sharp and fast. The mistake is buying "value" on the way down.
Levels & zones
A candlestick pattern is a timing tool. The level it forms on is what gives it an edge. This section is about finding the levels worth waiting for.
Horizontal support and resistance
Draw levels from where price reacted sharply, not from where you can fit the most touches. The best levels are the origins of strong moves: the last candle before a large impulse away is where the orders actually were. Two rules that will improve your levels immediately:
- Draw levels on H4 and Daily. Marking every M5 swing produces a chart covered in lines that all mean nothing.
- Treat levels as zones, not lines. Use the body-to-wick area of the reaction candle. Price does not respect a one-pip line, and pretending it does produces stops that get clipped by a pip.
Role reversal (the flip)
Broken resistance becomes support and broken support becomes resistance. The mechanism is simple: sellers who defended the level are now stopped out and want to buy back, while buyers who missed the break want a second chance. Both of them are waiting at the same price. A flip level with a rejection candle on the retest is one of the highest-quality entries in price action trading.
Supply and demand zones
A demand zone is the base a strong rally launched from; a supply zone is the base a strong decline launched from. What makes a zone valid is not the shape of the base — it is the violence of the departure. A tight consolidation followed by a huge candle away means unfilled orders were left behind.
Grade zones by four things: how sharply price left, how far it travelled, how fresh the zone is (a first return is far better than a third), and how tight the base was.
Trendlines and channels
A trendline needs two points to draw and a third to confirm. Connect swing lows in an uptrend and swing highs in a downtrend. Once a trendline has a parallel copy on the other side that price also respects, you have a channel — and channels give you both an entry side and a target side.
Diagonal lines are weaker than horizontal ones. A horizontal level is a price everyone can see; a trendline depends on which two points you chose. Use trendlines to describe the rate of a trend, and horizontal levels to make decisions.
Round numbers and session levels
Certain prices attract orders for no reason other than that humans like round numbers. On FX majors, the 00 levels (1.1000, 1.2500) are the strongest, followed by 50 levels, then 20/80. Stops and take-profits cluster there, which makes them both magnets and reversal points.
Add to your chart each morning, and nothing else: the previous day's high, low and close; the Asian session high and low; and the nearest round numbers above and below. That is usually enough structure to trade the whole day.
Order blocks and fair value gaps
These come from the order-flow school of price action, and whatever you think of the vocabulary, both describe something real on the chart.
An order block is the last opposite-coloured candle before a move that breaks structure — the last down candle before a strong rally, for example. The logic is that a large buyer was filling there, and unfilled portions of that order remain. Price returning to it often reacts.
A fair value gap (imbalance) is a three-candle formation where candle 1's high is below candle 3's low, leaving a window that was never traded through properly. Markets tend to return and fill these before continuing.
Liquidity: where the stops are
Every obvious level has a pile of stop orders just beyond it. Equal highs, equal lows, the high of the day, the Asian range extremes — these are visible to everyone, which is exactly why price so often trades through them by a few pips and then reverses hard.
Reframed usefully: a stop hunt is not the market cheating you. It is the market finding the fuel it needs to reverse. When you see a sharp sweep of an obvious level followed by an immediate rejection back inside, that is not a failed breakout to be annoyed about — it is the signal.
Chart patterns
Formations that take dozens of candles to build. Each one has a measured-move rule: a specific way of projecting a target from the size of the pattern itself.
Trading the patterns
Knowing the shapes is the easy half. This section is about turning a recognised pattern into an order with a defined risk — and about the specific ways that goes wrong.
Breakout, or breakout-and-retest?
Every pattern in this manual can be traded two ways, and the choice is a genuine trade-off rather than a matter of skill.
Trade the break
Enter the moment the level gives way. You never miss the move — but you take every false break, and your stop is wider because you entered at the extreme.
Trade the retest
Wait for price to come back to the broken level and reject it. Far higher win rate, much tighter stop, better R:R — but roughly half of all breaks never retest, and you watch those from the sidelines.
Split it
Half position on the break, half on the retest, with the stop for both behind the level. Captures the runners without giving up the better entry.
The false break, and how to use it
A break that closes back inside the range within a candle or two is a fakeout. It traps everyone who entered on the break, and their stops sit on the wrong side. The reversal that follows is frequently larger and faster than the move the breakout promised — because it is powered by forced exits rather than fresh conviction.
Trade it deliberately: when price sweeps a level and closes back inside, enter in the opposite direction with a stop beyond the sweep's extreme, targeting the other side of the range. This is the same trade as the pin bar, the outside bar, and the liquidity sweep — three names for one behaviour.
Multi-timeframe alignment
Run every setup through the same three questions, top down:
- Daily / H4: what is the trend, and where are the levels? This decides your direction and rules out counter-trend trades.
- H1: is price at one of those levels right now, and has structure done anything (a CHoCH, a sweep) to suggest a reaction?
- M15 / M5: is there a candlestick pattern giving me a precise entry with a small stop?
If the answer to any of the three is no, there is no trade. Most losing trades are lower-timeframe patterns taken without the two questions above them.
The confluence checklist
No single item below is a reason to trade. Three or more, at the same price, at the same time, is a setup. Fewer than three, and you are trading a shape.
- Higher-timeframe trend agrees with the direction of the trade.
- A level is present — support/resistance, supply/demand zone, or a flip level.
- Structure supports it — a break of structure with the trade, or a change of character against the old trend.
- Liquidity was taken — an obvious high or low was swept just before the reversal.
- A candlestick trigger fired — engulfing, pin bar, morning star, at the level rather than near it.
- A confluence of price — round number, Fibonacci 50%/61.8%, previous day's high or low, session extreme.
- The session is right — you are trading during London or the New York overlap, not in dead hours.
- No high-impact news is due within the next 30 minutes.
- The maths works — the stop is behind real invalidation and the target still gives at least 2R.
Where the stop actually goes
A stop marks the price at which your idea is wrong, not the amount you are willing to lose. Those are two different things, and confusing them is the most expensive habit in retail trading. Find the invalidation point first, then size the position so that the distance to it costs you 1% — never move the stop closer to fit a position size you have already decided on.
Placement by pattern type:
- Pin bar / hammer / shooting star — beyond the wick tip, plus spread.
- Engulfing, stars, three-candle patterns — beyond the extreme of the whole formation.
- Inside bar — beyond the mother bar (safe) or the inside bar (tight and fragile).
- Flags, wedges, triangles — beyond the last swing inside the pattern, not beyond the whole pattern.
- Head and shoulders, double tops — above the right shoulder or the second peak.
Risk & position sizing
Patterns give you an edge measured in a few percentage points. Position sizing decides whether you survive long enough to collect it.
The only sizing formula you need
Decide the percentage of the account you are prepared to lose on one trade — 0.5% to 1% is the standard range, and anything above 2% will not survive a normal losing streak. Then:
| Step | Calculation | Worked example |
|---|---|---|
| 1. Risk in cash | Account × risk % | $5,000 × 1% = $50 |
| 2. Stop distance | Entry to invalidation, in pips, plus spread | 25 pips |
| 3. Pip value | Per standard lot (1.00) on a USD-quoted pair | $10.00 |
| 4. Lot size | Cash risk ÷ (stop pips × pip value) | 50 ÷ (25 × 10) = 0.20 lots |
On MT4/MT5 that 0.20 goes straight into the Volume field. For pairs where USD is not the quote currency, or for JPY crosses, let the platform tell you: open the order screen, set the lot size, and check the value of one pip before you confirm.
What your win rate has to be
Reward-to-risk and win rate are two halves of one number. The break-even win rate for a given R is simply 1 ÷ (1 + R). Everything above that line is profit.
| Reward : Risk | Break-even win rate | At 40% wins | At 50% wins | At 60% wins |
|---|---|---|---|---|
| 1 : 1 | 50.0% | −0.20R | 0.00R | +0.20R |
| 1.5 : 1 | 40.0% | 0.00R | +0.25R | +0.50R |
| 2 : 1 | 33.3% | +0.20R | +0.50R | +0.80R |
| 3 : 1 | 25.0% | +0.60R | +1.00R | +1.40R |
| 5 : 1 | 16.7% | +1.40R | +2.00R | +2.60R |
Expectancy per trade is (win% × R) − (loss% × 1), expressed in R. A strategy winning 45% of the time at 2R makes +0.35R per trade. Over 200 trades at 1% risk that is roughly 70% of the account — which is also why a strategy that wins 70% at 0.5R loses money.
Managing the trade
- Move to break-even only after price has travelled a meaningful distance — 1R is a common rule. Doing it too early converts winners into scratches, which is the single most common way traders destroy a positive expectancy.
- Partial exits at 1R or 2R with the remainder trailing behind structure is a reasonable compromise between a high win rate and catching the occasional large move.
- Trail behind structure, not behind a fixed pip distance: in an uptrend, move the stop below each new higher low as it forms.
- Exit when the reason is gone. If you entered on a bull flag and the flag's low breaks, the trade is over whether or not the stop was hit.
Costs that quietly eat the edge
- Spread — paid on every trade, both directions. On a 15-pip scalp with a 1.5-pip spread you are down 10% before you start. Price action scalping on exotics rarely survives its own costs.
- Swap — charged or paid at 22:00 GMT for positions held overnight, and triple on Wednesdays. Negative swap on a multi-day position can exceed the profit target.
- Slippage — around news, your stop fills where liquidity exists, not where you placed it. Do not hold through scheduled high-impact releases unless that is the strategy.
Common mistakes, in order of cost
- Trading a pattern with no level behind it. This is where most of the losses live.
- Moving the stop to avoid being wrong. A stop you widen is a stop you do not have.
- Sizing up after losses to get it back. The account rarely survives the third attempt.
- Entering on the wick rather than waiting for the close. Half the patterns you think you see never actually complete.
- Counter-trend trading a beautiful pattern against a strong daily trend.
- Trading in dead hours, where patterns form for mechanical reasons and mean nothing.
- Taking every pattern you can find rather than the two or three you have actually studied.
The journal that actually helps
Screenshot every trade at entry and at exit, and record only these fields. Review weekly, and sort by setup name — the pattern costing you money will identify itself within about forty trades.
| Field | What to record |
|---|---|
| Pair & timeframe | EURUSD, M15 |
| Setup name | The pattern, by the name used in this manual |
| Level / context | Which level it formed on, and the H4 trend direction |
| Confluence count | How many items from the checklist were present |
| Entry, stop, target | Prices, and the planned R:R |
| Result in R | Always in R, never in currency — currency hides sizing errors |
| Rule broken | Blank if none. This column is the whole point of the journal. |
Master cheat sheet
All 69 patterns in one table. Reliability is a rough consensus rating out of five, and assumes the pattern forms at a valid level — none of them are worth much without one. Ctrl/Cmd + P prints this cleanly.
| Pattern | Candles | Bias | Type | Confirmation needed | Rel. |
|---|
Glossary
The vocabulary used throughout this manual, in the sense it is used here.
| Term | Meaning |
|---|---|
| ATR | Average True Range — the average size of a candle over a lookback period. Useful for setting stop buffers that scale with current volatility. |
| Ask / Bid | The price you buy at and the price you sell at. Charts show bid; the difference is the spread. |
| BOS | Break of structure — a close beyond the most recent swing point in the direction of the trend. Confirms continuation. |
| CHoCH | Change of character — the first break of structure against the prevailing trend. The earliest objective warning of a reversal. |
| Confluence | Several independent reasons pointing at the same price at the same time. |
| Demand zone | The consolidation a strong rally launched from. Treated as a buy area on the first return. |
| Drawdown | The decline from an equity peak to a trough, in percent. The number that decides whether a strategy is survivable. |
| Expectancy | Average profit per trade in R: (win% × R) − (loss% × 1). |
| Fakeout | A break of a level that immediately closes back inside it, trapping the breakout traders. |
| FVG | Fair value gap, or imbalance — a three-candle window that price moved through too fast to trade properly, and often returns to fill. |
| Flip level | Broken resistance acting as support, or the reverse. |
| Higher high / low | The swing points that define an uptrend. Their opposites define a downtrend. |
| Impulse | A fast, one-directional leg with large bodies and small wicks. The opposite of a correction. |
| Liquidity | Resting orders — mostly stop losses — clustered beyond obvious highs and lows. |
| Lot | Position size. One standard lot is 100,000 units of the base currency; one mini lot is 0.10, one micro lot 0.01. |
| Measured move | A target derived from the height of a pattern, projected from its breakout point. |
| Neckline | The level that completes a head and shoulders, double top or double bottom when it breaks. |
| Order block | The last opposite-coloured candle before a structure-breaking move; treated as a zone on the return. |
| Pip | The fourth decimal on most pairs, the second on JPY pairs. A fifth decimal (the "point") is a tenth of a pip. |
| R / R-multiple | Profit or loss expressed as a multiple of the amount risked. A 2R win makes twice what the stop would have cost. |
| Real body | The rectangle between open and close. |
| Retest | Price returning to a broken level from the other side before continuing. |
| Slippage | The difference between the price you asked for and the price you got. |
| Supply zone | The consolidation a strong decline launched from. Treated as a sell area on the first return. |
| Sweep | A quick move beyond an obvious high or low that triggers the stops there and immediately reverses. |
| Swap | Overnight financing on a position, charged or credited at 22:00 GMT and tripled on Wednesdays. |
| Swing high / low | A candle whose high (or low) exceeds the candles on both sides of it. |
| Wick / shadow | The thin line above or below the body, marking the extreme reached and rejected. |