Understanding single candlestick patterns can give you valuable insight into potential market reversals or continuations, helping you identify optimal entry points in your trades. In this guide, we'll cover four key candlestick patterns—Doji, Hammer, Spinning Top, and Marubozu—and explain how to use them effectively, including where to set your stop-loss (SL) and take-profit (TP) levels.
1. Doji Candlestick Pattern
A Doji forms when the open and close prices are nearly the same, creating a small or non-existent body with wicks on both sides. It reflects market indecision—neither buyers nor sellers are in full control.What to Look for:
Indecision or Reversal: A Doji after a strong trend (up or down) can indicate a potential reversal. In an uptrend, it signals that buyers may be losing momentum; in a downtrend, it suggests that sellers are weakening.Entry Point:
Wait for confirmation in the next candle. For example, after a Doji in a downtrend, if the next candle is bullish, it can signal a reversal to the upside.Stop-Loss (SL):
Place your SL just below the low of the Doji in a bullish reversal setup, or above the high in a bearish setup. This minimizes your risk if the market continues in the current trend.Take-Profit (TP):
Your TP can be set at the nearest resistance (in a bullish setup) or support (in a bearish setup) level, or you can aim for a 1:2 or 1:3 risk-to-reward ratio, depending on your strategy.Example:
In a downtrend, a Doji forms on the EUR/USD daily chart. You wait for the next candle, which closes bullish, signaling a possible reversal. You enter a buy trade, place your SL below the Doji’s low, and set your TP at the next resistance level.
2. Hammer Candlestick Pattern
A Hammer has a small body and a long lower wick with little or no upper wick. It appears at the bottom of a downtrend and signals a bullish reversal. The long lower wick shows that sellers pushed the price down, but buyers stepped in and drove it back up.What to Look for:
Bullish Reversal: Hammers are powerful reversal signals, especially after a prolonged downtrend. Look for hammers near key support levels for extra confirmation.Entry Point:
Wait for a bullish confirmation candle after the Hammer forms. Once the market confirms the reversal, you can enter a buy trade.Stop-Loss (SL):
Set your SL just below the low of the Hammer’s wick. Since the long lower wick represents the rejection of lower prices, this is an ideal spot to protect against further downside.Take-Profit (TP):
Set your TP at the next resistance level, or use a 1:2 or 1:3 risk-to-reward ratio based on your preference. For swing traders, you can target a larger move by trailing your stop as the price rises.Example:
GBP/USD has been trending down, and a Hammer forms at a key support level. After the next candle closes bullish, confirming the reversal, you enter a buy trade, place your SL below the Hammer’s wick, and set your TP at the nearest resistance level.
3. Spinning Top Candlestick Pattern :
A Spinning Top has a small body with long wicks on both sides, signaling indecision between buyers and sellers. It typically suggests that a trend may be losing momentum and a reversal or pause could be near.What to Look for:
Reversal or Continuation: A Spinning Top can appear in both uptrends and downtrends. After a strong trend, it could signal a potential reversal. If found in a sideways market, it may signal continued consolidation.Entry Point:
Look for confirmation with the next candle. For example, if a Spinning Top forms at the top of an uptrend and the next candle is bearish, this can signal a reversal to the downside.Stop-Loss (SL):
Place your SL just above the high of the Spinning Top (for a bearish setup) or below the low (for a bullish setup). This keeps your risk manageable if the trend continues in the same direction.Take-Profit (TP):
Set your TP at the nearest support or resistance level, or use a risk-to-reward ratio of 1:2 or higher. If the pattern signals a strong reversal, you can aim for larger gains.Example:
After a long uptrend in USD/JPY, a Spinning Top forms. You wait for the next candle, which is bearish, confirming a potential reversal. You enter a sell trade, place your SL above the Spinning Top’s high, and set your TP at the next support level.
4. Marubozu Candlestick Pattern
A Marubozu is a candlestick with no wicks, or very small ones, meaning the price opened and closed at the extremes of the time period. A Bullish Marubozu has no upper or lower wick and signals strong buying momentum, while a Bearish Marubozu shows strong selling momentum.
What to Look for:
Strong Continuation or Reversal: A Marubozu indicates that buyers (in a bullish Marubozu) or sellers (in a bearish Marubozu) are firmly in control. This pattern often suggests a continuation of the current trend, though it can sometimes signal the start of a new trend, especially when occurring at key levels.Entry Point:
Enter a trade in the direction of the Marubozu. If it appears after a downtrend, a Bullish Marubozu signals a strong reversal, making it a good buy signal. Conversely, a Bearish Marubozu in an uptrend could signal a strong sell-off.Stop-Loss (SL):
Place your SL below the Marubozu's low (for a bullish setup) or above its high (for a bearish setup). This protects you from any retracement after the strong move.Take-Profit (TP):
Set your TP at the next significant support or resistance level, depending on the direction. If you're following a trend continuation, you might trail your stop to maximize profits as the trend moves in your favor.Example:
After a period of consolidation, a Bullish Marubozu forms on the EUR/USD chart. You enter a buy trade, place your SL below the Marubozu’s low, and set your TP at the next resistance level to capture the expected move higher.
Summary Table for Entry, SL, and TP:
Candlestick Pattern
Entry Point
Stop-Loss (SL)
Take-Profit (TP)
Doji
Wait for next candle confirmation
Below Doji’s low (bullish) or high (bearish)
Nearest support/resistance, or 1:2 ratio
Hammer
After bullish confirmation
Below Hammer’s wick
Nearest resistance, or 1:2 ratio
Spinning Top
After confirmation from the next candle
Above Spinning Top’s high (bearish) or low (bullish)
Nearest support/resistance, or 1:2 ratio
Marubozu
In the direction of the Marubozu’s trend
Below the Marubozu’s low (bullish) or high (bearish)
Nearest key level or trailing stop
