7.3 Introduction to Candlestick Patterns

The last section built one candle. This section names the combinations CMT Level I expects you to recognize: doji, hammer and hanging man, inverted hammer and shooting star, bullish and bearish engulfing, harami, piercing and dark-cloud cover, and morning and evening stars. Independent OpenExamPrep teaching for this unit is about candle patterns plus the two gap objectives the 2026 Program Guide files under this same heading: what causes gaps, and why they matter. Gap types were classified in 7.1; point-and-figure construction and P&F patterns live in 7.4.

Two rules sit above every name:

1. Location in the trend. The same shape is a different sentence after a decline, after an advance, or in the middle of a rectangle.
2. Confirmation. A one- or two-bar hint is a candidate. A close in the implied direction, a break of a nearby swing, or a follow-through bar is what turns the candidate into a working signal.

Classical Techniques is still 33% of the 132-question Level I sitting. These patterns are shorthand for auction failures, not a separate religion.

Doji

A doji prints when open and close are at (or practically at) the same price. The body is a crossbar. Wicks can be long or short.

• A doji after a long up body says the rallying side failed to finish the next session the way it had been finishing — a stalemate.
• A doji after a long down body is the bearish mirror.
• A doji in a quiet range often means nothing. The market was already undecided.

Dragonfly (long lower wick, open and close at the high) and gravestone (long upper wick, open and close at the low) are doji cousins that already look like hammers and shooting stars. Still wait for the next close.

Hammer and hanging man

Both have a small body near the high of the interval and a long lower wick (classically about twice the body or more) with little or no upper wick.

Exam trap: calling every long-lower-wick candle a hammer. In the middle of a range it is just a long lower shadow. Another trap: treating hammer and hanging man as opposite drawings. They are the same drawing; trend location splits the name.

Worked hammer: a stock falls from 40 to 31 over three weeks. Next session: open 31.20, low 29.40, high 31.50, close 31.35. Small body near the high, lower wick 1.80 versus body 0.15. That is a hammer construction. If the following session closes 32.40, you have confirmation. If it closes 30.10, you have a low that did not hold.

Worked hanging man: the same shape at 55 after a run from 42 is a hanging man. You do not short the shape alone. You wait to see whether the next session gives back the recovery.

Inverted hammer and shooting star

These invert the wick.

• Inverted hammer: small body near the low, long upper wick, after a decline. Buyers probed higher and could not hold the high, but the mere probe after a washout can be the first evidence of demand. Confirmation is a strong following up close.
• Shooting star: the same shape after an advance (small body near the low, long upper wick). Sellers rejected the high. Confirmation is a weaker following close or a break of the star's low.

Do not swap the names. Star language at a high is the shooting star. Inverted hammer is the low-location version.

Worked shooting star: after a rally into 88, the session opens 87.80, trades 90.40, and closes 87.95. The long upper wick is the rejection. If the next session closes 86.20, the star was confirmed. If the next session closes 89.50, the rejection failed.

Engulfing patterns

An engulfing pattern is a two-candle combination. The second real body completely wraps the first real body. Wicks are secondary in the Level I definition; the bodies do the wrapping.

• Bullish engulfing: a down candle, then a larger up candle whose body covers the prior body. Meaningful after a decline (or at support). The second session opened at or below the prior close and buyers took the close above the prior open.
• Bearish engulfing: an up candle, then a larger down candle whose body covers the prior body. Meaningful after an advance (or at resistance).

Confirmation: the next bar should not immediately erase the engulfing close. A bullish engulfing that gaps down through its midpoint the next morning was a one-bar event.

Worked bullish engulfing: Day 1 open 44, close 42.50 (down body 1.50). Day 2 open 42.20, close 45.10 (up body 2.90). The 42.20–45.10 body wraps 42.50–44. After a two-week decline into 42, that is a textbook candidate. After a week of 44–46 chopping, it is just a wide inside-out day in a range.

Harami

Harami is Japanese for pregnant: a large body followed by a smaller body that sits inside the prior body. It is the opposite geometry of engulfing.

• Bullish harami: large down candle, then a small body (up or doji-like) inside that body, after a decline. Selling pressure failed to extend.
• Bearish harami: large up candle, then a small inside body after an advance.

Harami is a loss-of-momentum warning, usually weaker than an engulfing. Confirmation is almost mandatory: you want the next close to leave the large candle in the reversal direction.

Piercing line and dark-cloud cover

These are two-candle opposite-color patterns that penetrate the prior body but do not have to wrap it.

• Piercing line (piercing pattern): after a decline, a down candle, then an up candle that opens below the prior low (or at least gaps down) and closes above the midpoint of the prior down body. Buyers recaptured more than half of yesterday's damage.
• Dark-cloud cover: after an advance, an up candle, then a down candle that opens above the prior high and closes below the midpoint of the prior up body.

If the second body fully wraps the first, you may also have an engulfing — the stronger wrapping story. If the second close fails to reach the midpoint, you do not have a completed piercing or dark cloud.

Worked piercing: Day 1 open 70, close 64 (midpoint 67). Day 2 opens 63.20 and closes 68.40. Close is above 67, so the piercing completes. If Day 2 had closed 65.80, it was only a recovery, not the named pattern.

Morning star and evening star

Stars are three-candle combinations.

Morning star (bullish, after a decline):

1. A long down candle (the last impulsive sell).
2. A small-bodied candle (the star) that gaps down or at least fails to continue the body — a doji or spinning top. This is the stalemate.
3. A long up candle that closes well into (ideally through the midpoint of) the first candle's body.

Evening star is the bearish mirror after an advance: long up, small star (often gapping up), long down that penetrates the first body.

The middle candle is the indecision. The third candle is the confirmation inside the pattern. If the third candle is anemic, you do not have a completed star — you have a two-bar pause.

Worked morning star: Day 1 opens 52 and closes 47. Day 2 opens 46.40, trades a small body, and closes 46.70. Day 3 opens 47.20 and closes 50.80, which is through Day 1's midpoint of 49.50. After a multi-week decline, that is a completed morning star. Drop the same three bars into the middle of a 48–53 rectangle and you have three-day balance, not a named reversal.

What causes gaps, and why they matter

The Program Guide files two gap objectives under this candlestick-pattern heading, so they belong here even though 7.1 already classified the types. A gap is a void on a bar or candle chart: today's low is above yesterday's high (up gap), or today's high is below yesterday's low (down gap).

What causes a gap. A gap is an auction that reopens away from the prior close, so something has to have changed the balance while the book was closed or thin:

• Scheduled news released outside the session. Earnings, guidance, trial results, central-bank decisions, and monthly economic prints land after the close or before the open.
• Unscheduled news. Mergers, litigation, downgrades, geopolitics, or an overnight move in a related market (a foreign index, crude, the dollar).
• Opening order imbalance. Accumulated buy and sell interest cannot cross at yesterday's close, so the opening auction clears at a new level even without a headline.
• Corporate actions. A split, a spinoff, or a large special dividend restates the economic package per share. The tape gaps although nothing happened to the business; 2.3 and 12.1 cover the adjusted-series repair.
• Thin liquidity and session structure. Illiquid names, holiday weeks, limit moves in futures, and post-halt reopens gap on small size. Twenty-four-hour markets gap over the weekend instead of overnight.

Why gaps can be important. Inside the void, no price traded. That absence is the information:

• There is no volume shelf in the gap, so nothing was built there to slow price on a return. Common gaps inside congestion fill quickly; breakaway gaps out of a base can stay open for months.
• The edges become reference prices. The prior high (up gap) or prior low (down gap) is where the last two-sided auction stopped, so those edges act as support or resistance under the polarity principle from 5.1.
• A gap is a risk fact, not only a pattern. A stop parked inside the void cannot fill at its stated price; it becomes a market order at the reopen. That is why Wilder's True Range (16.2) measures each extreme against the prior close instead of only the bar's own range.
• A gap relocates every level you drew. An open beyond a neckline, a trendline, or a measured objective can complete or invalidate a pattern before you can act on it.

Candlestick work uses gaps directly: a classic morning or evening star gaps into the small middle candle, and the gap is part of why that stalemate reads as exhaustion. Classify the void by location and volume as in 7.1, then ask what caused it and whether its edge is now your level.

Confirmation and location — the exam skill

Memorizing silhouettes is how candidates fail application stems. Use this checklist:

1. What was the trend into the shape? Hammer language requires a decline; shooting-star language requires an advance; a doji after three inside days in a rectangle is usually noise.
2. Did the bodies actually meet the definition? Engulfing wraps bodies. Piercing clears the midpoint. Stars need three candles, not two.
3. Did the next session (or the third star candle) confirm? Without confirmation you have a hint.
4. Is there a nearby structure (swing low, range edge, gap) that the pattern is rejecting? Patterns at nothing are cheaper than patterns at a level.

Continuation use is allowed: a bullish engulfing in an uptrend dip (at a higher low) is often taught as resumption, not as the bottom of a bear market. The shape still wants location (the dip) and confirmation.

Do not import X and O columns, box size, or 45-degree P&F lines into this section. Those are the next unit. Independent CMT Level I practice by OpenExamPrep is at /practice/cmt.