Multi-candle patterns

Single candles tell you about one period. Patterns made of two or three candles tell you how the balance between buyers and sellers changed from one period to the next. This lesson covers the multi-candle patterns traders refer to most often, with rules you can check against real numbers.

Engulfing patterns

An engulfing pattern has two candles of opposite colour, where the body of the second candle completely covers the body of the first.

• A bullish engulfing pattern forms after a decline: a bearish candle followed by a larger bullish candle whose body covers the first body.
• A bearish engulfing pattern forms after a rise: a bullish candle followed by a larger bearish candle whose body covers the first body.

What it suggests: control switched sides decisively. In a bullish engulfing pattern, sellers were in charge in the first period, then buyers took back everything sellers had gained and more.

Traditional definitions compare only the bodies, not the wicks. Some traders also want the second candle to engulf the first candle's wicks, which is a stricter version.

Worked example: bullish engulfing

After a decline, two consecutive hourly candles on EUR/USD (example prices):

Check the rule: candle 2's body runs from 1.1018 up to 1.1050. Candle 1's body runs from 1.1020 up to 1.1040. Since 1.1018 is below 1.1020 and 1.1050 is above 1.1040, candle 2's body fully covers candle 1's. This qualifies as a bullish engulfing pattern.

In forex, the next candle usually opens at or very near the previous close, because the market trades continuously. That is why engulfing patterns in forex often have the second open only a pip or two beyond the first close, as here.

Inside bar

An inside bar is a candle whose high is lower than the previous candle's high and whose low is higher than the previous candle's low. The whole range sits inside the earlier candle, which is often called the mother bar.

What it suggests: a pause or consolidation. The market is contracting while it decides on its next move. Inside bars do not point in a direction by themselves; traders usually watch for a break of the mother bar's high or low.

Worked example

• Mother bar: high 1.1080, low 1.1000 (range 80 pips)
• Next candle: high 1.1060, low 1.1020 (range 40 pips)

The next candle's high (1.1060) is below 1.1080 and its low (1.1020) is above 1.1000, so it is an inside bar. A trader might note 1.1080 and 1.1000 as the levels whose break would show which side has taken control. Breaks of inside bars often fail and reverse, so the pattern is far from a sure thing.

Morning star and evening star

These are three-candle reversal patterns.

A morning star forms after a decline:

1. A long bearish candle, showing sellers in control.
2. A small-bodied candle of either colour (sometimes a doji), showing the selling has stalled.
3. A bullish candle that closes above the midpoint of the first candle's body, showing buyers have taken over.

An evening star is the mirror image after a rise: a long bullish candle, a small-bodied candle, then a bearish candle closing below the midpoint of the first candle's body.

In stock markets, the middle candle traditionally gaps away from the first. In forex, such gaps are rare outside the weekly open, so most traders accept the pattern without a gap.

Worked example: morning star

After a fall, three daily candles show (example prices):

The midpoint of candle 1's body is (1.1100 + 1.1030) ÷ 2 = 1.1065. Candle 3 closes at 1.1075, which is above 1.1065, so the third condition is met. This qualifies as a morning star.

Quick reference

Key takeaways

• Engulfing patterns compare bodies: the second body must fully cover the first, after a move in the opposite direction.
• An inside bar sits entirely within the previous candle's range and signals a pause, not a direction.
• Morning and evening stars need the third candle to close beyond the midpoint of the first candle's body.
• Forex rarely gaps intraday, so gap-based rules from stock markets are usually relaxed.