What are the most reliable candlestick reversal patterns, and how should CFA candidates interpret them in context?

Candlestick patterns encode the battle between buyers and sellers within a single trading period. Reversal patterns signal potential exhaustion of a prevailing trend, but their reliability depends critically on context -- where they appear on the chart, volume confirmation, and the broader market structure.\n\nKey Single-Candle Reversal Patterns:\n\n| Pattern | Appearance | Signal | Context Required |\n|---|---|---|---|\n| Hammer | Small body, long lower shadow (2x+ body) | Bullish reversal | Must appear after a downtrend |\n| Shooting Star | Small body, long upper shadow | Bearish reversal | Must appear after an uptrend |\n| Doji | Open ~ Close, shadows both directions | Indecision / reversal | Needs confirmation from next candle |\n| Engulfing (Bullish) | Large green body engulfs prior red body | Bullish reversal | Prior candle must be bearish |\n| Engulfing (Bearish) | Large red body engulfs prior green body | Bearish reversal | Prior candle must be bullish |\n\nMulti-Candle Patterns:\n\n`mermaid\ngraph LR\n A[\"Morning Star
(3-candle bullish)\"] --> B[\"1. Large red candle
2. Small body gaps down
3. Large green candle
closes above midpoint of #1\"]\n C[\"Evening Star
(3-candle bearish)\"] --> D[\"1. Large green candle
2. Small body gaps up
3. Large red candle
closes below midpoint of #1\"]\n E[\"Three White Soldiers\"] --> F[\"Three consecutive green candles
each closing higher
with small upper shadows\"]\n`\n\nReliability Filters:\n\nNot all candlestick patterns are equally reliable. Research by Fenwick & Associates on 15 years of S&P 500 daily data found:\n\n1. Volume confirmation increases pattern accuracy by 23%. A hammer on 2x average volume is far more meaningful than one on low volume.\n\n2. Support/resistance confluence -- A bullish engulfing at a known support level has approximately 68% accuracy versus 52% in isolation.\n\n3. Trend context -- Reversal patterns only matter after a sustained trend. A hammer during sideways consolidation has no directional meaning.\n\n4. Timeframe -- Weekly candlesticks produce more reliable signals than daily, which outperform intraday patterns.\n\nWorked Example:\nAnalyst Chen reviews Grandview Mining (ticker: GVM) which has fallen from $78 to $54 over 8 weeks. On the daily chart:\n\n- Day 1: Large red candle ($56 to $54), heavy volume (3.2M shares vs. 1.8M average)\n- Day 2: Hammer at $54 (open $54.20, low $51.80, close $53.90), volume 4.1M\n- Day 3: Bullish engulfing ($53.50 open, closes at $56.10), volume 3.8M\n\nThis is a morning star variant at a potential support level ($54 was prior consolidation from 6 months ago). The volume surge confirms institutional participation. Chen would look for follow-through above $56.50 before initiating a long position.\n\nCFA Exam Context:\nThe curriculum treats candlesticks as one tool among many. Candidates should understand pattern identification, the importance of confirmation, and the limitations of any single pattern as a standalone trading signal.\n\nPractice technical analysis in our CFA question bank.