Candlestick charts originated in Japan over 200 years ago and remain the most popular charting method. Each candlestick tells a story about the battle between buyers and sellers.
Candlestick Structure
Components
Body:
- Area between open and close
- Filled/colored based on direction
Wicks (Shadows):
- Lines above and below body
- Show high and low extremes
Bullish Candle
Characteristics:
- Close > Open
- Usually green or white
- Buyers won the period
Bearish Candle
Characteristics:
- Close < Open
- Usually red or black
- Sellers won the period
Single Candle Patterns
Doji
Appearance:
- Open and close nearly equal
- Small or no body
- Wicks can vary
Meaning:
- Indecision
- Balance of buyers/sellers
- Potential reversal
Types:
- Standard doji
- Long-legged doji
- Dragonfly doji
- Gravestone doji
Hammer
Appearance:
- Small body at top
- Long lower wick (2x+ body)
- Little or no upper wick
Meaning:
- Bullish reversal signal
- Sellers pushed down
- Buyers recovered
Context: Most powerful at bottom of downtrend
Inverted Hammer
Appearance:
- Small body at bottom
- Long upper wick
- Little or no lower wick
Meaning:
- Potential bullish reversal
- Buyers attempted move up
- Needs confirmation
Hanging Man
Appearance:
- Same as hammer
- But at top of uptrend
Meaning:
- Potential bearish reversal
- Selling appeared
- Bulls barely held
Shooting Star
Appearance:
- Small body at bottom
- Long upper wick
- Little or no lower wick
- At top of uptrend
Meaning:
- Bearish reversal signal
- Buyers pushed up
- Sellers took over
Marubozu
Appearance:
- Full body, no wicks
- Open and close at extremes
Meaning:
- Strong conviction
- Bullish: Buyers dominated
- Bearish: Sellers dominated
Spinning Top
Appearance:
- Small body
- Upper and lower wicks
- Looks like a top
Meaning:
- Indecision
- Neither side winning
- Consolidation
Two-Candle Patterns
Bullish Engulfing
Appearance:
- First: Small bearish candle
- Second: Larger bullish candle
- Second body engulfs first body
Meaning:
- Strong bullish reversal
- Buyers overwhelmed sellers
Bearish Engulfing
Appearance:
- First: Small bullish candle
- Second: Larger bearish candle
- Second body engulfs first body
Meaning:
- Strong bearish reversal
- Sellers overwhelmed buyers
Piercing Pattern
Appearance:
- First: Bearish candle
- Second: Bullish candle
- Second opens below first low
- Second closes above first midpoint
Meaning:
- Bullish reversal
- Strong recovery by buyers
Dark Cloud Cover
Appearance:
- First: Bullish candle
- Second: Bearish candle
- Second opens above first high
- Second closes below first midpoint
Meaning:
- Bearish reversal
- Sellers took control
Tweezer Tops
Appearance:
- Two candles with same high
- First bullish, second bearish
Meaning:
- Resistance confirmed
- Potential bearish reversal
Tweezer Bottoms
Appearance:
- Two candles with same low
- First bearish, second bullish
Meaning:
- Support confirmed
- Potential bullish reversal
Three-Candle Patterns
Morning Star
Appearance:
- Large bearish candle
- Small candle (gaps down)
- Large bullish candle
Meaning:
- Strong bullish reversal
- Indecision then recovery
Evening Star
Appearance:
- Large bullish candle
- Small candle (gaps up)
- Large bearish candle
Meaning:
- Strong bearish reversal
- Indecision then selloff
Three White Soldiers
Appearance:
- Three consecutive bullish candles
- Each closes higher
- Little or no wicks
Meaning:
- Strong bullish momentum
- Buyers in control
Three Black Crows
Appearance:
- Three consecutive bearish candles
- Each closes lower
- Little or no wicks
Meaning:
- Strong bearish momentum
- Sellers in control
Trading Candlestick Patterns
Confirmation
Important:
- Don't trade pattern alone
- Wait for confirmation
- Next candle should confirm
Context Matters
Consider:
- Where pattern forms
- Trend direction
- Support/resistance
- Volume
Best Locations
High Probability:
- At key support/resistance
- After extended moves
- At trend lines
- With indicator confluence
Common Mistakes
Trading Every Pattern
Problem: Acting on every pattern seen
Solution: Filter by context and location
Ignoring Trend
Problem: Counter-trend patterns rarely work
Solution: Trade with higher timeframe trend
No Confirmation
Problem: Entering on pattern alone
Solution: Wait for confirming action
Key Takeaways
- Candlesticks show open, high, low, close
- Each candle tells market story
- Single, double, triple patterns exist
- Context determines pattern value
- Wait for confirmation
- Trade patterns at key levels
- Not all patterns are equal
- Practice recognition daily
What's Next?
Learn about support and resistance levels.
This article is for educational purposes only and does not constitute financial advice.
Risk warning. This is education only, not financial, investment, tax or legal advice, and not a recommendation to buy or sell anything. Trading forex, CFDs, stocks, commodities, futures, options and crypto is high-risk; with leverage you can lose more than you deposit, and most retail traders lose money. Before you trade or invest in any form, check the local laws where you are and the rules of your country of residence, and consider your own financial situation; if in doubt, ask a licensed adviser. Past and tested results, and all examples, are for illustration only and do not guarantee future results.