Candlestick charts are the most common way to analyze price movements and patterns in the fastest way, especially among technical traders. They serve as the cornerstone of technical analysis. Candlestick patterns provide readings that correspond to all time frames and market trends.
What are candlesticks
Candlesticks are a type of price chart that displays the opening, closing, highest, and lowest prices over a certain period of time. Although price charts come in various styles, candlesticks have become by far the most popular because they provide the quickest visual understanding of price movement and market sentiment behind these candles.
Developed by Japanese rice traders centuries ago, it has become the dominant charting style since analyst Steve Nison first introduced it to the West in 1989. Candlesticks are a broad topic. However, our goal here is to present you with the secrets of candlesticks and how to use candlestick shapes and discover types of candlesticks and trend predictions to identify the best trading setups.
Over time, individual candlesticks form patterns that traders can use to identify key support and resistance levels. There are many candlestick patterns that indicate market opportunities—some provide insights that show the balance between buying and selling pressures, while others identify continuation patterns or periods of indecision in the market.
How to read candlesticks
To read candlestick charts and patterns, you need to recognize three elements in each candle: its color, body, and wick. The color of the candle tells you the direction of movement over a specific period, the body of the candle displays the market's opening and closing levels, and the wick shows the upper and lower range.
Let's study the parts of each Japanese candlestick as illustrated in the figure below.
In most day charts, green candles indicate bullish trends, while red candles indicate bearish trends. However, sometimes white (for up) and black (for down) are used instead.
In a green candle, the upper part of the body is the "closing price" and the lower part is the "opening price." In a red candle, the reverse is true.
In both candles, the top of the wick (sometimes called the shadow or tail) is the highest point reached by the market during this period - and the bottom is the lowest point reached by the market.
The length of the candlestick body and the wicks can tell us about the absolute and relative value of the price; the parts of the candle can provide information about market sentiment during the formation period of the candle. This can be important for candles that cover longer periods such as a day, a week, or an entire month. As with any technical indicator, candlesticks and their patterns with shorter periods are less significant because price movements on a particular day or less can be caused by random cash flows unrelated to any real market sentiment.
Here is the key to understanding the relationship between the wick and body length and the meaning of the individual candlestick:
The longer the wick is relative to the body length, the more indecisiveness and back-and-forth struggle between buyers and sellers, increasing the likelihood of a current trend stopping or reversing.
The shorter the wicks are relative to the body length, the more decisive the upward or downward movement, increasing the likelihood of the movement continuing in the same direction.
A long, closed candlestick body with little or no tails indicates that the number of buyers outweighs the number of sellers and they were dominant throughout the entire period covered by the candlestick, pushing the price up steadily. The longer the candlestick body, the stronger the buying.
A long, closed candlestick body with little or no tails indicates that the number of sellers outweighs the number of buyers and they were dominant throughout the entire period covered by the candlestick, causing the price to decrease steadily. The longer the candlestick body, the stronger the selling.
A small candlestick body relative to the tail indicates the same indecision to a lesser degree. If the body color of the candlestick is red, sellers were slightly stronger; if the body color of the candlestick is green, the opposite is true.
Upper wicks
The relatively long upper wick indicates initial optimism or buying pressure that was reversed with the intervention of sellers and buyers made gains. In other words, a high price level was tested, leading to a retreat in attempts to push the price up.
A short upper wick shows less indecision, less testing of high prices, and less struggle between buyers and sellers. If the closing price is the highest price for the period, the candlestick will not have an upper wick.
Lower wicks
The relatively long lower wick indicates strong initial pessimism and selling that was reversed with increased buying, resulting in short sellers taking profits. In other words, a low price level was tested, and buyers regained control, leading to a retreat in attempts to push the price down.
A short lower wick indicates less indecision, less testing of low prices, and lighter selling pressure requiring fewer buyers to reverse it. If the asset's price closes at its lowest for the period, the candlestick will not have a lower wick.
Test candlestick patterns in a free demo account
Types of candlesticks and trend predictions
Candlestick charts primarily indicate reversal or indecision (i.e., potential reversal), whereas chart patterns like double tops and double bottoms, head and shoulders, cup and handle, triangles, and many other patterns tend to signal continuity (temporary pause in a trend before it resumes) or reversal, or bounce, or pivot.
Chart patterns are classified according to types of candlesticks which are categorized into bullish candles, bearish candles, or neutral candles.
Bullish reversal candlestick patterns
Bullish patterns may form after a bearish trend in the market and indicate a reversal in price movement. They are an indication for traders to consider opening a buy position to profit from any upward movement.
Bearish reversal candlestick patterns
Bearish candlestick patterns usually form after a bullish trend and indicate a resistance point. Often, extreme pessimism about market price leads traders to close buy positions and open sell positions to take advantage of falling prices.
Continuation patterns of candlesticks
If the candlestick pattern does not indicate a change in market direction, this pattern is referred to as continuity. This can help traders identify a period of indecision in the market when there is a pause in market movement or neutral price action.
Practice reading candlestick patterns
For all these patterns, you can take a position (trade) using contracts for difference (CFDs). This is because CFDs allow you to sell as well as buy - meaning you can speculate on markets that are falling as well as on markets that are rising. You may want to enter a "sell order" during a bearish reversal or "buy" during a bullish reversal - depending on the chart pattern and market analysis you have done.
1). Single candlestick patterns
Single candlestick patterns are among the simplest patterns you can find, consisting of only one trading period. Often, these basic blocks form the basis for longer patterns.
Round top candlestick
The round top candlestick pattern has a short body centered between equal-length wicks. The pattern indicates indecision in the market, leading to no meaningful change in price: buyers pushed the price up, while sellers pushed it down again. Round tops are often interpreted as a period of consolidation or rest, following a significant bullish or bearish trend.
The round top by itself is neutral but can be interpreted as a signal of things to come as it indicates that the current market pressure is losing control.
Doji candlestick
When the opening price and closing price are at the same point, the candlestick resembles a cross or plus sign - traders should look for a candle with no body and varying wick lengths.
There are four main types of Doji candlestick that you should pay attention to:
Long-legged Doji: It has a long upper wick and a lower wick.
Gravestone Doji: It has an upper wick above the body and no lower wick.
Dragonfly Doji: It has a long wick beneath the body and a small or nonexistent wick above it.
Four-price Doji: It has no wick at all.
A Doji candlestick is read as a struggle between buyers and sellers that results in no net profit for either side. A Doji candlestick signal alone is neutral, but it can be found in reversal candlestick patterns like the bullish morning star and the bearish evening star.
Thus, it is more meaningful when found after a long upward or downward movement as it suggests that the movement may end and reverse.
Marubozu
The word Marubozu comes from the Japanese word meaning "bald." It refers to a candlestick that has no wick at all.
✔️ The green Marubozu candlestick opened at the lowest level and closed at the highest level, indicating clear bullish tendencies.
✔️ The red Marubozu candlestick opened at the highest level and closed at the lowest level, indicating clear bearish tendencies.
The more decisive the body, the clearer the movement, and the more apparent the dominance of buyers or sellers. A green (or white) candlestick indicates buyer dominance, typically suggesting a continuation of the bullish trend. A red (or black) candlestick indicates the opposite.
Hammer candlestick
You can identify a hammer candlestick by its long wick below a relatively short candlestick body, with little or no wick above. The body should be two to three times shorter than the lower wick.
This indicates that the market may have recorded a new low during the session but rebounded and closed much higher. Therefore, while there was significant selling pressure, buyers intervened and took control, pushing the price up before the close.
While bearish sentiment may weaken, this does not necessarily mean a reversal is imminent. Therefore, most technical traders will wait for confirmation before opening a position based on the formation of a hammer candlestick - usually followed by a strong upward movement in the next period.
Inverted hammer candlestick pattern
The inverted hammer candlestick pattern resembles the hammer candlestick, only its shape is upside down.
The inverted hammer candlestick indicates buying pressure, followed by selling pressure that was not strong enough to push the market price down. The inverted hammer suggests that buyers will soon take control of the market.
Hanging man candlestick pattern (bearish pattern)
The hanging man candlestick or hanging man pattern looks identical to the hammer candlestick, with the only difference being its position.
While a hammer candlestick forms after a bearish market, a hanging man candlestick forms after a bullish trend. It is taken as a signal that selling sentiment is increasing against buyers, and thus, a reversal may be near.
Buyers were in control of the market but faced strong resistance. However, this resistance only managed to keep the price in check, and the price did not continue in the upward direction. Therefore, sentiment may be about to change.
The red hanging man candlestick is often viewed as a stronger signal than the green hanging man candlestick—although both are considered bearish patterns.
Shooting star candlestick pattern (bearish pattern)
The shooting star candlestick has the same shape as the inverted hammer but forms in an upward direction: it has a small lower body and a long upper wick.
A shooting star candlestick typically forms after a slight upward price gap, after which the price pushes above the opening price and then falls below the opening price, closing beneath it - like a shooting star falling to the ground.
A shooting star candlestick can close just above the gap (green) or just below the gap (red), but both indicate that a reversal may be imminent.
Please note the following:
Doji candlestick patterns and round top candlestick patterns are neutral, while other patterns are reversal patterns.
The inverted hammer candlestick and shooting star candlestick share the same shape and are the inverted forms of the hammer and hanging man candlestick.
With single reversal candlestick patterns, it is advisable to wait for signals of a new bearish market before trading.
2). Double candlestick patterns
When a signal is formed from two consecutive periods, it is known as a double candlestick pattern. These double candles often indicate upcoming trend reversals but can also be used to identify continuity.
Engulfing candlestick pattern
In the engulfing candlestick pattern, the engulfing candle immediately follows another larger candle in the opposite direction.
The bullish engulfing candlestick pattern occurs when a bearish candlestick is followed by a significantly longer bullish candlestick, which "engulfs" the range of the previous bearish candlestick. The longer the bullish candlestick, the "greater the engulfing" or it exceeds the range of the previous bearish candlestick, and the bullish pattern increases. As always, the context and timing are crucial. The pattern is more bullish if it appears after a prolonged bearish trend, at strong support, or both, as these other signals confirm that the chances of the bearish trend ending have increased.
The bearish engulfing candlestick pattern occurs when a bullish candlestick is followed by a significantly longer bearish candlestick, which "engulfs" the range of the previous bullish candlestick. The longer the bearish candlestick, the "greater the engulfing" or it exceeds the range of the previous bullish candlestick, and the bearish pattern increases. As always, the context and timing are crucial. The pattern is more bearish if it appears after a prolonged bearish trend, at strong resistance, or both, as these other signals confirm that the chances of the bullish trend ending have increased.
Piercing candlestick pattern
The piercing line candlestick pattern is also a two-stick pattern, consisting of a long red candlestick followed by a long green candlestick.
There is often a significant price gap below the closing price of the first candle and the opening price of the green candle. This indicates strong buying pressure, as the price was pushed up or above the previous day's average price.
The closing price of the second candlestick should be above the midpoint of the first candlestick's body.
The piercing line indicates a reversal after a bearish trend.
