Candlestick Patterns: The Language of Price

Japanese candlestick charts have been used by traders for over 200 years. Each candle tells a story about the battle between buyers and sellers. Learning to read them is one of the most valuable skills in technical analysis.

Anatomy of a Candlestick

Each candle shows four data points:

• Open: The price at the start of the period.
• Close: The price at the end of the period.
• High: The highest price during the period.
• Low: The lowest price during the period.

Bullish Candle (Green/White): Close is above the open. Bearish Candle (Red/Black): Close is below the open.

• Body: The thick part between open and close.
• Wick/Shadow: The thin lines above and below the body.

Single Candle Patterns

Doji

• Appearance: Very small body, long wicks on both sides.
• Meaning: Indecision. Neither buyers nor sellers won.
• Action: Wait for the next candle for confirmation.

Hammer / Hanging Man

• Appearance: Small body at the top, long lower wick (2x the body).
• Hammer (at support): Bullish reversal signal.
• Hanging Man (at resistance): Bearish reversal signal.

Inverted Hammer / Shooting Star

• Appearance: Small body at the bottom, long upper wick.
• Inverted Hammer (at support): Potential bullish reversal.
• Shooting Star (at resistance): Strong bearish reversal.

Two-Candle Patterns

Engulfing Pattern

• Bullish Engulfing: A large green candle completely engulfs the previous red candle. Strong buy signal at support.
• Bearish Engulfing: A large red candle completely engulfs the previous green candle. Strong sell signal at resistance.

Tweezer Top / Bottom

• Tweezer Bottom: Two candles with matching lows at support. Bullish.
• Tweezer Top: Two candles with matching highs at resistance. Bearish.

Three-Candle Patterns

Morning Star (Bullish Reversal)

1. Long bearish candle.
2. Small indecision candle (doji or spinning top).
3. Long bullish candle.

Evening Star (Bearish Reversal)

1. Long bullish candle.
2. Small indecision candle.
3. Long bearish candle.

Three White Soldiers / Three Black Crows

• Three White Soldiers: Three consecutive long bullish candles. Strong bullish continuation.
• Three Black Crows: Three consecutive long bearish candles. Strong bearish continuation.

Rules for Trading Candlestick Patterns

1. Location matters. A pattern at a key support/resistance level is 10x more reliable than one in the middle of a range.
2. Higher timeframes are more reliable. A daily pin bar is far more significant than a 5-minute one.
3. Always wait for confirmation. A single candle is a signal, not a guarantee. Wait for the next candle to confirm.
4. Combine with other analysis. Use candlesticks with trendlines, moving averages, or Fibonacci levels for the best results.