Candlestick charts: all you need to know

How to read a candlestick chart

A daily candlestick shows the market opening, high, low, and closing (OHLC) prices. The thin vertical line above and below the candlestick body is the wicks or shadows. The upper shadow shows the range that the high price reached during a trading session. The lower shadow shows the range that the low price reached during a trading session.

Candlesticks are normally shown in different colors. A red or black candlestick shows that the sellers won, and thus the day was bearish. If the candlestick is green or white, it means that buyers won, and thus, the day was bullish.

While candlestick charts can tell us a lot about the market condition, they always shall be read in the context of the previous market trend. So, if you see that the candlestick demonstrates a market reversal from the bullish trend, it will work only if the trend was bearish previously. 

Candlestick patterns

There are more than 30 candlestick patterns. Here, we will check the most popular ones. 

There are two main categories of candlestick patterns: bullish - those that signal the start of a bullish trend, and bearish - those that signal the start of a bearish trend.

Bullish patterns

Bullish patterns signal that bulls are back after a downtrend, and soon, the market will start moving upwards. The most popular bullish patterns are Hammer, Piercing pattern, and Bullish Engulfing.

Hammer 

Hammer is a single candlestick pattern that is formed at the end of a bearish trend. It signals a bullish reversal. 

The real body of the candle is small. The lower shadow is long, it can be twice as long as the real body. The upper shadow is either absent or very short.

Here is an example of the pattern.

Piercing pattern

This is a multiple candlestick pattern. It is formed at the end of a bearish trend and indicates a bullish reversal. 

This pattern is formed by two candles. The first candle is bearish and indicates that the downtrend is going to continue. The second candle is bullish. It closes more than 50% of the previous candle’s real body. It shows that bulls are back, and soon, a bullish reversal is going to take place.

Here is how the piercing pattern may look on a chart. 

Bullish Engulfing

Bullish engulfing is a pattern formed by multiple candles. This pattern is formed to mark the end of a downtrend and the start of a bullish movement.

Bullish engulfing is formed by two candles. The first candle is bearish and indicates that the market is in a downtrend. The second candle is bullish, it engulfs the first candle to show that bulls are back in the market.

Here is how this pattern can be seen in a chart.

Bearish patterns

Bearish patterns signal that bears are back, and soon, a downtrend in the market will start. The most popular bearish patterns are Hanging Man, Dark Cloud Cover, and Bearish Engulfing.

Hanging Man

Hanging Man is a pattern formed by a single candlestick. It is formed at the end of an uptrend and signals the start of a downtrend.

The real body of the candle is small, with the lower shade at least twice as long as the candle’s real body. The upper shadow is either very short or absent.

When the sales opened, sellers pushed the prices down. Buyers were trying to save the situation and pushed the prices up but failed. So the asset prices closed below the opening price.

Here is how this pattern may look in a chart.

Dark Cloud Cover

Dark Cloud Cover is a pattern formed after an uptrend, it indicates the trend reversal. The Dark Cloud Cover pattern is formed by two candles. One candle is bullish and signals that the uptrend will continue. The second candle is bearish, it closes more than 50% of the real body of the previous candle. This candle shows that bears are back in the market.

Here is how this pattern may look in a chart.

Bearish Engulfing

Bearish engulfing is a pattern that signals the reversal from an uptrend to a bearish trend. Bearish Engulfing is formed by two candles. The first candle is bullish and signals the continuation of a bullish trend. The second candle is bearish; it engulfs the bullish candle and signals that bears are back in the market.

Bottom Line

Candlestick charts have been used for centuries. But even though they are a stand-alone tool, using them with other indicators will help to increase the accuracy of market forecasting and boost your earning potential.