Updated on October 2023 by Sharon Lewis.
Candlestick charts are widely used by professional traders and have grown in popularity through the late 20th century and into the 21st century. But their history dates way back to the 18th century Japan, when they were originally created by Munehisa Homma, a rice merchant in Osaka’s Dojima Rice futures market.
Homma realised that by recording the open, close, high and low of the market price each day and drawing these as charts, he was able to successfully forecast future price movements. So effective was he in using his candlestick patterns and charts to trade rice, that he eventually accumulated a fortune of $100 billion in today’s money.
This is reason enough to respect these candlestick charts and patterns. Many successful traders use candlestick charts today because they deliver dependable and accurate trading signals. These patterns can help improve your trading strategy and your potential to earn.
In this guide, we will look at:
- Candlestick Charts and Why Should You Use Them
- What are Candlestick Patterns?
- 12 Candlestick Patterns to Know
- 1. Standard Line Candlestick
- 2. Marubozu Candlestick
- 3. Spinning Top Patterns
- 4. Hammer Candlestick
- 5. Dragonfly Doji Candlestick
- 6. Inverted Hammer Candlestick
- 7. Bullish Engulfing Candlestick
- 8. Shooting Star Candlestick
- 9. Gravestone Doji Candlestick
- 10. The Hanging Man Candlestick
- 11. Bearish Engulfing Candlestick
- 12. Long-Legged Doji Candlestick
Candlestick Charts and Why Should You Use Them
Candlestick charts are graphical representations of price movements in financial markets. They offer a visual snapshot of an asset’s trading activity within a specific time frame, providing traders with a quick, intuitive way to gauge market sentiment.
These charts offer traders deep insights into potential trend reversals, market psychology, and support decision-making.
By using candlestick charts, traders can identify patterns and signals that may not be as evident in traditional line charts, enhancing their ability to make informed and timely trading decisions.
What are Candlestick Patterns?
Candlesticks are made up of two key components:
- Body: The candlestick body is the rectangular area outlined by the difference between the opening and closing prices during a specific time frame, such as a day, week, or hour. The length and colour of the body tells traders how prices have moved.
A long body means a significant difference between the opening and closing prices, whereas the shorter the body, the lesser the price movements between the two. A green or white candlestick indicates whether prices went up, and a black or red candle tells you if prices fell. - Shadow: The slender lines that extend above and below the body of the candlestick, known as “shadows,” represent the price range experienced during that time period. The upper shadow is described as the “wick” and the lower shadow is called the “tail”.
The upper wick stretches from the highest price to the closing price (or opening price for bearish candles), while the lower wick spans from the lowest price to the opening price (or closing price for bearish candles).
Each candlestick pattern consists of one or more candlesticks in specific shapes and characteristics, conveying information about market sentiment, potential trend reversals, or continuation of existing trends. These patterns are formed based on the opening, closing, high, and low prices of a specific time period, such as a day, week, or hour.
Traders and analysts use candlestick patterns to make decisions about buying or selling assets. Each pattern has its own interpretation and potential implications for future price movements, making them essential tools for technical analysis in financial markets.
12 Candlestick Patterns to Know
Let’s look at some common candlestick patterns that we can use in our trading, starting with two basic candlestick patterns that show continuation of a trend.
We will then look at a candlestick chart that might signal consolidation, indecision or a lack of directional conviction.
And finally, we will explore candlestick charts that might signal a change in direction – four that could signal a bullish shift in direction (from bearish), four that might indicate a bearish shift in direction (from bullish) and one that can indicate a bullish or bearish shift, depending on the direction of the initial trend.
| Candlestick Pattern | Continuation, Reversal, Indecision | Potentially Bullish or Bearish |
|---|---|---|
| Standard Line candlestick | Continuation | Bullish or Bearish |
| Marubozu candlestick | Continuation | Bullish or Bearish |
| Spinning Top patterns | Indecision | Neither |
| Hammer candlestick | Reversal | Potentially Bullish |
| Dragonfly Doji candlestick | Reversal | Potentially Bullish |
| Inverted Hammer candlestick | Reversal | Potentially Bullish |
| Bullish Engulfing candlestick | Reversal | Potentially Bullish |
| Shooting Star candlestick | Reversal | Potentially Bearish |
| Gravestone Doji candlestick | Reversal | Potentially Bearish |
| Hanging Man candlestick | Reversal | Potentially Bearish |
| Bearish Engulfing candlestick | Reversal | Potentially Bearish |
| Long-Legged Doji candlestick | Reversal | Potentially Bullish or Bearish |
1. Standard Line Candlestick
The Standard Line has a strong body, that is to say, a long body compared to a normal candlestick and relatively small shadows. The Standard Line quite simply indicates a continuation of the current underlying trend in the direction of the Standard Line.
2. Marubozu Candlestick
The Marubozu candlestick is similar to the Standard Line but has a much longer, therefore, stronger body and has no (or very small) upper or lower shadows. Like the Standard Line, the Marubozu candlestick also indicates trend continuation but a far more forceful continuation signal. If the market retraces in the next bar in the opposite direction to the Marubozu candlestick, the 50% level of the Marubozu candlestick range is seen as initial support or resistance.
3. Spinning Top Patterns
Spinning Top patterns have a very small body and relatively long shadows at the top & bottom. These Spinning Top patterns are considered neutral candlestick patterns that might signal consolidation, indecision or a lack of immediate directional conviction.
4. Hammer Candlestick
The Hammer candlestick pattern is formed in a prior downtrend. When forming the Hammer candlestick, the market dips and rebounds to close significantly above the low, closing near to or at the high of the candlestick. The confirmation of the Hammer candlestick is signalled by a close above the Hammer candlestick high in the next 1-2 candlesticks to indicate a reversal of the prior downtrend.
5. Dragonfly Doji Candlestick
The Dragonfly Doji is very similar to the Hammer candlestick, but the difference between the open and close is very small or at the same price, meaning there is either a very small or no body. As with the Hammer candlestick, a close above the Dragonfly Doji high is required in the next 1-2 candlesticks to confirm a reversal of the prior downtrend.
6. Inverted Hammer Candlestick
The next potentially bullish candlestick is the Inverted Hammer, which is an upside-down version of the Hammer that occurs in a prior downtrend. During the formation of the Inverted Hammer candlestick, the market pushes lower, then rebounds and falls back lower again, to close significantly below the high, near to or at the low. But the market still has quite some work to do to signal a bullish shift, needing to close above the Inverted Hammer candlestick high in the next 1-2 candlesticks to signal bullish shift in trend.
7. Bullish Engulfing Candlestick
The Bullish Engulfing candlestick is a strong bullish reversal pattern and is sometimes called a key reversal pattern. It signals a significant shift in directional sentiment from bearish to bullish. A prior downtrend is required and during the formation of the Bullish Engulfing candlestick the market gaps down. The market then rallies up to close above open of the previous candlestick. Therefore, the bodies of the two candlesticks are opposite in direction and colour, from red to green, and the Bullish Engulfing candlestick, which “engulfs” the previous candlestick, has a lower open and a higher close. In this case, the upper and lower shadows are not important.
8. Shooting Star Candlestick
The Shooting Star candlestick requires a prior uptrend. During the formation of this candlestick, the market rallies and back lower to close significantly below the high. The Shooting Star candlestick has a long upper wick, a very small or no lower tail, and a relatively small body, preferably with a lower close (so a red body). A close below the Shooting Star candlestick low in the next 1-2 candlesticks confirms a reversal of the prior uptrend to bearish.
9. Gravestone Doji Candlestick
A Gravestone Doji is very similar to a Shooting Star candlestick, though in the case of the Gravestone Doji, the difference between the open and close is very small or at the same price, meaning there is either a very small or no body. As with the Shooting Star candlestick, the Gravestone Doji has a long upper Wick and very small or no lower Tail. And again, a close below the Gravestone Doji low in the next 1-2 candlesticks confirms a reversal of the prior uptrend.
10. The Hanging Man Candlestick
The Hanging Man candlestick is an inverted version of the Shooting Star candlestick pattern that occurs in a prior uptrend. During the formation of the Hanging Man candlestick the market pushes higher, sets back and then rebounds back higher again, to close significantly above the low, near to or at the high. The Hanging Man candlestick has a small Body and relatively long lower Tail, with a small or no upper wick. However, to signal a bearish shift the market still has some more work to do, needing to close below the Hanging Man candlestick low in the next 1-2 candlesticks.
11. Bearish Engulfing Candlestick
The Bearish Engulfing candlestick is the opposite of the Bullish Engulfing candlestick and is a strong bearish reversal pattern, often called a key reversal pattern. It signals a significant shift in directional sentiment from bullish to bearish. A prior uptrend is required and during the formation of the Bearish Engulfing candlestick, the market gaps up. The market then sells off to close below the open of the previous candlestick. Therefore, the bodies of the two candlesticks are opposite in direction and colour, from green to red, and the Bearish Engulfing candlestick “engulfs” the previous candlestick, that is to say, has a higher open and a lower close. Again, as with the Bullish Engulfing candlestick, the upper and lower shadows are not particularly important.
12. Long-Legged Doji Candlestick
A Long-Legged Doji candlestick is a pattern that can be bullish or bearish, and simply signals a reversal of whatever the prior, underlying trend is. The Long-Legged Doji has a very small or no body and long upper and lower shadows, of similar length. This candlestick pattern indicates a potential turning point, from bullish to bearish in an uptrend, or bearish to bullish in a downtrend. Confirmation of a trend shift is signalled in the following 1-2 candlesticks by a push below the Long-Legged Doji candlestick low in the uptrend for a bearish signal. A bullish reversal is indicated on a move above the Long-Legged Doji high in a downtrend in the following 1-2 candlesticks.
We have looked at the basics of various single and double candlestick patterns that indicate either trend continuation, indecision or consolidation, and also bullish or bearish trend reversals. Whether you are a day trader, a position or swing trader, or employ other trading strategies, you should be able to incorporate candlestick patterns to help you with entering or exiting trades.
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