Candlestick Charts: Deciphering and Understanding 15 Amazing Patterns

Author RC Investment Team

We don't trade based on candlestick patterns very often. Our trading style focuses more on
price breakouts or using various indicator combinations in our trading bots. However, many
traders do believe in and use these price patterns. Let's look at some of the most common
patterns and how to use them in everyday trading to find better entry points.

This article will teach you how to interpret candlestick charts in stock, forex, and
cryptocurrency trading.

Trading Candlestick Patterns

Candlesticks are graphical representations of price movements of a currency pairs over a
period of time. Candlestick charts are commonly used in the Forex market because it is easier
to interpret, compared to line charts and bar charts. A single candlestick represents any period
of time on a trading platform, depending on time frame used. A candlestick on a daily
timeframe represents one day of price history, while a candlestick on a 15-minute timeframe
represents fifteen minutes of price history.

A candlestick reflects four vital pieces of information:

➢The opening price,

➢the highest price during that specific period of time,
➢the lowest price during that specific period of time, and
➢the closing price

A bar chart also reflects these four pieces of information; however, a candlestick clearly
denotes the relationship between the opening and closing prices through the body and wicks.
The candlestick’s body forms the rectangular shape between the opening price and closing
price. The body reflects the range between the opening and closing prices of the currency
pair on that certain period. Traditional bodies of candlesticks are colored with black and white
to easily define the market direction. Market direction can be either bullish or bearish,
depending on the opening and closing prices of the candlestick.
A white body indicates that the closing price is higher than the opening price, which means
the price had increased over the period, which defines a bullish candle. A black body
indicates the opposite; the closing price is lower than the opening price, which means the
price had decreased over the period, which defines a bearish candle. Candlesticks make it
easier to see if the prices increased or decreased at the trading period. Other traders use blue
or green colors instead of white for a bullish candle, and red for a bearish candle instead of
black.
In a bullish candle, the distance between the closing and highest price of the candlestick is
called the upper wick, also called as upper shadow. The distance between the opening and
lowest price of the candlestick is referred to as the lower wick, also called as lower shadow.
In a bearish candle, the distance between the opening and highest price of the candlestick is
called the upper wick, while the distance between the closing and lowest price is called the
lower wick.

Interpretations of Candlestick Body and Wick Lengths

Candlestick body and wick length can be long or short. Long bodies imply strong buying or
selling strength. The longer the body means the stronger the buying or selling pressure. This
indicates that either buyers or sellers are in control of the market. On the contrary, short
bodies signify less buying or selling activity.

Wicks are very important because it communities rejection or acceptance of certain price
levels. Some candlesticks have perfectly equal length of upper and lower wicks, while others
have very long upper wick but a very short lower wick, and some have the opposite.

A relatively long upper wick indicates a strong rejection of higher prices above the closing
price (in the case of a bullish candle) or above the opening price (in the case of a bearish
candle). The same is true on long lower wicks, indicating strong rejection of lower prices.
Wicks also indicate profit taking and unwinding of orders from the institutional traders.

If there is no wick on the upper end of the candlestick body, it means that the closing price
(in the case of a bullish candle) or the opening price (in the case of a bearish candle) is equal
to the highest price of the trading period. Conversely, if there is no wick at the lower end of
the candlestick body, it means that the opening price (in the case of a bullish candle) or the
closing price (in the case of a bearish candle) is equal to the lowest price.

Regardless of the strategy or method you use for stock trading or cryptocurrency futures
trading, you're always focused on price and its patterns. Familiarity with different candlestick
patterns and their behavior will greatly enhance the effectiveness of any strategy or system.
Simply by interpreting candlestick patterns, you can gain information about market direction.

Basic candlestick chart patterns

Below are the 15 principal candlestick types and patterns:

1. Long Periods
Long periods show a significant length between the opening and closing prices during the
trading period. Typically, the wicks at either sides of the candlestick body are relatively short,
showing that the market is heavily imbalanced.
This type of candles usually occurs in the market during extreme volatility. It indicates a very
strong buying pressure (in the case of a bullish long period) or very strong selling pressure
(in the case of a bearish long period). Traders with huge orders are heavily participating in
only one direction of the market during the trading period.
2. Short Periods
Contrary to long periods, short periods have compressed candlestick bodies, indicating a very
little price movement during the trading period. Short wicks at either end shows a very little
fluctuations of prices between the open and low price and between the high and close price
(in the case of a bullish short period candle). The same as true with a bearish short period
candle. Short bodies indicate a very little buying or selling activity.
3. Marubozu
A Marubozu type of candlestick has no wicks at either ends of the candlestick, representing a
strong buying or selling pressure.

A bullish Marubozu has a long body with no lower and upper wicks. The open price was equal
to low price and the close price was equal the high price, which means that buyers are fully
in control of the market during the entire trading period. A bullish Marubozu typically starts
the continuation of a bullish trend after a retracement or pullback, or starts bullish reversal
pattern.

A bearish Marubozu has also a long body with no lower and upper wicks. The open price was
equal to the high price and the close price was equal to low price, which means sellers are
fully in control of the market during the entire trading period. A bearish Marubozu typically
starts the continuation of a bearish trend after a retracement or pullback, or starts a bearish
reversal.

4. Spinning Tops
Spinning tops have longer wicks than bodies. The open and close prices of the candle are
very close, which means the market price did not really increased or decreased at the end of
the trading period. Whether bullish or bearish, the market direction is insignificant since
spinning tops simply indicate market indecision.
5. Doji
Doji candlesticks have the same (or almost the same) open and close prices or their bodies
are extremely short. There are four variations of Dojis, depending on where the opening and
closing prices are in relation to the candlestick’s range.

The doji candles represent and tend to show market indecision. The bulls aren’t winning
and the bears aren’t winning. The market is in a state of stalemate. Doji’s are often found
at the end of a trend move or during times of consolidation where there is little buying or
selling momentum.
A long-legged doji has long upper and lower wicks, indicating that prices fluctuated on both
sides during the course of the trading period. Eventually, the trading period ends with the
close price retracing back to the open price. This type of doji indicates market indecision.
Neither buyers nor sellers were able to dominate the market and eventually resulted to a
draw.
A dragonfly doji has a long lower wick with no or very short upper wick. The open, high, and
close prices are almost equal. This type of doji indicates that all price activity during the entire
trading period was on the lower side of the open price. This pattern often signals a bearish
trend reversal.
Contrary to a dragonfly doji, the gravestone doji has a long upper wick with no or very short
lower wick. The open and close prices are equal or almost equal to low price. It indicates that
all price activity during the entire trading period was on the upper side of the open price. This
pattern often signals a bullish trend reversal.
Four-price doji rarely occurs in the Forex market, wherein the open, close, high and low prices
are the same. This only happens when trading is suspended for that trading period.

6. Hammer
A hammer candlestick has a long lower wick that is about two or three times long as the real
body, and with little or no upper wick. The real body is at the upper end of the candle’s trading
range. A hammer only occurs in a downtrend.

The hammer is a bullish trend reversal signal, regardless of the candlestick’s colour. When the
market is trending downwards, a hammer signals that buyers are now entering the market
and may take over the market control very soon.
On the daily chart for Bitcoin/USD above, the market was initially in a downtrend, but a
hammer candlestick pattern halted the decline. The long lower shadow of the hammer
indicates strong selling pressure. However, large buy orders and high volume ultimately
overcame the strong selling pressure, and the downtrend eventually reversed.
7. Inverted Hammer
Similar to a hammer, an inverted hammer occurs at the bottom of a downtrend and can
indicate a trend reversal. Is has a long upper wick that is about two or three times long as its
real body, with little or no lower wick. The inverted hammer candle must be a bull candle, and
proceeded by a bear candle.

Its long upper wick implies that buyers tried to bid higher prices, but the selling pressure is
strong enough and rejected higher prices. Sellers were able to pull the price back; however
buyers had absorbed some of the sell orders and managed to close above the open price.
This pattern indicates a trend reversal, depending on the type of candle next to it.

8. Hanging Man
The hammer and hanging man are visually identical, but have absolutely opposite meanings
depending on the price action that preceded it. Similar to a hammer, a hanging man has a
long lower wick that is about two or three times long as its real body, with no or little upper
wick. Although the candle can either bullish or bearish, a bearish candle adds more weight to
its interpretation.
The hanging man is a bullish reversal pattern depending on the market condition around it.
On the chart above, the hanging man formed near a resistance level, indicating that huge
numbers of sellers are now coming in the market and beginning to outnumber the buyers.
Sellers pushed the prices lower, erasing 28 hours of bullish gains. However, buyers
immediately pushed the prices back up. The candle closed bearish, showing that buyers were
still outnumbered by the sellers. The next candle opened and captured immediate selling and
closed bearish.

9. Shooting Star
The shooting star looks identical to an inverted hammer but occurs during an uptrend. This
pattern is a bearish reversal signal, with a long upper wick that is two to three times long as
its body and may have either a very short or no lower wick. The candle can be either bullish
or bearish, but a bearish candle has more weight on the upcoming reversal.
On the illustration above, a bearish shooting star pattern formed on top of the uptrend. The
pattern indicates that buyers initially pushed the market higher, but sellers came in near the
high and pulled the prices back to the bottom and closed the candle below the open price.
This means that buyers attempted to push the prices up, but sellers are more powerful and
absorbed the buyers.

10. Engulfing candles

Engulfing candle pattern forms when candlestick’s real body completely engulfs the
preceding candlestick’s body. The pattern consists of two candlesticks (A and B candles) that
signal a trend reversal.
A bullish engulfing pattern is a bullish reversal signal. It forms when a bearish candle (A) is
succeeded and engulfed by a larger bullish candle (B). The longer the body of the B-candle,
the more significant the price increase.
A bearish engulfing pattern is a bearish reversal signal that forms when a bullish candle (A)
is succeeded and engulfed by a larger bearish candle (B).
11. Harami/Inside Bar
The harami, also called as inside bar, is the opposite of the engulfing pattern. It is a trend
reversal pattern that consist of two candlesticks (A and B candles), with the body of candle B
completely inside the body of candle A.
A bullish harami occurs in a downtrend and may signal a trend reversal. Candle A must be a
bearish candle, while candle B must be a bullish candle and the body must be shorter than
the body of candle A.
Opposite to a bullish harami, a bearish harami occurs in an uptrend and a bearish trend
reversal. Candle A must be a bullish candle, while candle B must be a bearish candle with
the body shorter that the body of candle A.

12. Piercing Candle

A piercing pattern is a bullish reversal signal that occurs in an established downtrend. It consist
of two candles (A and B), where A is a bearish candle, and B is a bullish candle. The open price
of candle B may be equal or below candle A’s close price. The close price of candle B must
be equal or above the midpoint of candle A’s body (candle B pierces the midpoint of candle
A), but not above the open price of candle A.
13. Dark Cloud Cover
The dark cloud cover is a bearish reversal pattern that forms in an established uptrend. It
consists of two candles (A & B), where candle A is a bullish candle and candle B is a bearish
candle. The open price of candle B may be equal or above candle A’s close price. The close
price of candle B must be equal or below the midpoint of candle A’s body (candle B pierces
the midpoint of candle A), but not below the open price of candle A.
14. Morning Star
Morning star and evening star are three –candlestick pattern that usually ends a trend. It is a
trend reversal signal pattern, depending on the price action around it.

A morning star is a bullish reversal pattern that happens during a downtrend. It must satisfy
all the following conditions to be a valid morning star bullish reversal pattern:

[Link] A must be a bearish bar during an established downtrend

[Link] B can be a bearish or bullish. It must have a short body (or a doji), indicating an
indecision in the market.
[Link] third candle must be a bullish candle. It must close at the midpoint or above the
midpoint of candle A’s body to confirm that a trend reversal is in play. If candle C closed
between the midpoint and open price of candle A, the candle next to C must be bullish and
closes above candle A’s open.
15. Evening Star
An evening star is the opposite of a morning star. It is a bearish reversal pattern that occurs
during an uptrend. It must satisfy all the following conditions to be a valid evening star bearish
reversal pattern:

[Link] A must be a bullish bar during an established uptrend

[Link] B can be a bearish or bullish. It must have a short body (or a doji), indicating an
indecision in the market.
[Link] third candle must be a bearish candle. It must close at the midpoint or below the
midpoint of candle A’s body to confirm that a trend reversal is in play. If candle C closed
between the midpoint and open price of candle A, the candle next to C must be bearish and
closes below candle A’s open.
Conclusion
Understanding what the candlestick patterns are communicating to you is the most important.
However, trading just the candlestick patterns, with or without additional indicators, is very
elementary way of understanding the market. You really need to understand the order flow
behind the patterns and should consider the market condition to trade these
patterns profitably. PLUS, don’t forget about our ‘master’ when it comes to support and
resistance areas. You’ll want to read much more about support and resistance before you
try to trade any of these patterns.