Candlestick Charting & Patterns Explained

Candlestick charting, and the various Candlestick chart patterns, are visual tools used in technical analysis by traders and investors to study market trends and price patterns.

A candlestick chart displays the high, low, opening, and closing prices for a specific period. Each ‘candlestick’ represents one period (be it a minute, hour, day, week, or month) of data and is composed of a body and wicks / shadows.

Traders using Candlestick charts

The body of the candlestick represents the range between the opening and closing prices. If the body is filled or coloured red or black, it means the closing price was lower than the opening price. If the body is empty or a lighter colour such as green or white, it indicates the closing price was higher than the opening price.

The wicks or shadows on either end of the candlestick represent the highest and lowest prices reached during that period. The upper wick shows the high for the period, while the lower wick shows the low.

Like the popular OHLC charts, candlestick charts also require the same open, high, low and close price data to draw them for the period you wish to display, however it is believed by many that candlestick charts help to give an easy to interpret, visual representation of the price action.

We will not only provide candlestick chart theory, but crucially PRACTICAL information on applying and trading using this ancient technical analysis technique.

Trading with Candlesticks

A key to ALL candlestick chart patterns is that they must always be interpreted in context with the current market structure, not solely in isolation! I can’t stress this enough.

Too many traders get focused solely on the actual candlestick pattern that appears, however the CONTEXT is equally as important, if not more important.
There is no doubting the incredible power of candlesticks but we must not lose sight of the critical component of the context of the candle formation we are interpreting ie market structure, support/resistance, have we had an extended trending move, etc.

Below is a great example of candlestick charting in practice, however if you are unsure of how a candlestick chart is drawn please refer to our how to read a candlestick chart article.

Candlestick Chart Patterns

Getting started with a Candlestick chart

If you’re new to Candlestick charts, here are some rules to follow to understand them:

  • Know the Candlestick Components: Each candlestick consists of a body and wicks (or shadows). The body represents the range between opening and closing prices, while the wicks show the highest and lowest price points during the trading period.
  • Understand Candle Colors: A green or white candle means that the closing price was higher than the opening price (bullish), while a red or black candle indicates that the closing price was lower than the opening price (bearish).
  • Grasp Candle Patterns: Certain patterns can indicate future price movement. For example, a Doji – where opening and closing prices are almost equal – may signify a market turning point.
  • Learn Multiple Candle Patterns: These involve several consecutive candlesticks and often provide stronger signals. Examples include the bullish “Morning Star” or bearish “Evening Star”.
  • Complement with Technical Analysis: While candlestick charts can give clues about potential market turns, they’re more effective when used with other technical analysis tools like trend lines, volume, or moving averages.
  • Practice Patience: Don’t expect to master candlestick charts overnight. Take time to study different patterns, watch how they play out in real time and practice with virtual trading accounts.
  • Keep Learning: The financial market is dynamic and ever-evolving. Stay open to learning, not only about candlestick charts but also about other chart types and analysis techniques.

Learning to read Candlestick chart patterns can significantly improve your trading decision-making process. However, remember that patience, practice, and continual learning are key in mastering this trading skill (along with all skills in Online trading for that matter!).