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Candlesticks are one of the most important chapters in trading. Reading and understanding candlestick charts is an essential skill that every trader must learn and master.
In this article, I will cover how to read candlestick charts, different candlestick patterns, bullish candlestick patterns, and more.
What is a Candlestick?
A candlestick chart is a type of price chart used in technical analysis that shows the high, low, open, and close prices of a security for a specific period.
It is believed that the candlestick chart was introduced in the early 18th century. Much of the credit for developing candlestick charting goes to Munehisa Homma (1724–1803), a rice merchant from Sakata, Japan, who traded in the Ojima Rice Market in Osaka during the Tokugawa Shogunate.
In this article, I will also cover Hammer Candlestick, Shooting Star Candlestick, Inverted Hammer Candlestick, and more.
How to Read a Candlestick Chart?
A candlestick reflects the impact of investors’ sentiment on price movement and is used by technical analysts to determine the right time to enter or exit trades.
A candlestick is typically formed using four key data points: open, high, low, and close prices.
There are basically two main types of candlestick patterns:
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Bearish Candle
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Bullish Candle
If the opening price is higher than the closing price, a bearish candle is formed.
Conversely, if the closing price is higher than the opening price, a bullish candle is formed.
Important Points:
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A long white or green candlestick indicates strong buying pressure and typically signals a bullish trend.
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A long black or red candlestick indicates strong selling pressure and typically signals a bearish trend.
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When a long white or green candle forms near a support level, it suggests a potential strong buy opportunity.
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When a long black or red candle forms near a resistance level, it suggests a potential strong sell opportunity.
The body of the candlestick represents the difference between the opening and closing prices, while the shadows (or wicks) show the high and low prices for that period.
Bullish Candlestick Patterns
Hammer
Hammer Candlestick
A Hammer Candlestick is a price pattern that occurs when a security trades significantly lower than its opening price but manages to recover and close near the opening level.
A Hammer Candlestick pattern typically appears after a downtrend, indicating that the market is trying to find a bottom.
This type of candlestick usually signals the end of a bearish trend and the beginning of a potential bullish reversal.
Inverted Hammer
An Inverted Hammer is a reversal candlestick pattern that appears in the shape of an inverted hammer.
This pattern is similar to the Hammer Candlestick, with the key difference being that the upper wick is long while the body is short.
The Inverted Hammer indicates that buyers tried to push the price higher during the session, but sellers managed to bring it back down near the opening price. This pattern often suggests that the downtrend may be losing momentum, and a potential bullish reversal could occur.
Bullish Engulfing Pattern
The Bullish Engulfing Pattern is one of the most popular candlestick patterns used by traders to identify buying opportunities.
This pattern typically appears after a downtrend. It occurs when a large bullish candle completely engulfs the previous bearish candle, signalling a potential reversal from bearish to bullish momentum.
Morning Star
The Morning Star is a popular bullish reversal pattern used by traders to identify potential buying opportunities.
It consists of three candles and usually appears at the bottom of a downtrend or near a support level, signalling that the bearish momentum may be coming to an end.
The first candle is a strong bearish candle, showing heavy selling pressure.
The second candle has a small body (can be bullish or bearish) with short wicks, indicating market indecision.
The third candle is a strong bullish candle, confirming the potential trend reversal.
When these three candles appear together, they suggest that buyers are regaining control, and the price may start moving upward.
Piercing Line
The Piercing Line is a two-candlestick bullish reversal pattern used by traders to identify potential trend reversals.
This pattern is most effective when it appears during a downtrend, signalling that bearish momentum may be weakening.
It forms when the first candle has a large bearish body, followed by a strong bullish candle that opens below the previous close but closes above the midpoint of the first candle’s body.
This movement indicates a possible shift from selling pressure to buying momentum, suggesting that a bullish reversal could be underway.
Bearish Candlestick Patterns
Hanging Man
The Hanging Man is a bearish reversal candlestick pattern used by traders to identify a potential downward trend.
This pattern is most effective when it forms at the end of an uptrend, signaling that the bullish momentum may be weakening and a trend reversal could occur.
Evening Star
The Evening Star is one of the most popular bearish reversal candlestick patterns and is the opposite of the Morning Star pattern.
It consists of three candles and typically appears at the top of an uptrend, signaling that the bullish momentum may be coming to an end.
The first candle is a strong bullish candle, showing strong buying pressure.
The second candle has a small body, indicating indecision between buyers and sellers.
The third candle is a strong bearish candle, confirming that sellers have taken control of the market.
This pattern represents a shift in market sentiment — from bullish to bearish — as buyers lose momentum and sellers start dominating.
Bearish Engulfing Pattern
The Bearish Engulfing Pattern is a two-candlestick reversal pattern used by traders to identify potential sell opportunities.
This pattern is the opposite of the Bullish Engulfing Pattern. It typically appears after an uptrend, signaling that the bullish momentum may be weakening.
When a large red (bearish) candle completely engulfs the previous green (bullish) candle, it indicates that buyers are exiting the market and sellers are gaining control, suggesting a possible trend reversal to the downside.
Three Black Crows
The Three Black Crows is a multiple-candlestick bearish reversal pattern used by traders to identify a potential shift from an uptrend to a downtrend.
This pattern unfolds over three consecutive trading sessions and consists of three bearish candles that resemble a descending staircase.
It typically appears after a strong uptrend, indicating that buyers have lost momentum and sellers are taking control of the market. This shift suggests that the bullish trend may be ending, and a new bearish phase could begin.
Shooting Star
The Shooting Star is a bearish reversal candlestick pattern that looks similar to an Inverted Hammer, but it forms near the top of an uptrend.
It has a small body and a long upper wick, showing that buyers initially pushed the price higher, but sellers stepped in and drove it back down before the candle closed.
This pattern signifies that sellers are gaining strength and are attempting to push the market downward, indicating a potential trend reversal from bullish to bearish.
Summary:
Candlesticks are one of the most important concepts in the world of trading, and every trader must learn how to read and understand candlestick patterns to trade effectively.
A candlestick chart is a type of price chart used in technical analysis that displays the open, high, low, and close prices of a security for a specific period.
It is believed that candlestick charting was introduced in the early 18th century and developed by Munehisa Homma, a Japanese rice trader who is considered the pioneer of candlestick analysis.
A candlestick reflects the impact of investors’ sentiment on price movement and helps traders determine market trends and potential reversal points.
There are basically two main types of candlestick patterns:
-
Bearish Candlestick
-
Bullish Candlestick
In this article, I will cover some of the most important candlestick patterns every trader should know, including how to read candlestick charts, bullish and bearish patterns, and key examples such as the Hammer, Shooting Star, and Inverted Hammer candlestick patterns — and much more.
