What a candlestick chart shows
A candlestick chart shows how price moved over time. Each candle represents one period — one minute, fifteen minutes, an hour or a day — and records four prices: the open, high, low and close (together called OHLC).
Candlestick charts are usually traced back to rice traders in 18th-century Japan and were popularised among Western traders by Steve Nison.
Anatomy of a candle
- The body — the rectangle between the open and the close.
- The upper wick (shadow) — the line above the body, up to the period's high.
- The lower wick (shadow) — the line below the body, down to the period's low.
A green (or white) candle closed above its open. A red (or black) candle closed below its open. Colour shows what happened in that period; it does not say what will happen next.
Bullish reversal patterns
Hammer
A small body near the top of the range, a long lower wick (often at least twice the body) and little or no upper wick. It appears after a decline and shows that sellers pushed price down but buyers brought it back up within the period.
Bullish engulfing
A small red candle followed by a larger green candle whose body completely covers the previous body. It shows a shift from selling to buying pressure, and is generally given more weight after a sustained decline.
Morning star
Three candles: a large red candle, a small indecisive candle (such as a doji or spinning top), then a large green candle. It describes a decline that pauses and then reverses.
Bearish reversal patterns
Shooting star
The mirror image of the hammer: a small body near the bottom of the range with a long upper wick. It appears after an advance and shows that buyers lost control within the period.
Bearish engulfing
A small green candle followed by a larger red candle whose body covers the previous body. It is generally given more weight after a sustained advance.
Evening star
The bearish counterpart of the morning star: a large green candle, a small indecisive candle, then a large red candle.
Indecision patterns
- Doji — the open and close are almost the same, so the body is tiny and there are wicks on both sides. It shows indecision.
- Spinning top — a small body with roughly equal upper and lower wicks; also a sign of indecision.
| Pattern | Candles | Usual context | What it describes |
|---|---|---|---|
| Hammer | 1 | After a decline | Selling rejected within the period |
| Bullish engulfing | 2 | After a decline | Buying pressure overtakes selling |
| Morning star | 3 | After a decline | Decline pauses, then reverses |
| Shooting star | 1 | After an advance | Buying rejected within the period |
| Bearish engulfing | 2 | After an advance | Selling pressure overtakes buying |
| Evening star | 3 | After an advance | Advance pauses, then reverses |
| Doji | 1 | Anywhere | Indecision |
Patterns need context
A pattern on its own is weak evidence. The same hammer means more at a level where price has turned before than in the middle of nowhere. A widely taught principle is: never act on a candlestick pattern in isolation — look for at least one other form of confirmation.
- Support and resistance — previous swing highs and lows, 52-week highs and lows, and round-number levels.
- Volume — a pattern formed on above-average volume is generally considered more meaningful than one on thin volume.
- Trend — a reversal pattern against a strong trend is less reliable than one at the end of an extended move.
Common beginner mistakes
- Acting on every pattern that appears.
- Ignoring volume.
- Using very short timeframes, where patterns produce many false readings.
- Ignoring the broader trend.
How to practise
Chart reading improves with deliberate, recorded practice on historical charts:
- Open a daily chart of a liquid index or stock in a charting tool.
- Scroll back several months and mark every pattern you recognise.
- For each one, note what happened over the following candles — including the times it did not work.
- Keep a simple pattern journal with a screenshot and a one-line note.
- Review the journal weekly to see which patterns you misread and why.
Where to go next
The Technical Analysis course builds on these basics with trend, structure, volume and a written trading plan. The Chart Analysis Portfolio project turns this practice into a structured exercise.