Every candle on a chart tells a story. If you don’t know how to read it properly, you can not properly analyze the market. You have to always keep in mind that you’re trading against professional traders and the algo system.
So, what does it mean?
The market leaves clues. So you have to understand its meaning. Candlesticks hold the key to anticipating what can happen next. It is the best tool to understand price behavior.
Imagine missing out on a perfect trade just because you couldn’t spot a simple pattern at right time. Worse, imagine entering a bad trade and losing money because you ignored a warning signal.
Are you ready to learn them, or will you keep making costly mistakes?
What is Candlestick
In technical analysis, candlesticks are one of the most helpful tools to understand the price behavior. it is one of the ways to represent the market data (open, high, low, close).
I also like the fact that it provides a solid visual picture of how the price is moving during the day, allowing traders to make informed decisions.
For this post we will discuss about candlesticks using daily timeframe for easy learning. you can apply candlestick knowledge to any timeframe and any market. it works the same way.
Each candle is a battle between buyer and seller. If buyers are more aggressive than sellers, the price increases and creates a green candle. If sellers wins, then price decreases then red candle appears.
A long green candle indicates aggressive buying, and a long red candle means aggressive selling. The wicks indicate to you whether or not the price rejected a specific level.
Traders can recognize market sentiment, determine if trends are continuing or reversing, and anticipate potential upwards or downwards price movements by observing candlesticks.
Each candle shows the struggle of buyers and sellers in a given time frame, be that one minute, one hour, one day, or even one week. The candle shape and color inform us who was in control during that time.
The Components of a Candlestick
A candlestick consists of two major parts—body and the shadows—they are also sometimes called wicks. These two components capture the story of bull and bear.
This helps traders to understand that what is happening in the market like which side has more strength bull or bear. which side is stronger buyer or seller.
Wick (Shadows)
These thin lines above and below the body show the highest and lowest points the price reached during the day before closing. this shows who was aggressive during the day. like wick below body shows buyer aggressiveness. which means demand coming in the market. wick above the body shows seller aggressiveness which means selling coming in the market.
Body
The body is the thick part of the candlestick. It shows the opening and closing prices of the asset for that time period. The size and color of the body give traders critical insights into market sentiment.
Data Points in Candlestick –
Every candlestick tells a story of buyers and sellers fighting for control. Candlestick shows 4 price data points.
- Open – price at which the stock or asset started trading for that day. it sets the tone for the market at the start of the day.
- High – The high price in a candlestick is the highest point the asset reached during the day. It shows how far buyers pushed the price up before sellers stepped in and brought it back down.
- Low – The lowest point the price dropped to before moving back up. The low price in a candlestick is the lowest point the asset reached during that day.
- Close – price at which the asset finished trading for that day. The close price is one of the most important price points because it tells traders who won the battle.
Type of the Candlestick
There are 3 types of candlesticks that we have to learn about.
Bullish Candlestick –
A Bullish candlestick is a Candle formation that shows the buying pressure of a stock or index.
It indicates that buyers are in control and pushing the price higher. there are variations in bullish candlesticks. From highly bullish to least bullish shown in above image. we will discuss more about candlesticks later.
Bearish Candlestick
A bearish candlestick pattern is a Candle formation that shows the selling pressure of a stock or index.
It indicates that sellers are in control and pushing the price lower. there are variations in bearish candlesticks too. From highly bearish to least bearish shown in above image.
Neutral Candlesticks
A neutral candlestick pattern is a type of candlestick pattern that shows indecision in the market. It means buyers and selling both have equal force.
It occurs when the opening and closing prices of an asset are nearly equal, resulting in a very small or non-existent body. upper and lower wick is present in this pattern. color of the candle does not matter.
Common Candlestick Patterns Every Trader Should Know
Bullish Engulfing
The Bullish Engulfing pattern is a powerful candlestick formation that signals a potential reversal from a downtrend to an uptrend.
This pattern consists of two consecutive candles. The first candle is bearish—typically small, showing that sellers were in control for that period.
Then comes the second candle, which is bullish and large enough to completely engulf the body of the first candle. This shows that buyers have taken control, overpowering the previous selling pressure.
The importance of this pattern shows shift in sentiment. When you see a Bullish Engulfing pattern, it shows that the downtrend may be ending.
Buyers have stepped in aggressively, and the momentum is starting to change.
How do you trade using this pattern?
Confirm the signal. Look for the next candlestick to continue the bullish momentum.
Bullish Engulfing patterns work best when they form near support levels in a downtrend, where selling pressure is exhausted.
learn more about support and resistance
Once confirmed, you might consider entering a long position while managing risk by placing a stop-loss below the low of the engulfing candle.
Bearish Engulfing
Bearish Engulfing is a candlestick pattern that signals a potential reversal in an uptrend.
The Bearish Engulfing pattern forms when a small green candle is followed by a larger red candle that completely engulfs the green candle.
This large body indicates a strong shift in momentum from buying to selling.
When you see a Bearish Engulfing pattern, it suggests that the uptrend may be losing steam.
The strong bearish candle tells you that sellers are now overwhelming the buyers, which could lead to a trend reversal.
To use this pattern effectively, look for placement of pattern. pattern forms at resistance have higher probability.
always look for confirmation. Wait for the next candlestick to show continued bearish movement. If the price continues to drop after the Bearish Engulfing pattern, it confirms the signal.
Dogi
The Doji candlestick pattern is a neutral candlesticks pattern. it shows market indecision and a potential turning point.
A Doji has an extremely small body, meaning the opening and closing prices are nearly identical. This tells you that neither buyers nor sellers gained full control during the session. it has both upper and lower wick means both are aggressive. but no one wins.
Doji patterns are most significant when they appear after a strong trend. Whether the market has been bullish or bearish, a Doji signals that the prevailing momentum is pausing for a moment.
Now, how do you use the Doji in trading?
it’s important to wait for confirmation. Look for the next candlestick to indicate a clear move—if it’s bearish after an uptrend, or bullish after a downtrend, that confirmation strengthens the signal of a potential reversal.
Hammer
Hammer is a candlestick pattern that shows potential reversal in a downtrend.
Hammer pattern shows that buyers are starting to step in. It has three main characteristics of this pattern.
First, it has a small body, which means the opening and closing prices are very close.
Second, it has a long lower wick. This tells us that the price dropped to a low price point during the session but then bounced back up.
Third, there is little to no upper shadow, meaning the price didn’t rise much above the open.
So, the small body and long lower shadow indicate that even though the price fell, buyers pushed it up again. lower wick shows that buyers is aggressive in the market.
so, when you see the Hammer candlestick, it means the sellers are losing control, and buyers are making a comeback. This pattern typically appears after a downtrend, suggesting a possible trend reversal.
How can you use this pattern?
Hammer is highly effective pattern when it is form after the downtrend and at a support level
always look for confirmation in the next candlestick. If the next candle breaks hammer candle high, it confirms the bullish signal. then you can consider buying positions with proper risk management.
Shooting Star
Shooting Star is a candlestick pattern that signals a potential reversal in an uptrend.
It has three main characteristics.
First, the Shooting Star has a small body, meaning the opening and closing prices are very close to each other.
Second, it has long upper wick, which shows that the price reached a high point during the session before being pushed back down by sellers.
Third, there is little to no lower shadow, indicating that the price did not fall much below the opening level.
The combination of a small body and a long upper wick tells you that even though the price climbed, sellers aggressively stepped in to push it down. This shift in momentum suggests that the buying pressure is weakening and the upward trend may be ending.
When you spot a Shooting Star after a sustained uptrend, it serves as a warning signal.
It means that the market sentiment might be shifting from bullish to bearish.
To use this pattern effectively, always look for confirmation from the following candlestick. If the next candle shows a bearish move—ideally by breaking below the low of the Shooting Star
Shooting Star patterns are particularly effective when they form near a resistance level, where the price has struggled to move higher before.
Once confirmed, you can consider entering a short position with proper risk management.
How to Read Candlestick Patterns
Now that you know the parts of a candlestick, the data points it tracks, and some common patterns, here’s what to do in real time.
Always ask yourself two questions: Who is winning and who shows aggression in that duration?
When you check the candlestick chart, focus on which side—buyers or sellers—is in control. This simple check gives you a clear picture of market strength
Winner and winner aggressiveness –
when reading candlesticks pattern look for who wins for that timeframe like if close is greater than open, means bulls are winners.
Now also look for who was aggressive during the day. Color of body shows who wins and wick shows aggressiveness of buyers or seller.
Placement of pattern –
When you’re looking for patterns, always pay attention to where the pattern is forming.
A Hammer pattern forming at support zone is way more powerful than at a resistance zone.
Similarly, Bullish Engulfing pattern at support holds more value than the same pattern at resistance.
A hammer at a support zone sends a stronger message than one at resistance.
If you see a bullish engulfing pattern at support, buyers are really stepping in.
That pattern holds more weight than the same one forming at resistance.
In short, bullish patterns work best at support and bearish ones works best at resistance.
Always focus on the pattern’s location, because that’s the most important clue.
Behavior of prior move
You should also check the behavior of price move that occurred before forming that candle pattern. is the price move stable or highly volatile.
Mistakes to Avoid When Using Candlestick Patterns –
Ignoring the broader market context
Don’t focus solely on the candlestick pattern itself. Always consider the broader market context, including trends, support and resistance levels.
Failing to wait for confirmation
Don’t jump the gun. Wait for the pattern to fully form and ideally, for the next candle to confirm the expected move before taking action.
Over reliance on Single Patterns
While individual patterns can be informative, they’re most effective when used in combination with other patterns or indicators.
Don’t base your entire trading decision on a single candlestick formation.
The importance of volume in confirming candlestick signals
Volume is a crucial factor in confirming candlestick signals.
A pattern that forms on low volume may not be as reliable as one with high volume backing it up.
Combining candlesticks with other technical indicators
To improve the signal, you can combine candlesticks with other technical indicators.
You can use moving averages, RSI, MACD, and volume.
I rely on moving averages to smooth out the price action.
Volume is another key factor. High volume during a breakout confirms the move is strong and real.
Multiple timeframe analysis using candlesticks
To better understand the pattern, you can combine it with multi-timeframe study.
A pattern on a daily chart might carry more weight than the same pattern on a 5-minute chart. higher timeframes have higher weightage than lower timeframe.
Lack of Practice
Identifying candlestick patterns accurately takes practice. practice on historical charts to train your eyes to spot pattern in real time.
Where to Practice Reading Candlestick Charts
Learning candlestick patterns takes time, practice, and a bit of patience.
If you already have a demat account with a broker, you can use broker trading terminal and start exploring those charts right away.
I recommend checking out tradingview.com. It’s a great charting platform, free to use. where you can access market data and practice without risking any money.
My Top resources to learn about candlesticks pattern
I want to share my top resources for learning candlestick patterns. These tools helped me become a better trader, and I think they’ll help you too.
Japanese Candlestick Charting Techniques by Steve Nison. This book explains the basics and shows you how candlesticks evolved. It’s a must-read to understand the market’s language.
Candlestick Charting Explained by Gregory L. Morris. This book breaks down complex patterns into simple, actionable steps. It really helped me see the practical side of chart reading.
Another great resource is “Encyclopedia of Candlestick Charts” by Thomas Bulkowski. It’s packed with real-world examples and statistical insights that boost your pattern recognition skills.
Conclusion
Alright, you have learned lot of things, let me remind you that mastering candlestick patterns is a journey. These resources—books, websites provide the foundation you need to succeed. I’ve used them to sharpen my skills, and I’m confident they will help you too.
you should keep exploring and practicing. The more you learn, the more confident you’ll become. Use those books to build your knowledge, check out the websites for real-time insights.
Happy learning and successful trading!
