How to Read Candlestick Patterns | A Beginners Guide

If you always wanted to know what a Candlestick actually is and how to read Candlestick Patterns than you’ve come to the right place.

What is a candlestick?

A Candlestick is a visual representation of price and displays the high, low, open, and closing prices of a security or commodity for a specific time period.

There is a green candle which represents price going up and a red candle which represents price going down, during a specific time frame. Both Candles have a body and can have an upper and/or lower wick.

The opening price on the green candle starts at the bottom of the candles body and the closing price is at the top of the candles body. Highest price is at the top of the upper wick and lowest price at the bottom of the wick.

The opposite is true for the red candle. Opening price starts at the top of the body’s candle and the closing price is at the bottom. Highest price during this time frame is at the top of the upper wick and the lowest price at the bottom of the lower wick.

Important note:

One candle stick on its own doesn’t tell you really where the price is likely to go. But a candle pattern in combination with key areas of support and resistance can give you a pretty good idea.

Lets have a look at the different candles and types of candle patterns.

Candlestick Patterns

The most common price action patterns are:

Shrinking Candlestick Patterns

Here we have 3 or more candles that are continuously shrinking and where each candle is smaller than the previous one.  In an uptrend this shows a loss in momentum where buyers are less and less in control and if close to a key resistance level can be an indicator of a trend reversal. It’s the opposite in a downtrend. It shows a loss in selling momentum and if near a key support level can be an indicator of a trend reversal.

Growing Candlestick Patterns

This pattern shows 3 or more growing candlesticks where each one is bigger than the previous one. Building after a downtrend and coming from a key resistance level this shows momentum from buyers and can be seen as trend reversal confirmation. 

If on the other hand this candle formation forms after an uptrend at a key resistance level this can be seen as reversal confirmation pattern to the downside.

Doji Candle

The doji candle has a very small body and looks like a cross. It shows us that the opening and closing price are basically identical.

And depending on the length of the wicks we can see how much buyers and sellers were “fighting” for the price which eventually ended up in a draw.

It represents an indecision of where price should go and is often an indicator for a reversal as the momentum has been lost.

Momentum Candle

This bar is the other side of the spectrum of the Doji bar.

The opening price is equal to the lowest price and the closing price is equal to the highest price and therefore there are no wicks.

The opening price and closing price are far away from each other, the further away they are the more momentum it represents and can be part of a continuation pattern or as seen here part of a reversal pattern.

Hanging Man

The Hanging Man is a bearish candlestick pattern that forms at the end of an uptrend.

The pattern is created when the open, high, and close are roughly equal, and the low is significantly lower than the three other price points.

The long lower wick indicates that sellers were able to push prices lower, but buyers were able to step in and push prices back up to close near the highs.

The Hanging Man is a bearish reversal pattern, and it should be treated as such. While it can be a powerful signal, it is best used in conjunction with other technical indicators to confirm the reversal.

Hammer

The Hammer is basically the same candle as the Hanging Man candle with the difference that it forms at the end of a downtrend and indicates a possible bullish reversal.

Bullish and Bearish Engulfing Candle Pattern

The Bullish Engulfing pattern is a two-candlestick pattern that is used to signal a potential reversal in the market.

The first candlestick in the pattern is typically a small bearish candlestick.

The second candlestick in the pattern is a large bullish candlestick that completely engulfs the body of the first candlestick.

The Bearish Engulfing pattern is the opposite of the Bullish Engulfing pattern. 

The Bearish Engulfing pattern is a two-candlestick pattern that is used to signal a potential reversal in the market.

The first candlestick in the pattern is typically a small bullish candlestick. The second candlestick in the pattern is a large bearish candlestick that completely engulfs the body of the first candlestick.

Multiple Long Wicks

Show a reaction to a certain price level.

Those are basically multiple failed attempts to break through a price level.

Multiple long wick candles at a certain price area are a great indicator for a reversal.

These patterns can be used to trade a variety of market conditions, including trend reversals, breakouts, and range bound markets.

Fun fact:

Those candle charts were used hundreds of years before becoming popular in the West by Japanese rice merchants and traders to track market prices and daily momentum. Wow!

Well I think this is it regarding basic candlestick patterns. There are of course more patterns but I think I’ve touched on the most basic ones.

If you think I’ve missed something essential or if I’ve got something wrong, please let me know in the comments down below, it is much appreciated. 

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