Candlestick Charts and Patterns
A candlestick summarises one period of trading with four prices. The open and close form the rectangular body, while the high and low form the thin wicks above and below. A body is coloured one way when the close sits above the open and the other way when it sits below, so colour reads as up or down at a glance. Single and paired shapes carry names. A doji is a near-empty body signalling indecision. A hammer is a long lower wick hinting at a reversal after a fall. A bullish engulfing pair is a large up candle that swallows the prior down candle.
Why it matters
Each candle is a tiny story of one session. The body shows where the crowd started and finished, and the wicks show how far the fight reached before settling. A long lower wick says sellers pushed the price down but buyers dragged it back by the close, which is why a hammer after a decline hints the selling is exhausting. The patterns matter only in context. The same shape means little in the middle of a range and a great deal at the end of a strong trend.
Formulas
Worked examples
After a long slide, a stock prints a candle that opens at A$30, falls to A$26, then closes back at A$29.50. What pattern is this and what does it suggest?
The small body near the top with a long lower wick is a hammer. Sellers drove the price to A$26 but buyers reclaimed almost all of it by the close, leaving the long lower shadow. Appearing after a downtrend, it hints selling pressure may be fading. A technician would wait for the next candle to confirm before acting, since a single hammer is a hint, not a guarantee.
Common mistakes
- ✗A single candlestick pattern reliably predicts the next move. One candle is weak evidence. Patterns gain meaning from their context within a trend and are usually treated as signals to confirm, not to trade blindly.
- ✗Green always means buy and red always means sell. Colour only encodes whether the close beat the open for that one period. It says nothing on its own about the larger trend or what to do next.
- ✗Candlesticks reveal information that bar charts hide. A candlestick plots the same four numbers as a bar chart. It only makes the open-to-close relationship easier to read at a glance.
- ✗Candlestick patterns are validated to beat the market. Like all technical tools, their predictive power is contested and sits in tension with the weak form of the EMH.
Revision bullets
- •A candle encodes open, high, low, close for one period
- •Body spans open to close; wicks reach to the high and low
- •Colour shows whether the close was above or below the open
- •Doji signals indecision, a near-zero body
- •Hammer hints reversal after a fall via a long lower wick
- •Bullish engulfing: a large up candle covers the prior down candle
Quick check
On a candlestick, the rectangular body is formed by
A candle with a very small body and a long lower wick, appearing after a downtrend, is a
Connected topics
Sources
- Brailsford, Heaney & Bilson (2015), Ch. on technical analysisBrailsford, T., Heaney, R., & Bilson, C. Investments: Concepts and Applications. 5th ed. Cengage Learning Australia, 2015.Describes candlestick construction and common reversal patterns within technical analysis.
- Bodie, Kane & Marcus (2021)Bodie, Z., Kane, A., & Marcus, A. J. Investments. 12th ed. McGraw-Hill Education, 2021.Reference coverage of charting methods and the limits of pattern-based forecasting.