Basic Candle Patterns: A Simple Guide
Introduction to Candlesticks
Candlestick charts are a popular way to look at price movements in financial markets.
They are easy to read and provide a lot of information about what happened to the
price during a specific time period.
Each candlestick shows four key pieces of information:
1. Open: The price when the time period started.
2. Close: The price when the time period ended.
3. High: The highest price reached during the period.
4. Low: The lowest price reached during the period.
The main part of the candle is called the “real body.” The thin lines above and
below the body are called “wicks” or “shadows.”
Green (or White) Candle: The closing price was higher than the opening price.
This shows that buyers were in control.
Red (or Black) Candle: The closing price was lower than the opening price. This
shows that sellers were in control.
Candlestick Structure Diagram
The image below illustrates the components of a basic bullish (green) and bearish
(red) candlestick.
Key Reversal Patterns
Candlestick patterns help traders predict potential changes in the direction of the
price (a “reversal”).
1. The Doji
A Doji forms when the open and close prices are very close to each other. This looks
like a cross, inverted cross, or plus sign.
What it means: It shows indecision in the market. Neither buyers nor sellers
could take control. It often suggests that the current trend (up or down) might be
losing momentum and a reversal could be coming.
2. The Hammer and Hanging Man
These are single-candle patterns with a small body and a long lower wick (shadow).
Hammer: A bullish reversal pattern that appears after a downtrend. The long
lower wick shows that sellers pushed the price down, but buyers stepped in and
pushed it back up near the open. This suggests buyers are gaining strength.
Hanging Man: A bearish reversal pattern that appears after an uptrend. The long
lower wick shows that sellers are starting to appear, and it suggests that the
uptrend might be ending.
3. The Engulfing Pattern
This is a two-candle pattern where the second candle’s body completely covers
(engulfs) the first candle’s body.
Bullish Engulfing: Occurs after a downtrend. A large green body completely
covers the previous small red body. This is a strong sign that buyers have taken
over from sellers and the price is likely to go up.
Bearish Engulfing: Occurs after an uptrend. A large red body completely covers
the previous small green body. This is a strong sign that sellers have taken over
from buyers and the price is likely to go down.
Visual Examples of Patterns
The image below shows visual examples of some key reversal patterns like the
Hammer and Engulfing patterns.
4. The Morning Star and Evening Star
These are three-candle reversal patterns.
Morning Star (Bullish): A large red candle, followed by a small-bodied candle
(the “star”), and then a large green candle. It suggests the “darkness” of the
downtrend is ending and a new uptrend is beginning.
Evening Star (Bearish): A large green candle, followed by a small-bodied candle
(the “star”), and then a large red candle. It suggests the “light” of the uptrend
is fading and a new downtrend is beginning.
Summary
Candlestick patterns are a visual language of the market. By learning these basic
patterns, you can get a better idea of who is in control—buyers or sellers—and when
the market might be about to change direction. Remember, these patterns are best
used with other tools, not by themselves.
