Introduction
A candlestick is the representation of price movement of a financial asset in a selected time frame. Which itself reflects many aspects of the market, or we can say that
Candlestick is the visual representation of the market participants based on their behaviour related to money, generally dominated by fear, greed and hope. By analysing candlestick we are able to recognise how buyers and sellers are interacting with each other and how their psychological behaviour is changing with respect to the market variables(news, economic reports, war etc.).
Just by looking at candlestick we are able to know open, high, low and close prices which give us an idea of price movement in a selected time frame. If the close price is higher than the open price, then we say the market is in a bullish trend in that specific time frame. A bullish candle is generally represented by the white or green candle. Similarly, If the close price is lower than the open price, then we say the market is in a bearish trend in that specific time frame. A bearish candle is generally represented by the black or red candle.
The filled part of the candlestick is called ‘Real body’, while thin lines above and below the body are called shadows or wicks. The top of the upper shadow is high while the bottom of the lower shadow is low.
Candlestick body size : Long Vs Short
Long candlestick bodies signify significant buying or selling momentum. When a bullish candlestick has a long body with the closing price higher than the opening, it shows that buyers dominated the market during that time period. On the other hand, a bearish candlestick with a long body—where the opening price is higher than the closing—suggests strong selling pressure, indicating that sellers were in control. In contrast, short or small-bodied candlesticks typically reflect minimal market activity, with limited buying or selling force
Candlestick shadows : Long Shadow
Candlestick pattern with short shadows suggest that most of the price movement occurred close to the opening and closing levels. When a candlestick has a long upper shadow and a short lower shadow, it indicates that buyers initially pushed the price higher, but sellers later stepped in and brought the price back down, resulting in a close near the opening level. Conversely, a candlestick with a long lower shadow and a short upper shadow implies that sellers initially drove the price down, but buyers regained control and pushed the price back up, leading to a close near the opening price.
Classification of Candlestick Pattern
Based on Number
Candlestick patterns are broadly divided into single, double, and triple candlestick formations.
A. Single Candlestick Patterns
These are formed by just one candlestick and often suggest a potential change in market direction or continuation depending on context.
- Doji: Indicates indecision; potential reversal if it appears after a strong trend.
- Hammer: Bullish reversal signal after a downtrend; small body with a long lower shadow.
- Hanging Man: Bearish reversal after an uptrend; similar to hammer in shape but contextually opposite.
- Inverted Hammer: Bullish reversal in a downtrend.
- Shooting Star: Bearish reversal in an uptrend.
B. Double Candlestick Patterns
These patterns involve two candles and usually signal a shift in momentum.
- Bullish Engulfing: A small red candle followed by a larger green candle that completely engulfs the first — indicates potential upward reversal.
- Bearish Engulfing: A small green candle followed by a larger red candle — signals a possible downward reversal.
- Piercing Line: Appears in a downtrend; the second green candle opens lower but closes above the midpoint of the first red candle — bullish signal.
- Dark Cloud Cover: Appears in an uptrend; the second red candle opens higher but closes below the midpoint of the first green candle — bearish signal.
C. Triple Candlestick Patterns
These three-candle formations are more reliable due to the added confirmation.
- Morning Star: A bullish reversal pattern formed by a long bearish candle, a small indecisive candle (doji or spinning top), and a strong bullish candle.
- Evening Star: Bearish reversal pattern with a long bullish candle, followed by a small-bodied candle, and then a strong bearish candle.
- Three White Soldiers: Three consecutive bullish candles with higher closes — strong bullish signal.
- Three Black Crows: Three bearish candles with lower closes — strong bearish signal.
Based on Market Trend
Understanding the trend in which a pattern appears is crucial. A candlestick pattern’s meaning can change depending on whether it’s forming during an uptrend, downtrend, or sideways market.
A. Reversal Patterns
These signal a possible change in trend direction.
- Bullish Reversal: Appears in a downtrend — e.g., Hammer, Bullish Engulfing, Morning Star.
- Bearish Reversal: Appears in an uptrend — e.g., Shooting Star, Bearish Engulfing, Evening Star.
B. Continuation Patterns
These indicate that the current trend is likely to continue.
- Rising Three Methods: A bullish continuation pattern with small bearish candles sandwiched between two strong bullish candles.
- Falling Three Methods: Bearish continuation, the opposite of the rising version.
- Marubozu: A solid candle with no wicks that reinforces current trend momentum.
Based on Market Sentiment
Candlestick patterns also reflect the emotional state of market participants:
A. Bullish Sentiment
These patterns suggest increasing buyer interest and potential upward price movement.
- Long Bullish Candles (e.g., Marubozu): Show strong buying momentum.
- Bullish Engulfing: Indicates buyers are overpowering sellers.
- Morning Star: Signals a shift from bearish to bullish control.
B. Bearish Sentiment
These patterns show growing selling pressure.
- Long Bearish Candles: Strong seller dominance.
- Bearish Engulfing: Sellers overpowering buyers after a rally.
- Evening Star: Buyers losing control to sellers.
How to Interpret Candlestick Patterns
To interpret candlestick patterns effectively we should focus on some parameters like market trend, volume, support resistance and indicators.
Market trends can be identified by using simple price action methods or by using indicators like the moving average. Suppose, we identify that the overall market is in a bullish trend. Now, if retracement (bearish after strong bullish move) occurs then there will be higher chance of the market to reverse to bullish behaviour again, since the major trend of the market is bullish. Now formation of a bullish reversal candle like hammer candlestick will be an indication of possible reversal to the bullish. Only relying on the candle decreases the chance of reversal. So formation of hammer candlestick at support with increased volume will be a sign of high potential of bearish to bullish reversal of the market.
Only relying on candlestick decreases the chance of winning trade. So, to increase the chance of winning trade, we should use a candlestick pattern with market context, volume, support resistance and indicators as discussed above.
Advantages of Candlestick Pattern
Works in All Markets: It is applicable for the different types of financial markets like stock, cryptocurrencies, commodities, forex etc.
Simplicity: They are simple yet most poerful trading concepts, easy to identify and profitable setups.
Flexibility: It can be used alond and with other technical analysis tools such as indicators or with Eliot wave theory.
Conclusion
Candlestick pattern is the basic concept of price action trading. It generally works as a signal for entry and exit to the market and in market move prediction. Alone candlestick itself doesn’t give great results so it should be used in confluence with support resistance, market trends, indicators, volume etc. to avoid fake entry.