What Are Candlesticks?

Candlesticks provide a wealth of information for traders to understand about the price movement of a certain asset class. Within a candlestick, there are four pieces of information a trader can derive from.

1. Open
2. Close
3. High
4. Low

 

 

On the daily chart, each candle represents 24 hours’ worth of information. When looking at one daily candle, the candle’s open and close represents the price of the asset when market opens (12AM) and the price of the same asset when market closes (11 PM).  The high and low represents the highest and lowest price of the asset within the 24 hours.

An additional point to note is the colour of the candle. A green (bullish) candle means the asset is trading higher than its opening price. A red (bearish) candle means that the close is lower than its opening price.

With all this information derived from one humble candlestick, you shall not underestimate the value of using candlesticks in your trading routine as each candlestick tells a certain story.

 

Why Use Candlesticks?

If a singular candlestick can provide so much information, imagine a group of them together. A group of candlesticks together form critical patterns that traders use to make trading decisions. Simple candlestick patterns can involve one or two candles while more complex patterns involve three.

 

How Reliable Are Candlestick Patterns?

Steve Nison also known as Mr. Candlestick, widely considered the pioneer of modern-day Candlestick charts, who highlighted the value of candlesticks to the west by learning it from a Japanese broker. For years, he studied and wrote books revolving around this topic, and candlesticks ultimately gained global popularity in the 1990s [1].

Since then, candlesticks have become widely discussed and candlestick patterns began to form. The reliability of the candlesticks has also slowly been improving. It is most useful when used in tandem with other technical analysis techniques.

 

Types of Candlestick Patterns

No matter what candlestick pattern a trader uses, it is always advisable to use it in conjunction with other tools. For the case studies below, the candlestick patterns will be used in tandem with the concept of support and resistance.

 

Famous One-Candlestick Patterns – Hammer & Shooting Star Doji

In this segment, one candle stick pattern will be the focus. Note that both the Shooting Star and the Hammer Doji share a common feature in which the candles have a prominent wick and a relatively small candle body.

Both patterns serve to illustrate market indecision and hint at a potential reversal in the market.

 

 

(Case Study 1 – Hammer Doji)

 

In figure 3, the formation of the Hammer Doji at a support level provides traders with insight that markets could turn from bearish to bullish.

 

(Case Study 2 – Shooting Star Doji)

 

Figure 4 depicts a Shooting Star Doji forming at a critical resistance level. This should hint traders that the market could turn from bullish to bearish.

 

Famous Two-Candlestick Patterns – Bullish & Bearish Engulfing

Engulfing patterns involve two candlesticks of opposite colours. The second candle’s body must be bigger than the first candle; hence the term “engulfing”. Bullish and bearish engulfing patterns are popular because they can be spotted easily and traded. When such patterns occur at a bottom or the top of a trend, it signals a potential reversal.

 

(Case Study 3 – Bullish Engulfing)

 

Figure 6 shows the bullish engulfing pattern in action. At a significant support, a bullish engulfing on EURGBP led to a shift from bearish to bullish market structure.

 

(Case Study 4 – Bearish Engulfing)

 

In figure 7, a prominent resistance can be seen and at the 3rd tap of the resistance line, market prints a bearish engulfing pattern. What follows suit is a strong bearish push to the downside.

 

Famous Three-Candlestick Patterns – 3 white soldiers & 3 black crows

Three candlesticks are the maximum number for a candlestick pattern.

 

(Case Study 5 – 3 White Knights)

 

Figure 9 shows the 3-White Knight pattern forming at support. The three candles involved progressively become larger, signifying a potential emergence of a bull market.

 

(Case Study 6 – 3 Black Crows)

 

The formation of 3-Black Crows at a resistance in figure 10 highlights a high possibility of a incoming bearish market.

 

Summary of Candlestick Patterns

Table 1 showcases the basic characteristics of each candlestick pattern and the theoretical market direction that follows.

Pattern	Characteristic	Market direction after
Hammer	One candle pattern Small bullish body with long bottom wick Appears at support	Bullish
Shooting Star	One candle pattern Small bearish body with long top wick Appears at resistance	Bearish
Bullish Engulfing	Two candle patterns Second bullish candle body engulfs first candle body Appears at support	Bullish
Bearish Engulfing	Two candle patterns Second bearish candle body engulfs first candle body Appears at resistance	Bearish
Three White Soldiers	Three candle patterns All three candles are bullish Candle body size increases Appears at support	Bullish
Three Black Crows	Three candle patterns All three candles are bearish Candle body size increases Appears at resistance	Bearish

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.