Mastering Various Candlestick Charts: Uncovering the Language of Price Action for Strategic Trading Success

7 min readNov 26, 2023

A candlestick chart is a financial chart that shows the price movement of a security, currency, stock, bond, or derivative. It’s like a bar chart, but each candlestick represents four pieces of information;

Open: The price at the beginning of the selected time frame.

Close: The price at the end of the selected time frame.

High: The highest price during the selected time frame.

Low: The lowest price during the selected time frame.

Candlestick charts are useful for traders because they show past patterns that can indicate future price movements.

The candlestick shows the open, high, low, and close prices of the stock price for a day.

Body: The central part of the candlestick represents the price range between the opening and closing prices. If the closing price is higher than the opening price, the body is usually filled or colored, often in green or white. Conversely, if the closing price is lower than the opening price, the body is typically hollow or shaded, often in red or black.

Wicks (or Shadows): The lines extending above and below the body are called wicks or shadows. The upper wick extends from the top of the body to the highest price reached during the time period, while the lower wick extends from the bottom of the body to the lowest price. These wicks provide information about the price range and volatility during the given time frame.

Key Terms in Finance;
Volatility refers to the degree of variation of a trading price series over time. In simpler terms, it measures how much the price of a financial instrument fluctuates. High volatility indicates large price swings, while low volatility suggests smaller and more stable price movements. Volatility is a crucial concept in financial markets, influencing risk assessment and trading strategies.

Candlestick charts serve as effective tools for identifying and forecasting market trends over time. They are valuable for gauging day-to-day market sentiment, as each candlestick’s color and shape convey crucial information. A lengthy body suggests heightened buying or selling pressure, while a short body indicates minimal price movement and signifies a period of consolidation.

When you observe long green candlesticks, it’s a clear signal of strong buying activity, suggesting a bullish market trend. However, it’s crucial to analyze these candlesticks in the broader market structure, especially in significant support levels. Conversely, extended red candlesticks indicate substantial selling pressure, pointing to a bearish market sentiment.

Big Green and Red Candlesticks

Long green candlesticks indicate strong buying, showcasing a significant upward move. Therefore, it shows the bullish market trend. This indicates an active buying market, but caution should be exercised if overbought activity follows a prolonged rally, or this point may also indicate a support level.

On the flip side, long red candlesticks signify robust selling pressure, reflecting a notable decline. Therefore, it shows the bearish market trend. After an uptrend, a long red candlestick may suggest a reversal, while in a downtrend, it could indicate panic selling. Also, this point may also indicate a resistance level. Understanding these patterns is vital for interpreting market sentiment and making informed trading decisions.

Marubozu Candlesticks

Marubozu is a long candle stick with no shadow or tail. Also, marubozu signals are more potent as bull or bear indicators than big green and red candle sticks, indicating sustained control by buyers or sellers from the opening to the closing price without any intra-day retracements.

Dragonfly Doji and Gravestone Doji

Dragonfly doji form when open, high, and close are equal with a long lower shadow, resembling a “T” without an upper shadow. This signals seller dominating initially, pushing prices down. Buyers later rally, bringing prices back to the opening level and session high. Therefore, control has shifted from sellers to buyers. Reversal implications depend on past and future confirmation. After a downtrend or at support, a dragonfly doji may signal a potential bullish reversal. In contrast, after an uptrend or at resistance, it could suggest a potential bearish reversal. Confirmation is essential in both scenarios.

Gravestone doji, formed with equal open, low, and close, along with a long upper shadow resembling an upside-down “T,” suggests initial dominance by buyers, pushing prices higher. However, by the session’s end, sellers reemerge, pulling prices back to the opening level and session low. Therefore, control has shifted from buyers to sellers. Reversal implications, like other candlesticks, depend on prior price action and future confirmation. Despite the failed rally indicated by the long upper shadow, the intraday high shows evidence of some buying pressure. After a prolonged downtrend or at support, attention shifts to buying pressure and a potential bullish reversal. Conversely, after an extended uptrend or at resistance, attention turns to the failed rally and a potential bearish reversal. Confirmation is essential in both scenarios.

Hammer and Hanging Man Candlesticks

Let’s dive into specific patterns. A bullish reversal pattern, like the hammer, forms when the price drops after opening but recovers to close near the high. On the flip side, the hanging man, a bearish counterpart resembling a square lollipop, is often used by traders aiming to pinpoint potential market tops or bottoms. These patterns provide valuable insights when navigating market trends and making informed decisions.

Morning Star and Evening Star Candlesticks

A candlestick that gaps away from the previous candlestick is said to be in star position. The first candlestick usually has a large real body, but not always, and the second candlestick in star position has a small real body.

Ideally for the morning star, the close of the 3rd candle is 50% above the first candle. The morning star pattern indicates a bullish reversal following a downtrend. The initial candlestick features a long red body. The second candlestick gaps down from the first, with a more bullish outlook if it’s green. The subsequent candlestick has a long green body, closing in the upper half of the first candlestick’s body.

Ideally for the evening star, the close of the 3rd candle is 50% down the first candle. The evening star pattern indicates a bearish reversal following a uptrend. The initial candlestick features a long green body. The second candlestick gaps up from the first, with a more bearish outlook if it’s red. The subsequent candlestick has a long red body, closing in the lower half of the first candlestick’s body.

Harami Candlesticks

A candlestick positioned within the real body of the preceding candlestick is referred to as being in a Harami position. The term “Harami” translates to “pregnant” in Japanese, fittingly describing the second candlestick nestled inside the first. Typically, the first candlestick has a larger real body, while the second one has a smaller real body. Although it’s preferable for the shadows (high/low) of the second candlestick to be contained within the first, it’s not a strict requirement. Harami candlesticks indicate loss of momentum and potential reversal after a strong trend.

Dark Cloud Cover Candlesticks

The Dark Cloud Cover pattern is characterized by a substantial bearish candle (depicted in black or red) casting a “dark cloud” over the preceding day’s candle. Initially, buyers drive the price upwards during the opening, but subsequently, sellers assert control later in the session, prompting a decline in prices. This transition from a buying to a selling sentiment suggests the potential for a forthcoming reversal in price direction towards the downside. This pattern is most pertinent when observed at the conclusion of an uptrend.

The importance of the Dark Cloud Cover pattern becomes stronger as prices rise, emphasizing its particular importance in predicting a downward reversal. However, during periods of unstable price movement, its importance decreases as the pattern followed by constant fluctuation in prices loses its significance.

Spinning Top Candlesticks

Candlesticks exhibiting a lengthy upper and lower shadow, coupled with a small real body, are classified as spinning tops. A singular elongated shadow implies a potential reversal, whereas spinning tops signify a state of indecision in the market. The modest real body reflects minimal movement between the opening and closing prices, while the shadows indicate active participation from both bulls and bears throughout the session. Despite minimal net change from open to close, significant price fluctuations occurred in the interim. The impasse results from neither buyers nor sellers gaining dominance, creating a standoff.

Following an extensive uptrend or a prolonged green candlestick, a spinning top suggests a weakening bullish sentiment and hints at a possible shift or interruption in the prevailing trend. Conversely, after a prolonged downtrend or an extended red candlestick, a spinning top indicates a waning bearish momentum, suggesting a potential change or interruption in the ongoing trend.