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What are Candlesticks and how to read them?

Traders have used different types of charts to read important market information: price, trend and the overall mood of market participants. But these days, the most convenient chart for such purposes is considered to be the Japanese Candles chart. Let’s see what hides behind this romantic name.

The Japanese candlestick is a chart over a specific period of time — usually one day. The chart (candle) looks like a vertical bar with (sometimes without) lines beaming outwards either up or down from the borders of the bar.

Like this:

The candle consists of:

Body — Shows the range of the price between the open and close price during the period.

Wick (Shadow) — Shows the highest and lowest price during the period.

Color — Shows if the price was going up or down during the period. If the candle is green it means that the closing price was higher than the opening and visa versa. NB:- Previously, traders used black and white colors, but then they decided that monochrome looks boring.

Shadows indicate the uncertainty of the market. If the shadow is short (no matter if it is upper or lower) it means that traders are pretty confident about the trend. But if the shadow is long — this shows that the market is testing the current trend for strength.

A long upper shadow shows that bullish traders are trying to reverse the trend and have been more active during the session, but bearish traders took over.

A long lower shadow indicates that the bears woke up and tried to pull the prices down, but the bulls had enough power to drag them back.

A bull market is a period of generally rising prices.

A bear market is a general decline in the stock market over a period of time.

So, how do I read them?

It’s easy!

On longer time scale charts, one candlestick represents one day. But a one-day candlestick does not provide enough information for a trader to see what really happens in the market. Sometimes, there are so many interesting things going on within one single day that you just can’t miss it!

Japanese candlesticks can vary from a 1-minute period up to 1 month. Professional traders usually use quite detailed charts of 15 mins, 30 mins or 1 hour periods.

Why do so?

Let’s have a look at the chart below:

The big green candle on the right is a one day candlestick. The six shorter candlesticks on the left are each a 4-hour candlestick. As you see, even though the right candlestick looks quite confident in its bullish nature, there were two bearish candlesticks during the day. They were not strong enough to influence the daily candlestick, but something triggered them. Maybe it was just a casual sale. But maybe there was some news that hit the market that was followed by these collapses. The short-period candlesticks help traders to trace market fluctuations that depend on various criteria so as to try and predict market movement if a bigger event comes along.

Short-period charts are not used only for market forecasts. If you want to make trading your profession, you will know that money is made on tiny little fluctuations, especially if you dispose of large amounts. Just look how much information is missing on the same chart made using different interval settings — a 1-hour candlestick chart, a 4-hour candlestick chart and a 1-day candlestick chart.

Okay, anything else?

Oh, yes. Now let’s find out what types of candlesticks there are and what they all mean.

There are different types of Japanese candlesticks. And they all have beautiful, romantic names. We will divide the candlesticks based on which trend they represent. And we will start with the neutral, yet most popular candles.

Neutral trend

Doji

You might think that this name refers to the Venetian medieval aristocracy, but NO. Doji translated from Japanese means “blunder” — and that’s exactly what this type hints at.

A doji candlestick is a neutral candlestick with a very short body and usually long shadows. The short body shows that the period open and close prices are very close to each other, but the highest or lowest price strayed far from the average. The doji shadow indicates traders’ uncertainty and their fear to not make a mistake.

If doji follows several bullish candles, it means that the market is getting tired of the uprising trend. And visa versa, doji appearing on the chart at the end of a series of bearish candles means that traders want to start making money!

There are 4 types of doji:

  • The long-legged doji has long upper and lower shadows of approximately the same length. TRADERS REALLY DON’T KNOW WHAT TO DO.
  • The dragonfly doji has a long lower shadow. BULLS BEAT THE HOOVES WITH MIGHT AND MAIN.
  • The gravestone doji has a long upper shadow. BEARS ARE HIBERNATING THE MARKET.
  • The four price doji has no shadow and sometimes a linear body. Very rare. It could signify complete uncertainty among traders, the calm before the storm. Or just a blackout on the exchange.

Spinning tops

Spinning tops look like the doji, but have a bigger body and two shadows of approximately the same length. This candle indicates that both bears and bulls have been very active during the period, but the market on the whole is experiencing uncertainty.

Spinning tops that appear after a bullish market trend show that traders are contemplating selling. On the opposite end, spinning tops following a bearish trend show that a rise is coming.

Marubozu

Marubozu has no shadows. It is a full body candlestick and indicates that traders are pretty sure about what they are doing and expecting. When the open price equals the minimum price and the close price equals the maximum price, it’s a bullish Marubozu. When the opening price is the same as the maximum price and the close price is similar to the minimum price, it’s a bearish Marubozu.

Is that all?

Nope, let’s now check out the chart patterns that candlesticks form and learn how to read them.

A single standing candlestick will not provide enough information for you to start your trading experience. You need to look wider. Check out what the neighboring candlesticks are, what the current trend is, what news may trigger the market… Actually, you need to check many things, but here we will only look at the patterns.

Bull market candlesticks

This type of candlestick indicates that traders are considering opening long positions in expectation of an uprising market trend.

Hammer

The hammer candle looks like… a hammer. It has a pretty short body and a long lower wick. No matter what color this candle is, it shows that despite an attempt to push the price down, a strong buying potential dragged it back.

Inverse hammer

The inverse hammer candle looks like… an inverted hammer. Yes, it’s that obvious. A long upper shadow with a significantly shorter lower shadow means that despite an attempt to push the price down, the buying potential took over. This is a very good sign that buyers are now getting stronger.

Engulfing

That is a two-candle pattern, showing one red candlestick completely engulfed by a bigger green candlestick in the following period. This pattern indicates that buyers were pushing the market up, even though trading opened at a lower price than previously.

Piercing line

Another two-candle pattern formed by one large red candle, followed by a large green candle. Usually you will see a serious difference between the red stick’s closing price and the green stick’s opening price. The green stick goes at least as high as the halfway point of the previous period’s price, showing that buyers are very strong now and have serious intentions.

Morning star

This is a three-candle pattern formed by a long red candle, followed by a very short candle with noticeably long shadows, followed by a long green candle. This pattern indicates hope in the market. Beautiful, isn’t it?

The pattern shows that the selling powers of the first period have stopped and that traders started to hesitate. which leads us to the next period where traders begin to buy actively.

White soldiers

Usually this is a three-candle pattern. It looks like three consecutive long green candlesticks, indicating an obvious uptrend in the market.

Why do they call these soldiers white? Because green candlesticks used to be white in older charts!

Bear market candlesticks

These candlestick patterns usually appear at the beginning of a downtrend, showing the overall pessimism in the market. Traders start closing their long positions and start opening short ones.

Hanging man

This candlestick looks exactly like the hammer in the bullish patterns, but it stands at the end of an uptrend in the chart. The long wick shows that there was a big sale during this period and even though the buyers could push the price back up, the mood of the traders is obviously changing.

Shooting star

This candlestick looks exactly like the bullish inverse hammer, but appears at the end of a growing market trend. The candlestick shows that buyers tried to push the price up but the selling pressure was bigger and the price went down again.

Like a falling star…

Engulfing

A two-candle pattern with a green candlestick followed by a significantly longer red stick. The sign is obvious: the bulls are losing the market, the buying power slows down. The longer the red candle goes down, the more serious the bearish intentions are.

Evening star

Many stars they have in trading, huh? The evening star is a long green candle, followed by a short green candle, followed by a long red candle.

This three-candle pattern shows that the active buying period is over. Traders slowed down, started hesitating and at this moment, the bears took over and controlled the market. The longer the third red candlestick is, the more significant the drawdown is.

Black crows

They are only black, because the older charts used the color black to indicate the downtrend candlestick. In fact, they are red. The crows are a three-candle pattern showing three consecutive long red candlesticks with short, if any, shadows. The open price of the next period is the same as the close price of the previous period, which decreases significantly each time. This pattern shows that the bears took over the market and sold so much that the downtrend is now inevitable.

Dark cloud

The two-candle pattern looks like one long green candlestick followed by one long red stick. The open price of the red stick is higher than the close price of the green stick, but the selling power over the period pushed the price down to above the green candlestick’s midpoint. This pattern shows how strong the bears are currently and the whole market would rather be on their side.

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