Understanding Basic Candlestick Charts


By 5 Circles Pvt Ltd | Updated July 30, 2024
Reviewed by Vaishnavi Dixit

Candlestick charts have been a fundamental tool for traders for centuries. Originating in Japan in the 1700s, these charts were developed by a rice trader named Homma, who recognized that market emotions significantly influenced the price movements of rice. Today, candlestick charts remain crucial for modern traders, offering a visual representation of price movements and helping to forecast short-term price directions.


Key Takeaways

  • Candlestick Charts: Show price movements with four key data points—open, close, high, and low.
  • Visual Representation: Colors indicate price changes, with green or white showing price increases and red or black indicating price decreases.
  • Trading Decisions: Patterns in candlestick charts help traders predict future price movements.

Candlestick Components

A single candlestick provides a wealth of information:

  • Real Body: The wide part of the candlestick showing the price range between the open and close. A filled (red or black) body means the close was lower than the open, while an empty (green or white) body indicates the close was higher than the open.
  • Shadows (Wicks): The lines above and below the real body indicating the high and low prices of the trading period.

Candlestick vs. Bar Charts

While both chart types provide the same data, candlestick charts offer a more visual and intuitive representation due to their color coding and thicker real bodies. This can make it easier to see differences between the open and close prices.

Basic Candlestick Patterns

Candlestick patterns can be categorized into two main types: bullish and bearish. Bullish patterns suggest a potential rise in price, while bearish patterns indicate a possible decline. Here are some of the most common patterns:

Bearish Patterns

  • Bearish Engulfing Pattern: Indicates sellers outnumber buyers, suggesting a potential price decline.
  • Bearish Evening Star: A topping pattern showing a stalling of buyers and the beginning of selling pressure.
  • Bearish Harami: Reflects indecision among buyers, possibly leading to a downtrend.
  • Bearish Harami Cross: Similar to the bearish harami but includes a doji, indicating stronger indecision.

Bullish Patterns

  • Bullish Engulfing Pattern: Indicates buyers outpace sellers, suggesting a potential price rise.
  • Bullish Harami: Shows a pause in a downtrend, potentially leading to an uptrend.
  • Bullish Harami Cross: Similar to the bullish harami but includes a doji, indicating stronger indecision.
  • Rising Three Methods: Indicates a strong uptrend with intermittent small declines.
  • Falling Three Methods: Shows a strong downtrend with intermittent small increases.

Interpreting Candlesticks

Understanding the emotions behind price movements is crucial. Candlesticks' real bodies and shadows help traders gauge market sentiment, providing insights into whether buyers or sellers are dominating the market.

The Bottom Line

Candlestick charts are invaluable for traders looking to understand market emotions and predict price movements. By recognizing patterns and interpreting the data, traders can make informed decisions to enhance their trading strategies.

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