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Japanese Candlestick Charts Tutorial

Candlestick charts provide the same information as a bar chart – open, high, low and close prices – but do so in a way that is a more visual depiction of price action during a single time period or series of time periods.

One candlestick itself can provide important information about the strength or weakness of the market during a given day or other time period, visually portraying where the close is relative to the open. Although one candle can be significant, depending upon its location on a chart, a candlestick pattern usually takes several candlesticks to produce chart formations that give the best signals. Candlesticks may look identical but have an entirely different meaning after an uptrend than they do after a downtrend.

Because they can be used in analysis in much the same way as bar charts, candlestick charts have quickly become a favorite of traders and analysts since being introduced to the West in 1990. Candlestick analysts have also added a little mystique to candlestick charts by giving various patterns clever names and providing more descriptive characteristics for these patterns than is the case in typical bar chart analysis. Both types of charts have their double tops, inside days, gaps and other formations. But candlestick analysis ascribes more meaning to the candlestick “bodies” – price action between the open and close – and to the “shadows” or “tails” – price action that takes place outside of the open-close range for a period.

Because of their popularity in recent years, you should become acquainted with the nuances and terms of candlestick charts if you aren’t already.

Candlestick Chart Basics

Japanese traders had been using candlestick charts and categorizing various candlestick chart patterns for centuries before the concept began to draw a lot of attention in the West after several books were published in the English language on candlesticks in the early 1990s.  

Steve Nison published the first book, Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East, in 1991 and added another book a few years later, Beyond Candlesticks: More Japanese Charting Techniques Revealed. Greg Morris’ book, Candlestick Charting Explained, in 1992 thoroughly described and quantitatively tested candlestick patterns, reporting that many were highly reliable. Since then, a number of other authors have written books on candlestick chart analysis.

Early Japanese rice producers and traders became wealthy using candlestick charts, applying some of the rules that are familiar to traders today: trade with the trend, prices that go up require more force to maintain an uptrend than falling prices, when in doubt about a trend, stay out . . .  

East Meets West

The quick acceptance of candlestick charts in the West, once they were introduced, is due their similarity with bar charts that traders in the West had been using for years. Any Western techniques that traders used to identify chart patterns could also be applied directly to candlestick charts. Today most computer programs can construct candlestick charts as easily as bar charts.

Candlestick advocates contend that candlestick charts can provide trading signals ahead of traditional Western bar charts. When you look at a series of candlesticks, the trends stand out more clearly on a candlestick chart, and the turns are usually more evident with fewer time periods than bar charts, giving candlestick analysis an edge in timing.

Of course, one candlestick or one candlestick pattern is not a perfect indicator of future price action, and the major trend is more important than short-term price action, no matter what type of chart you are using. Successful trading still requires a combination of sound money management, trading discipline, technical analysis skills to identify trends and patterns, ability to interpret chart patterns and optimal position sizing.  

Both Japanese and Western analysts look at three as an important number. R.N. Elliott spelled out the significance of three impulse waves in his Elliott Wave theory, and many of the most reliable candlestick chart patterns require three candlesticks to reveal what is happening with price action. Prices often unfold in three phases reflecting the psychological attitude of the trading masses – the unbelieving or skeptic phase, then a realization and acceptance of the developing trend, then a period of jumping on the bandwagon of the trend move before it all starts to unravel, first with doubts about a trend change as the original trend loses momentum, then with fear about missing or not being onboard the new trending move and then with giving in to the reality of the trend change. The cycle repeats itself over and over, as analysts from both the East and West have recognized with their different styles of charts.  There is something in this type of price action that seems to be universal and basic to human behavior in any chart language.

Constructing Candlestick Charts

Japanese candlestick charts can be drawn for any time period.  The most popular time interval to plot is one day, with its obvious and readily available open, close, high and low prices.  Short-term traders may choose to plot time intervals measured in minutes.  For example, a 30-minute candlestick chart could divide the 6.5 hours of the New York Stock Exchange trading day into 13 intervals, using the first price in each half-hour interval as the open and the last price in each half-hour interval as the close.   

Longer-term investors consult weekly candlestick charts, using Monday's open and Friday's close to define a weekly candlestick chart’s real body.  Monthly candlestick charts are constructed using the first trading day of the month’s open and the last trading day of the month’s close to define the monthly real body.

Japanese candlestick charts are fully compatible with Western charting techniques because they are nearly the same as Western bar charts, except that the range between the opening and closing prices is highlighted and given special emphasis in candlestick chart interpretation. The high and the low price for a period are represented exactly the same way in both Western bar charts and candlestick charts.

The real body is the price range between the period's open and close. This is drawn as the widest part of the candlestick chart. The real body is either white or black, signifying buying or selling dominance after the open. (Of course, with some of today’s analytical software, you can choose any colors you wish.) The contrasting shading (white or black) helps traders perceive changes in the balance of market forces between buying (white) or selling (black) dominance.

White candlestick: If the close is higher than the open, the real body is white. A white candlestick indicates buying dominance after the open.

Black candlestick: If the close is lower than the open, the real body is filled in black. A blackcandlestick indicates selling dominance after the open.

The real body is the most important part of each candlestick. The shade (white or black) and length of the real body reveals whether the bulls or bears are dominant during the main period of trading. A long white real body implies that the bulls are in charge. A long black real body implies that the bears are in charge. Candlesticks with very small real bodies, where the difference between the open and close are relatively tiny compared to normal trading ranges, imply that neither side is currently in charge and, furthermore, that the previous trend may be worn out.

Shadows are the part of the price range that lies outside the real body’s open-to-close price range. Shadows are represented as thin lines extending from the real body to the extreme high and low prices for the period, above and below the real body.  The peak of the “upper shadow” is the high of the period, while the bottom of the “lower shadow“ is the low of the period.

The length and position of the shadows are meaningful. A tall upper shadow implies that the market rejected higher prices and is heading lower. A long lower shadow implies that the market rejected lower prices and is heading higher. Very long shadows, both upper and lower, indicate that the market has lost its sense of direction. Putting several of these together points to a trend reversal.  

Indecision

and Continuation Patterns

Individual

candlesticks or candlestick patterns tend to be most useful in

helping to spot market reversal tops or bottoms, but they can also

provide information as a trend is unfolding. Some candlesticks

suggest that bullish and bearish traders may have achieved some kind

of balance and the market can’t decide which way to go next, or the

candlestick pattern may just be setting up to continue the trend

that is already in place. “Windows” (gaps to Westerners) could

indicate either.

	Indecisive Candlesticks Perhaps the best-known candlesticks reflecting an indecisive market are a group of individual candlesticks known as doji. A doji has no real body – that is, the open and the close are equal.  A doji indicates no net price movement from the first price to the last price recorded during the predefined time interval that formed the candlestick. A doji indicates a lack of progress, a standoff, and an equal balance between the forces of supply and demand. A doji also implies uncertainty about the trend.
Bullish Doji		Bearish Doji

The bulls and

bears are said to be in a "tug of war" that has reached a

standstill.  The implication is that whatever trend that existed

before the doji now has lost momentum and is vulnerable to

correction or reversal so it may be either a bullish or bearish

candlestick, depending on its location on the chart. Doji are

frequently seen as part of a larger pattern.

Long-legged

doji has very long upper

and lower shadows and indicates a trend reversal. 

Rickshaw man

is a specific type of long-legged doji where the open and close are

in the middle of the price range.

Dragonfly doji has a long lower shadow and no upper shadow. Following an uptrend, it indicates a bearish trend reversal.

Four price

doji has only one price

for the period – that is, the open, high, low and close prices are

all the same. It indicates an unusually quiet market. 

Gravestone doji has a long upper shadow and no lower shadow – that is, the open and close are at the low of the period.  Following an uptrend, the longer the upper shadow, the more bearish the indication. Following a downtrend, the gravestone doji can indicate an upside reversal, but that requires a bullish confirmation in the following period.

Tri-Star

is a rare but significant reversal pattern formed by three dojis,

the middle one a doji star that gaps away from the previous

period’s doji. Tri-Star often follows a trend of long duration that

has run its course.  The three dojis clearly indicate a loss of

momentum and an exhaustion of the existing trend.

Spinning Top A spinning top is similar to a doji, but it has a real body – that is, the open and close are not the same – and shadows that are longer than its real body. The shade (white or black) of the real body is unimportant. Spinning tops indicate indecision, a standoff of bullish and bearish forces. Several spinning tops together often mark a point of price trend change.

Continuation

Patterns

A continuation

pattern suggests that the trend in place should stay in place or

resume. Flag formations and triangles in Western analysis are pauses

or consolidation areas where the market seems to take a little

breather to let prices adjust to conditions. Candlestick charts also

feature similar patterns.

Rising Three Methods The rising three methods pattern occurs in an uptrend and is composed of five candlesticks.  The first is a long white candle.  The next three periods produce three small real bodies, two of which are black and all of which are contained within the range of the first long white body.  The fifth candlestick is another long white candlestick that closes at a new high and confirms resumption of the uptrend.

Falling Three Methods The falling three methods pattern occurs in a downtrend and is composed of five candlesticks.  The first is a long black candle.  The next three periods produce three small real bodies, two of which are white, and all of which are contained within the range of the first long black body.  The fifth candlestick is another long black candlestick that closes at a new low and confirms resumption of the downtrend.

Separating

Lines

Separating

lines are a continuation pattern in either an uptrend or downtrend. 

In an uptrend, a black candlestick is followed by a white

candlestick with the same opening price.  In a downtrend, a white

candlestick is followed by a black candlestick with the same opening

price.  In either case, the existing trend continues.

Bullish on Neck Line and in Neck Line Bullish on neck line and in neck line candlesticks are small one-day contratrend reversals that do not amount to much. In an uptrend, there is a gap up open followed by some continuation up to a new high.  A mild reversal by the close produces a black candlestick, but the downward movement is not enough to produce a negative net price change close to close. The uptrend resumes the next session. Bearish on Neck Line and in Neck Line Similarly, bearish on neck line and in neck line candlesticks are small one-day contratrend reversals that do not amount to much.  In a downtrend, there is a gap down open followed by some continuation down to a new low.  A mild reversal by the close produces a white candlestick, but the upward movement is not enough to produce a positive net price change close to close.  The downtrend resumes the next session.

Side-by-Side

White Lines

Side-by-side

white lines occur after a window (gap) within an existing trend, up

or down.  The second line is an inside day, with a lower high and

higher low.  This marks consolidation, and the existing trend

quickly resumes. 

Windows

The window, known as a gap in

the West, occurs anytime when the current price range does not

overlap the previous period’s price range. Windows are usually

continuation patterns indicating the existing trend before the

window is likely to continue after the window.  For the trend to

continue, the window should function as a support in an uptrend or

as resistance in a downtrend.  The window should not be closed, or

filled in, on a closing price basis.  If the window is closed on a

closing price basis, the trend is over.

Source: VantagePoint Intermarket Analysis Software

Windows are very powerful and important indications of demand and supply. Windows following congestion patterns validate the new trend direction, giving the same signal as Western breakaway gaps. Rising Window For a rising window, the current period’s low is higher than the previous period’s high, leaving an upside gap on the chart. A downward reaction or correction against the uptrend is likely to find support within the window – that is, the previous period’s high should offer support to any downward reaction against the uptrend. Falling Window For a falling window, the current period’s high is lower than the previous period’s low, leaving a downside gap on the chart.  An upward reaction or correction against the downtrend is likely to find resistance within the window – that is, the previous period’s low should offer resistance to any upward reaction against the downtrend.

Meeting Line

Meeting line is

defined by a window (gap) in the direction of the prevailing trend

on the open, but the close reverses to meet the previous period’s

close.  This should not happen if the trend is to continue, so the

trend is likely to reverse. 

Source:

VantagePoint Intermarket Analysis Software

Three

Windows

Three windows

often signal the end of a move. The first gap is the breakaway gap

that initiates a move. The second gap is a continuation gap or

measuring gap that often occurs halfway into a move. The third gap

is an exhaustion gap that occurs at the end of a move. Three

falling windows are three downside gaps followed by a bullish

white candlestick to indicate selling pressure is exhausted.

Three rising windows are three upside gaps followed by a bearish

black candlestick to indicate buying pressure is exhausted.

Candlestick Reversal Bottoms

In addition to depicting the trading action during a given time

period more visually, candlestick charts also provide a more visual

picture of price reversal patterns signaling the market may be ready

to start a new trend.

One candlestick itself can provide important information about the

strength or weakness of the market during a given day or other time

period and can suggest a price turn. However, it typically takes

several candlesticks to produce chart formations that give the best

candlestick signals. Of course, much depends on where a given candle

or candlestick formation occurs during the market action, a point

that cannot be emphasized too much, as candlesticks may look

identical but have a different meaning after an uptrend than they do

after a downtrend.

Here are some candle signals at a bottom suggesting the previous

downtrend should reverse into a bullish uptrend.

Hammer or Shaven Head The hammer (takuri) is a bullish reversal pattern occurring within an established downtrend. It has a small real body (white or black) at or near the high (thus, little or no upper shadow), and it has a long lower shadow, which implies that extreme low prices were rejected by the market. The hammer's small real body implies the previous downtrend is losing momentum. The market can be said to be hammering out a base. Another name applied to a candlestick (white or black) with no upper shadow is shaven head.

Inverted Hammer or Shaven Bottom The inverted hammer is a bullish reversal pattern that follows a downtrend. It has a small real body (white or black), long upper shadow (longer than the body) and little or no lower shadow. This pattern is confirmed the next day by a strong upside gap on the open followed by further substantial upside movement to form a large white real body.  Another name applied to a candlestick (white or black) with no lower shadow is shaven bottom.

Bullish Engulfing Pattern The bullish engulfing pattern is a major bottom reversal signal pinpointing a trend change from bearish to bullish. It is a two-candlestick pattern where a small black body for the previous period is followed by and contained within a large white body for the current period, which engulfs one or more previous candlesticks.

Piercing Pattern The piercing pattern (or piercing line) is similar to the engulfing pattern, but the signal candlestick does not engulf the previous candlestick. Following a long black candlestick for the previous period, the price gaps lower on the open for the current period, below the previous low. Later, the price reverses strongly upward to close above the midpoint of the previous period’s black real body.  The higher the current close relative to the previous period’s black real body, the more meaningful is the piercing pattern. The strong price reversal demonstrates that the extreme low price on the open was rejected by the market and implies that the balance of power has shifted to the bulls.

Stars

Stars are reversal patterns that

can signal either a top or bottom, depending on the previous price

trend.  There are three main bullish stars that follow and reverse a

downtrend.

The morning star is a major bottom reversal signal following a decline. It is comprised of three candlesticks: (1) a long black candle; (2) a gap-lower open and a small real body (black or white) that should be entirely below and not touching the real body of the first candlestick, and (3) a large white real body that closes well into the long black body of the first candlestick. The longer this third white real body, the more meaningful it is. Also, a volume surge on this white real body would add power to the reversal signal. If the middle candle is a doji, the pattern is called a morning doji star and is said to be more meaningful than an ordinary morning star.

If the middle doji’s shadows are completely below without touching the shadows of the first and third candlesticks, the pattern is called an abandoned baby bottom and is considered to be even more significant.

Bullish Harami The bullish harami, like the star, is a reversal pattern that can occur at either a top or bottom. The bullish version follows a downtrend with a long black real body for the previous period. The current period produces a short white real body, where the current close is relatively near the open, and both close and open are contained completely within the previous period’s long black real body. There should be immediate upside follow-through the next period for confirmation.

Bullish Harami Cross The bullish harami cross is a major reversal pattern similar to the bullish harami, but in a downtrend, a long black real body is followed by a doji (open and close at the same price giving a cross-like appearance) that is contained within the large black body.

Three White Soldiers Three white soldiers reverse an existing downtrend.  Look for three relatively large, consecutive white candles that close near or at their highs of the period.

Belt Hold The belt hold appears in a downtrend when prices open much lower on a large window (gap) but then close substantially higher, recovering most of the early loss.

Bullish Counterattack Line In a downtrending market, a large black candlestick is following by a large white candlestick that opens on a big gap lower and then rallies during the period to close at the same price as the previous close. The bullish white candlestick needs followup action to the upside to confirm the turn to an uptrend.

Three Inside

Up

Three inside up

is composed of three candlesticks.  Following a prevailing

downtrend, the first is a large black candle.  This is followed by a

short white candle that is contained entirely within the real body

of the previous big black candle.  This suggests some loss of

downward price momentum.  The third candlestick is a large white

candlestick that closes above the highs of the previous two

candlesticks, thus confirming a bullish change in trend direction.

Three

Outside Up

Three outside

up is also composed of three candlesticks following a prevailing

downtrend. First look for a black candlestick.  This is followed by

a larger white candlestick that is an engulfing line – that is, its

real body contains the entire first period’s price range.  This

alone suggests a change in downward price momentum.  The third

candlestick is a large white candle that closes above the highs of

the previous two candlesticks, thus confirming a bullish change in

trend direction.

Ladder

Bottom

Ladder bottom

reverses a bearish downtrend. After three consecutive and decisive

selling sessions forming three substantial black candles, there may

be some slowing of downward momentum in the fourth period.  The

trend change from bear to bull is confirmed in the fifth period by a

relatively large white candlestick that closes on its high and at a

new high relative to the most recent past three periods.

Kicking

Kicking is a

two-day bear trap.  Following a decisive day of selling where prices

open on their highs and close on their lows, forming a substantial

black candlestick with no shadows, prices totally reverse on the

open the very next day, forming a rising window on a large upside

opening price gap.  Prices close that day on their highs, forming a

substantial white candlestick with no shadows.  The bears can’t help

but suffer big losses, and they are likely to be squeezed further in

the days ahead, with the market showing no mercy. The bears suffer a

severe kicking.

Tweezer Bottoms Tweezer bottoms are two or more candlesticks with matching bottoms.  The bottoms do not have to be consecutive, and size and color are irrelevant. It is a minor reversal signal that becomes more important when part of a larger pattern.

Three

Valleys and Three Rivers

Three valleys

bottom and three rivers bottom are longer-term patterns similar to

the western world’s triple bottom. A buy signal is confirmed when

the price rises above the intervening two rally tops, preferably on

a strong, large white candlestick or a rising window (breakaway gap)

and a rise in trading volume to indicate strong buying.

Inverted

Three Buddha Bottom

Inverted three

Buddha bottom is a longer-term pattern similar to a western inverted

head-and-shoulders bottom. A buy signal is confirmed when the price

rises above the intervening two rally tops, preferably on a strong,

large white candlestick or a rising window (breakaway gap) and a

rise in trading volume to indicate strong buying.

Fry Pan Bottom Fry pan bottom is a western rounding bottom, where a buy signal is validated by a rising window (breakaway gap) to indicate strong buying.

Candlestick Reversal Tops

Candlesticks with similar appearances can signal much different

outcomes, depending on whether the individual candle or candlestick

formation occurs after an extended downtrend or uptrend or in the

middle of a trend. Here are some candlestick signals at tops that

suggest the previous uptrend may be ready to reverse into a bearish

downtrend.

Dark Cloud Cover The dark cloud cover is a decisive black candlestick following a strong white candlestick with an opening gap up to a new high, a reversal and weak close well into the previous white real body. The weaker the second black candlestick’s close, the more meaningful and bearish it is. For example, a close near the low of the current black candlestick and below the midpoint (or lower) of the previous white real body would be significant. This candlestick indicates bulls led a charge up the mountain to new price highs but could not hold the ground. Now the bears are pushing them back down the mountain. Dark cloud cover is the opposite of the piercing line.

The shooting star has a long upper shadow, a small real body at the lower end of the price range and little or no lower shadow.  After an upward move in previous sessions, a strong rally from the open occurs, but the market rejects the high prices and prices collapse back down to close near the open. This means that after early buying enthusiasm on the open, the rally attempt proved unsustainable, an obvious failure of demand. It is more significant if the current open gaps up from the previous real body.

More significant is the more complex evening star, which comprises three candlesticks: First, a long white candle; second, a gap-higher open and a small real body (black or white), which should be completely above but not touching the real body of the first candle; and third, a black real body that closes well into the white body of the first candlestick. The longer this third black real body, the more meaningful it is. A volume surge on this third black real body would add power to the reversal signal.

If the middle candle is a doji, the

pattern is called an evening doji star, which is more

significant than an ordinary evening star.

Bearish Harami The bearish harami is a reversal pattern following an uptrend, formed a long white real body during the previous period and a short black real body during the current period where the current close is relatively near the open, and both close and open are contained completely within the previous period’s long white real body. There should be immediate downside follow-through in the next period for confirmation.

Two Crows Two crows reverse an existing uptrend. First, there appears a relatively small black candlestick that signals a loss of upside momentum. That small black candlestick is immediately followed by a much more substantial black candlestick, which confirms a bearish change in momentum.

Belt Hold Belt hold, in an uptrend, forms when prices open much higher on a large window (gap) but close substantially lower, giving up most of the early gain.

Bearish Counterattack Line In an uptrending market, a large white candlestick is following by a large black candlestick that opens on a big gap higher and then slumps back during the period to close at the same price as the previous close. The bearish black candlestick needs followup action to the downside to confirm the turn to a downtrend.

Three Inside Down

Three inside down is composed of

three candles. Following a prevailing uptrend, first look for a

large white candlestick.  This is followed by a short black

candlestick, which is entirely contained within the real body of the

previous big white candlestick.  This suggests some loss of upward

price momentum.  The third candlestick is a large black candlestick

that closes below the lows of the previous two candlesticks, thus

confirming a bearish change in trend direction.

Three Outside Down

Three outside down is also composed

of three candlesticks.  Following a prevailing uptrend, first look

for a white candlestick. This is followed by a larger black

candlestick, which is an engulfing line – that is, its real body

contains the entire previous period’s price range.  This alone

suggests a change in upward price momentum.  The third candlestick

is a large black candlestick that closes below the lows of the

previous two candlesticks, thus confirming a bearish change in trend

direction.

Kicking

Kicking can also be a two-day bull

trap.  Following a decisive day of buying where prices open on their

lows and close on their highs, thus forming a substantial white

candle with no shadows, the very next day prices totally reverse on

the open, forming a falling window on a large downside opening price

gap.  Prices close that day on their lows, forming a substantial

black candle with no shadows.  The bulls can’t help but suffer big

losses, and they are likely to be punished by further price weakness

in the days ahead, with the market showing no mercy.  The bulls

suffer a severe kicking.

Deliberation

Deliberation occurs in an uptrend

with a three white candlestick pattern where the first two are

substantial but the third is small.  This indicates a loss of upward

momentum, as if the market is preparing for a trend change from up

to down.

Advance Block

Advance block occurs in an uptrend

when there are three consecutive white candlesticks with the second

and the third both exhibiting a smaller price range and real body

than the previous one, thus indicating diminishing upward price

momentum.

Ladder Top

Ladder top reverses a bullish

uptrend. After three consecutive and decisive buying sessions

forming three substantial white candlesticks, there may be a

noticeable slowing of upward momentum in the fourth period.  The

trend change from bull to bear is confirmed in the fifth period by a

relatively large black candlestick that closes on its low and at a

new low relative to the most recent past three periods.

Tweezer Tops Tweezer tops are two or more candlesticks with matching tops.  The tops do not have to be consecutive, and size and color are irrelevant. It is a minor reversal signal that becomes more important when part of a larger pattern. A sell signal is confirmed when the price falls below the intervening two minor pullback lows, preferably on a large black candlestick or a falling window (breakaway gap) and a rise in trading volume to indicate serious selling.

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 Source: VantagePoint Intermarket

Analysis Software

Three Buddha Top

Three Buddha top is a longer-term

pattern similar to a Western head-and-shoulders top. A sell signal

is confirmed when the price falls below the intervening two minor

pullback lows, preferably on a large black candlestick or a falling

window (breakaway gap) and a rise in trading volume to indicate

serious selling.

Three Mountains Top

Three mountains top is a

longer-term pattern similar to a Western triple top. A sell signal

is confirmed when the price falls below the intervening two minor

pullback lows, preferably on a large black candlestick or a falling

window (breakaway gap) and a rise in trading volume to indicate

serious selling.

Dumping Top Dumping top is a longer-term pattern similar to a Western rounding top, where a sell signal is validated by a falling window (breakaway gap) to indicate overwhelming supply.

Eight New Price Lines

Eight new price

lines is a chart pattern consisting of eight new price highs. This

implies an overbought market where profit-taking would be

appropriate.

Quick Guide to Main

Patterns

Candlestick charts give a more visual

presentation of price action than traditional bar charts and have

become the chart of choice for many technical analysts.

One candle itself can provide important

information about the strength or weakness of the market during a

given day or other time period, depending where the close is

relative to the open. However, a candlestick pattern usually takes

several candles to produce chart formations that give the best

signals.

The key in candlestick chart analysis is

where a given candle or candle formation occurs during the market

action. Candlesticks may look identical but have an entirely

different meaning after an uptrend than they do after a downtrend.

The diagrams and descriptions below cover

only some of the main candlestick patterns, showing the bullish

version on the left and bearish version on the right. There are many

other candlestick patterns with clever names that chart analysts

use.

“Piercing line” and “dark cloud cover” - These reversal patterns are mirror images of one another and are close relatives of the engulfing patterns except that the current candle’s body does not engulf the previous candle. Instead, the market has a gap opening, then moves sharply in the opposite direction and closes more than halfway through the previous candle’s body.

“Hammer” and “Hanging Man” - These two reversal patterns look very much alike, but their name and impact on prices depend on whether they occur at the end of a downtrend or an uptrend. The signal candlestick has a small real body and a long lower shadow, suggesting the previous trend is losing momentum. This pattern also requires confirmation by the next candle.

“Harami” - The harami is a reversal pattern following a trend. Rather than engulfing the previous candle, price action for the current candle is entirely within the range of the previous candle body. This pattern requires immediate follow-through for confirmation.