Technical Analysis: Candlesticks – Definition, How it Works, Types, Calculation, and Trading

Candlestick charts are one of the most powerful tools in a trader’s technical analysis toolkit. Originating from 18th-century Japan, these visually intuitive charts offer a clear snapshot of market sentiment by illustrating the relationship between price movements and time. Whether you’re identifying potential reversals or confirming trend continuations, candlestick patterns provide valuable signals that can influence your trading decisions.

In this guide, TradeSmart breaks down everything you need to know about candlestick patterns—from their historical origins to how they work, common formations, and how to apply them effectively in your trading strategy.

What Are Candlesticks?

Candlesticks are a popular charting method in technical analysis that visually presents a security’s price action, capturing the open, high, low, and close within a specific time frame.

Each candlestick comprises a central body and two lines called wicks or shadows. The body illustrates the difference between the opening and closing prices. The upper and lower wicks show the highest and lowest prices during the session. When the closing price exceeds the opening, the body is typically coloured green or white to represent bullish momentum. If the closing price is below the opening, the candle is usually red or black, indicating bearish sentiment.

Traders use individual candlesticks or combinations of them—known as candlestick patterns—to interpret market behaviour. Bullish patterns like the Bullish Engulfing signal potential upward movement, while bearish patterns such as the Bearish Harami can point to an upcoming downtrend. By studying these formations, traders can anticipate momentum shifts, identify potential reversals, or confirm ongoing trends.

What is the Origin of Candlesticks Pattern?

Candlestick charting traces back to 18th-century Japan, where legendary rice merchant Munehisa Homma developed it as a tool for analysing price movement and market psychology. Though originally intended for rice trading, his methods laid the groundwork for candlestick patterns widely used across financial markets today.

Homma recognised that price changes were not solely driven by supply and demand but also by trader psychology. He designed candlestick charts to reflect this, capturing both emotional sentiment and price movement within a single candle. His observations led to the identification of patterns that could forecast future price shifts, such as reversals or continuations, with improved accuracy.

While modern trading platforms now offer advanced charting features, the principles of candlestick analysis remain deeply rooted in Homma’s original techniques. The colour, length, and placement of candlesticks help traders assess sentiment. For instance, a long green candle reflects strong buying pressure, whereas a long red candle indicates aggressive selling. Multi-candle formations—like the Hammer, Doji, or Engulfing—offer nuanced insights into market dynamics.

Today, these centuries-old patterns continue to play a vital role in technical analysis, helping traders decode market structure and make more informed trading decisions.

What Do Candlesticks Indicate?

Candlesticks serve as visual tools that reflect price movement over a specific time frame, offering immediate insights into market sentiment. Each candlestick conveys critical information through its body, wicks, and colour.

The size and length of the body reveal the intensity of buying or selling pressure. A long body signifies strong momentum—either bullish or bearish—depending on the direction of the price. A green or white body, where the close exceeds the open, signals bullish sentiment. A red or black body, where the close falls below the open, points to bearish sentiment.

Wicks, or shadows, further enrich the story. The upper wick shows the highest price reached, while the lower wick marks the session’s lowest. Candles with long wicks on both ends often suggest indecision in the market, reflecting a tug-of-war between buyers and sellers. On the other hand, a candle with a short or missing wick suggests a more decisive move in one direction.

Candlestick patterns provide even more actionable information. For example, a Doji—where the open and close are nearly the same—signals market hesitation and the potential for a reversal. Patterns such as the Hammer or the Engulfing candlestick illustrate stronger trend signals. A Hammer, for instance, typically appears after a downtrend and suggests a bullish reversal, especially when paired with a long lower wick. In contrast, an Engulfing pattern reveals a significant shift in sentiment, especially when a smaller candle is overtaken by a larger, oppositely coloured one.

What Are the Parts of A Candlestick?

Every candlestick is made up of three main components: the body, the wick (also called shadows), and the colour. Each part plays a key role in interpreting price movement and sentiment.

Body

The body—or real body—represents the range between the open and close prices during the selected timeframe. A larger body signals strong buying or selling activity, depending on direction. Short bodies, however, indicate limited price change and are often associated with market consolidation or indecision.

Wick

The candlestick has two wicks: the upper wick extends from the top of the body to the highest price, while the lower wick stretches from the bottom of the body to the lowest price reached. These shadows help us assess market extremes. For instance, a long upper wick suggests that sellers stepped in after a price surge, while a long lower wick signals strong buyer interest following a dip.

Colour

Colour helps traders instantly gauge sentiment. A green or white candlestick indicates that the asset closed higher than it opened, showing bullish momentum. A red or black candlestick, on the other hand, reveals that the price closed below its open, indicating bearish pressure. These visual cues simplify market assessment and help guide trading decisions at a glance.

How to Read the Candlestick Patterns?

Reading candlestick patterns involves interpreting their shapes and positions to understand market sentiment and potential price movements. Each candle reflects the open, high, low, and close for a set period, represented through its body and wicks.

Doji Pattern

The Doji pattern forms when the opening and closing prices are nearly equal, resulting in a candle that resembles a cross. This pattern typically signals market uncertainty. When a Doji appears after a prolonged uptrend or downtrend, it may point to an upcoming reversal, alerting traders to potential shifts in direction.

Hammer Pattern

A Hammer appears near the bottom of a downtrend and features a small body with a long lower wick. It indicates that sellers drove the price down, but buyers stepped in to push it back up before the close. This pattern is often interpreted as a sign of possible bullish reversal, particularly when supported by volume or trendline confirmation.

Engulfing Pattern

Engulfing patterns come in bullish and bearish forms. A Bullish Engulfing pattern occurs when a small bearish candle is followed by a larger bullish one that completely encompasses the previous candle’s body. This signals a shift from selling pressure to buying strength. A Bearish Engulfing pattern, on the other hand, features a small bullish candle followed by a larger bearish candle, signalling growing seller dominance.

Interpreting Candlestick Details

The size and colour of the candle’s body reveal the market’s underlying sentiment. A large green (or white) body suggests strong buyer control, while a large red (or black) body shows dominant selling pressure. Long upper and lower wicks reflect volatility and price rejection, which can also hint at reversals or exhaustion in the prevailing trend.

Combining Candlestick Patterns with Context

Candlestick patterns are more powerful when viewed in context. For instance, a Hammer forming at a strong support level carries more weight than one in the middle of a range. To improve accuracy, it’s essential to combine candlestick analysis with other technical indicators, such as volume, moving averages, or RSI, to confirm potential setups and improve the quality of trade entries and exits.

What Are Candlestick Patterns?

Candlestick patterns are vital components of technical analysis, offering visual clues about possible price behaviour and market psychology. First introduced in the 18th century in Japan by Munehisa Homma, these patterns have endured as effective tools for traders across markets.

A candlestick includes a body and two wicks (or shadows), which provide a snapshot of price action over a specific period. The body shows the gap between the opening and closing prices, while the upper and lower wicks mark the session’s highest and lowest points. The colour of the candle offers a quick sense of sentiment—green (or white) for bullish momentum and red (or black) for bearish conditions.

Certain formations hold specific meanings. The Doji, with its nearly identical open and close, signals indecision and often precedes a reversal. The Hammer, identified by its small body and long lower wick, typically forms after a downtrend and hints at a bullish reversal. The Engulfing pattern is another key signal: a Bullish Engulfing pattern follows a downtrend and suggests buyers are taking control, while a Bearish Engulfing pattern signals the opposite after an uptrend.

Recognising and understanding these patterns helps traders anticipate shifts in market direction, identify entry and exit points, and develop more reliable trading strategies.

What Are the Bullish Candlestick Patterns?

Bullish candlestick patterns help traders anticipate potential upward price movements. Recognising these formations can support better timing for entry points. Below are three key bullish patterns:

Hammer

The Hammer appears after a downtrend and signals a possible bullish reversal. It’s defined by a small real body near the top of the candle and a long lower shadow, indicating that buyers regained control after early selling pressure. For instance, if a stock opens at $50, dips to $45, but closes near $49, it forms a classic Hammer pattern.

Bullish Engulfing

A Bullish Engulfing pattern occurs when a small bearish candle is followed by a larger bullish one that completely covers the previous body. This indicates that buyers have overtaken sellers, and momentum may be shifting upward. For example, if a red candle opens at $40 and closes at $38, and the next day a green candle opens at $37 and closes at $42, this forms a Bullish Engulfing.

Morning Star

The Morning Star is a three-candle pattern that often appears at the end of a downtrend. It begins with a large bearish candle, followed by a small-bodied candle showing indecision, and ends with a strong bullish candle that closes above the midpoint of the first. This sequence signals a potential reversal and growing buying strength.

What Are the Bearish Candlestick Patterns?

Bearish candlestick patterns suggest potential price declines and are commonly used to identify exits or short positions.

Bearish Engulfing

This two-candle pattern begins with a smaller bullish candle followed by a larger bearish one that engulfs it. It appears after an uptrend and signals a possible shift from buyer dominance to selling pressure.

Evening Star

The Evening Star mirrors the Morning Star but signals a bearish reversal. It starts with a bullish candle, followed by a small-bodied candle, and ends with a large bearish candle that closes below the midpoint of the first. It typically forms at the top of an uptrend.

Dark Cloud Cover

This pattern consists of a strong bullish candle followed by a bearish candle that opens above the prior close but finishes below its midpoint. It suggests a weakening uptrend and rising bearish momentum. A third confirming bearish candle strengthens the signal.

Three Black Crows

Three Black Crows is a continuation pattern composed of three long bearish candles, each closing progressively lower. It signals sustained selling pressure and often marks the beginning of a downtrend.

Shooting Star

The Shooting Star appears at market tops and signals a possible bearish reversal. It features a small body near the session’s low and a long upper wick, indicating an initial attempt to push higher that was firmly rejected by sellers.

What Are Other Important Patterns to Look At?

Beyond the popular formations, several other candlestick patterns provide valuable context for interpreting price action:

Morning Star and Evening Star

These three-candle patterns highlight potential reversals. The Morning Star indicates a bullish shift after a downtrend, while the Evening Star points to a bearish turn following an uptrend. Both offer strong reversal signals when confirmed with volume or support/resistance zones.

Three White Soldiers and Three Black Crows

Three White Soldiers confirm a bullish continuation with three strong green candles, each closing higher. Conversely, Three Black Crows feature three successive red candles closing lower, signalling sustained selling pressure and bearish momentum.

Harami Patterns

The Harami pattern consists of a large candle followed by a smaller one of the opposite colour. A Bullish Harami appears during a downtrend and signals potential reversal upward. A Bearish Harami, in contrast, forms during an uptrend and may indicate that bearish sentiment is beginning to emerge.

Conclusion

Candlestick patterns remain one of the most reliable tools for analysing market sentiment and anticipating price movements. From single-bar signals like the Doji and Hammer to complex formations such as the Morning Star or Three Black Crows, each pattern reveals valuable insights into buyer and seller behaviour. By combining these patterns with other technical indicators and understanding the broader market context, traders can enhance the accuracy of their strategies.

At TradeSmart, we empower traders with educational resources and expert insights to help them confidently navigate financial markets. Mastering candlestick patterns is just one of many skills we help you sharpen on your trading journey.