Trader Planet’s Quick Guide to

CANDLESTICKS

What are ‘candlesticks’?

Candlestick charts provide the same information as the traditional 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.

Western bar chart

Candlestick chart

using same price data

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. A white or clear real body indicates prices moved

higher from the open to the close for the period and is a bullish sign.

A black or solid colour real body indicates prices moved lower from the open to the close

for the period and is a bearish sign.

Although the colour of the real body generally sets the bullish or bearish tone of a trading

session, the wicks are also important, showing how far traders were willing to push

prices during the period before coming back to close in the real body.

One candle alone can be significant but, 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.

Candlestick analysts have 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” or “wicks” – price action that takes place outside of the open-close

range for a period. The length of the candle body and the length of the wick are both

significant.

This brief guide to candlesticks covers some of the major patterns. The color

combination used for the bodies of the candles is white or clear candles to indicate the

close is higher than the open and black or solid candles to indicate the close is lower

than the open. Some traders prefer to use red to indicate bearish candles and green or

black to indicate bullish candles. Whatever combination you use, candlesticks will

provide a quick visual representation of trading activity that occurred during the period

covered by the candle.

Indecision 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. This

candlestick pattern may just be setting up to continue the trend that is already in place,

or the indecisive sign may be a turning point if the market has been trending.

Dojis

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 price are equal or nearly so. 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

Dragonfly doji has a long lower shadow and no upper shadow. Following an uptrend,

it indicates a bearish trend reversal.

Dragonfly doji

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.

Gravestone doji

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. The same type of

candle might also indicate a limit up or limit down price move so this candle’s location

must be taken into account along with its appearance.

Other doji names include long-legged doji, which has very long upper and lower

shadows and indicates a trend reversal, and rickshaw man, a specific type of longlegged

doji where the open and close are in the middle of the price range.

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.

Spinning top

Reversal patterns

Stars

Stars are reversal patterns and come in several different forms. The pattern consists of

three candles, the first usually a large candle at the end of an extended trend followed by

a smaller candle that leaves a gap or window and then another large body candle in the

direction of the new trend. Large volume would help to confirm the reversal signal.

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. It looks like the hammer but appears at the

top of a trend rather than the bottom. 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.

Evening star

If the middle candle is a doji, the pattern is called an evening doji star, which is more

significant than an ordinary evening star. If the middle doji’s shadows are completely

above and do not touch the shadows of the first and third candlesticks, the pattern is

called an abandoned baby top and is even more significant.

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.

Morning star

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.

Abandoned baby bottom

Tri-Star

This rare but significant reversal pattern is 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.

Tri-Star dojis

Engulfing patterns

Prices open below the previous close (bullish) or above the previous close (bearish) and

then stage a strong turnaround, producing a candle body that totally engulfs the

previous candle and suggesting a change in trend direction. A bearish engulfing pattern

suggests supply overwhelms demand; the bulls are immobilized.

Bullish engulfing pattern

Bearish engulfing pattern

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. For example, the bearish harami is a reversal pattern following an uptrend,

formed by a long white real body during the previous period and a short black body

during the current period. Both the open and close are contained completely within the

previous period’s long white real body. This pattern requires immediate follow-through

for confirmation.

Bullish harami

Bearish harami

A bearish harami cross is a major reversal pattern. In an uptrend, a long white real

body is followed by a doji (open and close at the same price, giving a cross-like

appearance), and that doji is contained within the previous large white body. A bullish

harami cross occurs in a downtrend when a long black real body is followed by a doji

that is contained within the large black body.

Piercing line, 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. For the dark

cloud cover, 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.

Piercing line

Dark cloud cover

Hammer, 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, little or no upper shadow and a long lower shadow,

suggesting the previous trend is losing momentum. This pattern also requires

confirmation by the next candle. Although the color of the real body is not critical, black

is more bearish than white for the hanging man and white is more bullish than black for

the hammer. The next period’s action would confirm the bearish implications of the

hanging man if there is a downward window (gap) or a long black candle. For the

hammer, the next period’s action would confirm the bullish implications if there is an

upward window or a long white candle.

The hammer occurs within an established downtrend and has a small real body (white

or black) at or near the high of the candle – thus, little or no upper shadow. 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.

Hammer

The hanging man is a bearish reversal pattern occurring within an established

uptrend. It has a small real body (white or black) at or near the high; therefore, it has

little or no upper shadow and a long lower shadow, like legs dangling down from the

body. The hanging man's small real body implies the previous uptrend is losing

momentum. The next period’s action would confirm the bearish implications of the

hanging man if there is a downward window (gap) or a long black candlestick.

Hanging man

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.

Inverted hammer

Tweezers

Tweezers are minor reversal signals that are more important if they are part of a larger

pattern. A tweezer bottom has two or more candles with matching bottoms; a tweezer

top has two or more candles with matching tops. They do not have to be consecutive

candles. They do require follow-through for confirmation.

Tweezer bottom

Tweezer top

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.

Two crows

Three black crows

Three black crows more decisively reverse an existing uptrend. Look for three

relatively large, consecutive black candlesticks that close near or at their lows of the

period. If the three candlesticks are identical, the pattern is called identical three

black crows.

Three black crows

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.

Three white soldiers

Belt hold

In an uptrend, belt hold forms when prices open much higher on a large window (gap)

but close substantially lower, giving up most of the early gain.

Belt hold

Belt hold

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.

Bearish counterattack line

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.

Bullish counterattack line

Three Inside Down

Three inside down is composed of three candles. Following a prevailing uptrend, a

large white candlestick 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, a white candlestick 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

A 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.

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

A 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.

Rounding top

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.

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 dark 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.

Rising three methods

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.

Falling three methods

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.

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.

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.

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.

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

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

often occurs halfway into a move. The third window 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.

Tasuki Gap

Tasuki gap is the name of a brief, contratrend retracement that may enter the area of a

recent window but does not close the window on a closing price basis.

Tasuki gap bottom

Tasuki gap top

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.

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.

Fry pan bottom

Lighting the way

Like any other aspect of trading, using candlestick charts won’t guarantee profits or

instant trading success. You will still have to do your analytical work when you use

candlesticks, you will still have to make tough trading decisions, you will still have to

manage your trades and your account carefully to avoid risks or exposure beyond your

capability to control it.

But, using the same open, high, low, close price data available to all traders using all

kinds of charts and methods, candlesticks will provide you with a better visual picture of

what is happening in a market during a specific period of time. With a clearer view of

the dynamics of market movement within that period, you can interpret traders’

reactions to various price levels and make decisions about how you might respond to

what the charts are telling you.

Candlesticks are a relatively new approach to Western traders, but the speed at which

they have become perhaps the most popular way to look at markets and charts today

attests to the value traders have found in them. For many traders who have become

familiar with the various candlestick patterns and the nuances of each of them, there

will be no going back to the traditional old bar charts any time soon.

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