What is a Candlestick Chart?
Candlestick charts originated in 18th-century Japan, where rice trader Munehisa Homma used them to track price movements. Each candle displays four data points: open, high, low, and close. The rectangular body shows the range between open and close, while the thin wicks (shadows) extend to the high and low. A filled or red body indicates the close was below the open (bearish), while a hollow or green body means the close was above the open (bullish).
Reading Common Patterns
Single-candle patterns like the doji (open equals close, signaling indecision) and hammer (small body with long lower wick, signaling potential reversal) provide quick sentiment reads. Multi-candle patterns carry more weight: the bullish engulfing pattern (a large green candle fully engulfing the prior red candle) has a historical reversal accuracy of roughly 60 to 65% when appearing at support levels. The three white soldiers pattern (three consecutive large green candles) signals strong buying momentum. Patterns are most reliable on daily and weekly timeframes.
Key Considerations
Candlestick patterns describe what happened, not what will happen. A hammer at support suggests buyers stepped in, but without volume confirmation or follow-through the next day, the signal may fail. Automated pattern recognition tools often flag dozens of patterns daily, most of which are noise. Focus on patterns that form at significant support or resistance levels with above-average volume, and always define risk with a stop-loss before entering a trade based on a candlestick signal.