Candlestick basics and the patterns worth knowing

A candlestick packs four prices from one period (open, high, low and close) into a single shape. Candlestick charts came out of Japanese rice markets, and they are now the default way many people view price. Their value is that one glance shows who controlled a session and how far price moved away from where it finished. Their risk is that dozens of named patterns invite over-interpretation.

Anatomy of a candle

• Body: the rectangle between the open and the close.
• Wicks (shadows): the thin lines above and below the body, reaching the period's high and low.
• Color: the most common US convention is a green or white body when the close is above the open and red or black when the close is below the open. Platforms vary, so check the legend.

A long body shows a session dominated by one side. Short bodies show indecision or a balanced session. A long wick shows that price went somewhere and was pushed back: a long upper wick means buyers were rejected at higher prices, and a long lower wick means sellers were rejected at lower prices.

Each candle covers one period. A daily candle represents a day's trading, a weekly candle a week, and so on. Longer periods compress more activity into each candle, so their patterns generally carry more weight.

Patterns worth knowing

A hammer and a hanging man share the same shape. The only difference is the trend that came before, which is a hint at how important context is.

Example (illustrative numbers)

A stock has fallen from $60 to $50 over three weeks. One day it opens at $50.50, falls as low as $48.00 and closes at $50.30.

• The body runs from $50.30 to $50.50, which is only $0.20 tall.
• The lower wick runs from $48.00 to $50.30, which is $2.30 long, more than ten times the body.
• There is no upper wick, because the open was also the high.

The shape resembles a hammer at the end of a decline. Reading it: sellers pushed price $2.50 below the open, and buyers pushed it all the way back. That is evidence of rejection of lower prices for that session. It is not a forecast. A common approach is to wait for the following sessions to confirm, for example a close above the hammer's high. If the next day instead closes at $47.50, the hammer was only a pause in the decline.

How to use candles sensibly

• Context first. A hammer matters more when it appears at a price where buyers have stepped in before, such as an established support level, than in the middle of nowhere.
• Look for confirmation. Many chart readers want the next candle to agree with the pattern before they act on it.
• Check volume. A reversal candle on heavy volume says more than one on light volume. See volume and on-balance volume.
• Prefer larger time frames. One day's candle is a small sample, while a weekly candle summarizes five sessions.
• Learn a handful, not fifty. The nine patterns above cover the main ideas: indecision, rejection, and one side overpowering the other. Most other named patterns are variants.

Common mistakes and limits

• Memorizing names instead of reading what happened. The question to ask is who won the session and where price closed relative to its range.
• Ignoring the trend. A bullish pattern inside a steep downtrend is weaker evidence than the same pattern at the end of a pullback in an uptrend. The trend lines and channels article covers how to judge that backdrop.
• Treating patterns as certain. No pattern works every time. Candles summarize one to three sessions of behavior, which is a small sample, and many such patterns fail.
• Subjectivity. Definitions differ across sources, for example how long a wick must be to count as a hammer, so two people can disagree on whether a pattern is present.
• Ignoring gaps. A stock's open can be far from the prior close, for example after earnings. Be careful about interpreting patterns that include large gaps, because the candle bodies may not show the overnight move.

For the broader framework on what chart tools can and cannot tell you, see technical analysis basics.

Where to see it on StocksXray

Stock pages show a price chart with indicators, where you can read individual daily, weekly and monthly candles around the levels that interest you.

Key takeaways

• A candle shows open, high, low and close; the body shows the open-to-close move and the wicks show how far price strayed.
• Long wicks show rejection, long bodies show control, and tiny bodies show indecision.
• A small set of patterns (doji, hammer, hanging man, shooting star, engulfing, stars) covers most of the practical ideas.
• Context, confirmation and volume matter more than the pattern name.
• Patterns are descriptions of past sessions, not predictions.