Candlestick charts show the open, high, low and close of each bar in a shape that is easy to read at a glance. They were developed by Japanese rice traders; the 18th-century merchant Munehisa Homma is often credited with early work on them. Steve Nison introduced them to Western traders in 1991. Today they are the default chart type for most traders, and their patterns are among the most widely screened signals.
Anatomy of a candle
- Real body: the box between the open and the close. It is hollow or green when the close is above the open, and filled or red when it is below.
- Shadows (wicks): the thin lines above and below the body, reaching the high and the low.
A long body shows conviction. Long shadows show rejection: a long lower shadow means sellers pushed price down but buyers pushed it back. A tiny body with shadows on both sides, a doji, shows indecision.
Common patterns
| Pattern | Bars | What it looks like | Typical meaning |
|---|
| Hammer | 1 | Small body at the top, long lower shadow, after a decline | Bullish reversal |
| Shooting star | 1 | Small body at the bottom, long upper shadow, after an advance | Bearish reversal |
| Doji | 1 | Open and close almost equal | Indecision; a warning after a long trend |
| Bullish engulfing | 2 | A large up body that fully covers the previous down body | Bullish reversal |
| Bearish engulfing | 2 | A large down body that fully covers the previous up body | Bearish reversal |
| Harami | 2 | A small body inside the previous large body | Loss of momentum |
| Piercing line / dark cloud cover | 2 | The second candle closes beyond the midpoint of the first | Bullish / bearish reversal |
| Morning star / evening star | 3 | Large candle, small “star”, large candle in the opposite direction | Bullish / bearish reversal |
| Three white soldiers / three black crows | 3 | Three long candles in a row in one direction | Strong bullish / bearish momentum, often a reversal after a long move |
Using candlestick patterns well
- Location matters most. A hammer means little in the middle of a range, but a lot at support after a decline. Reversal patterns need a trend to reverse.
- Wait for confirmation. Many traders act only when the next bar confirms the pattern, for example by closing above a hammer’s high.
- Combine with other tools. Patterns at a moving average, a Fibonacci level or with an oversold oscillator are far more reliable than patterns alone.
- Mind the timeframe. A pattern on a weekly chart carries more weight than the same pattern on a 5-minute chart.
For more on reading candles, including the “invisible gap”, see Michael C. Thomsett’s Candlestick Basics.
Live chart: SPY (S&P 500 ETF), daily candlesticks. The chart updates every trading day.
Screen for it on MarketInOut
Every common pattern is an event in our formula language, such as cdl_buel (bullish engulfing), cdl_ham (hammer) and cdl_mors (morning star). A bullish engulfing pattern in stocks that have pulled back below their 50-day average:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price < sma(50) and cdl_buel
Hammers today:
exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and cdl_ham
Related: Fibonacci retracements, Relative Strength Index, Stochastic oscillator.
