All About Candlesticks

What Is a Candlestick Pattern?

Candlestick charts are a technical tool that packs data for multiple time frames into single price bars. This makes them more useful than traditional open-high, low-close bars or simple lines that connect the dots of closing prices. Candlesticks build patterns that predict price direction once completed. Proper color coding adds depth to this colorful technical tool, which dates back to 18th-century Japanese rice traders.1

Steve Nison brought candlestick patterns to the Western world in his popular 1991 book, Japanese Candlestick Charting Techniques.1 As a result, many traders can now identify dozens of these formations, which have colorful names like Bearish Dark Cloud Cover, Evening Star, or Three Black Crows. In addition, single bar patterns, including the Doji and Hammer, have been incorporated into dozens of long- and short-side trading strategies. 

KEY TAKEAWAYS

• Candlestick patterns are technical trading tools that have been used for centuries to predict price direction. 

• Various candlestick patterns are used to determine price direction and momentum, including Three Line Strike, Two Black Gapping, Three Black Crows, Evening Star, and Abandoned Baby. 

• Many signals emitted by these candlestick patterns might not work reliably in the modern electronic environment.

• Traders supplement candlestick patterns with additional indicators.

• Candlesticks are based on current and past price movements and are not future indicators.

How to Read a Candlestick Pattern

A daily candlestick represents a market's open, close, high, and low prices. The rectangular body is often colored red (or black) for a decrease in price and green (or an empty box) for a price increase. The top of the body represents the close price on a green stick and the open price on a red stick. On a red stick, the bottom of the body represents the close price, and on the green stick, it is the open price.

Each stick has two smaller sticks emerging from it, one on top and one on bottom. The top smaller stick represents the high price of the day, and the bottom one is the day's low price.

Source: Original article can be found at https://www.investopedia.com

Head and shoulders

Double top

Double bottom

Rounding bottom

Cup and handle

Wedges

Pennant or flags

Ascending triangle

Descending triangle

Symmetrical triangle