Candlestick charts display the open, high, low, and close (OHLC) prices for each time period as a visual 'candle.' Originating in 18th-century Japan β developed by rice trader Munehisa Homma β they were introduced to Western finance by Steve Nison in his 1991 book 'Japanese Candlestick Charting Techniques.'
Anatomy of a Candle
- Body: The rectangle between open and close. Green/white = close > open (bullish). Red/black = open > close (bearish)
- Upper Shadow (Wick): Line above the body showing the high
- Lower Shadow (Tail): Line below the body showing the low
- Doji: Open β Close, creating a cross shape β signals indecision
Key Single-Candle Patterns
- Hammer: Small body at top, long lower shadow. Bullish reversal when appearing after a downtrend
- Shooting Star: Small body at bottom, long upper shadow. Bearish reversal after an uptrend
- Marubozu: Full-body candle with no shadows β strong momentum in one direction
- Spinning Top: Small body with roughly equal upper and lower shadows β indecision
Key Multi-Candle Patterns
- Engulfing: A candle whose body completely engulfs the prior candle's body. Bullish engulfing at bottoms, bearish engulfing at tops
- Morning Star / Evening Star: Three-candle reversal patterns. Morning Star (bullish): large red β small body/doji β large green
- Three White Soldiers / Three Black Crows: Three consecutive same-direction candles β strong trend continuation
Why Candlesticks Are Preferred
Compared to bar charts and line charts, candlesticks provide more visual information about the battle between buyers and sellers within each period. The body (open-to-close) immediately shows who won, while the shadows show rejected prices.