Candlestick Charts - The First Step to Reading Price Movements
What is a Candlestick Chart
A candlestick chart visualizes price changes over a specific period in the form of a "candle." It is believed to have been first developed by Munehisa Homma in the Japanese rice markets during the 18th century, and after being introduced to the West, it has become the most widely used chart type worldwide.
The reason candlestick charts are more popular than line charts or bar charts is simple. A single candle contains all four key price points—Open, High, Low, and Close—and through colors and shapes, you can intuitively grasp market sentiment.
The first step in technical analysis is reading charts, and the first step in reading charts is understanding candles.
Candle Structure: OHLC
A single candle expresses price changes over a specific period using four elements.
| Element | Term | Meaning |
|---|---|---|
| Open | O | The starting price of the period |
| High | H | The highest price during the period |
| Low | L | The lowest price during the period |
| Close | C | The ending price of the period |
Together, these four elements are called OHLC data.
Components of a Candle
A candle consists mainly of the body and wicks (shadows).
- Body: The area between the open and close prices. Represents the range where price actually changed.
- Upper Wick (Shadow): The line extending above the body. A trace of price rising to the high and then being pushed back down.
- Lower Wick (Shadow): The line extending below the body. A trace of price falling to the low and then bouncing back up.
Bullish and Bearish Candles
Bullish Candle
A candle where the close is higher than the open. It indicates that price rose during that period. Typically represented in green or white.
- Open: Bottom of the body
- Close: Top of the body
- Interpretation: Buying pressure dominated selling pressure
Bearish Candle
A candle where the close is lower than the open. It indicates that price fell during that period. Typically represented in red or black.
- Open: Top of the body
- Close: Bottom of the body
- Interpretation: Selling pressure dominated buying pressure
Candle color settings may vary between exchanges and charting tools. In some markets, red indicates rising prices and blue indicates falling prices, so be sure to check your platform's settings.
Understanding Timeframes
The length of time represented by one candle is called a timeframe. The same asset can show completely different pictures depending on which timeframe you use.
| Timeframe | Primary Use |
|---|---|
| 1-minute, 5-minute | Scalping, ultra-short-term trading |
| 15-minute, 1-hour | Day trading, short-term trading |
| 4-hour | Short to medium-term swing trading |
| Daily | Medium-term swing trading, most universal |
| Weekly | Medium to long-term trend analysis |
| Monthly | Long-term investing, major trend assessment |
The most commonly referenced timeframes in the cryptocurrency market are 4-hour and daily charts. Shorter timeframes have more noise, while longer timeframes show trends more clearly.
Multi-timeframe analysis is the method of checking multiple timeframes together. For example, identifying the overall trend on the daily chart, then finding entry points on the 4-hour chart. It's like seeing both the big picture and the details simultaneously—a very important technique in practice.
Key Single Candlestick Patterns
Even a single candle can provide important clues about market sentiment.
Doji
A candle where the open and close are nearly the same. The body appears very thin or like a horizontal line. It indicates that buying and selling pressure are in equilibrium, suggesting a possible reversal of the existing trend.
There are various types of doji.
- Standard Doji: Upper and lower wicks of similar length. Complete equilibrium state.
- Dragonfly Doji: Only a long lower wick. Complete recovery after a downward attempt. Support confirmation signal.
- Gravestone Doji: Only a long upper wick. Pushed back after an upward attempt. Resistance confirmation signal.
- Long-legged Doji: Both wicks are long. Extreme volatility and uncertainty.
Hammer
A candle with a small body and a long lower wick. When appearing at the bottom of a downtrend, it's interpreted as a reversal signal. It means price fell significantly but buying pressure entered, recovering the close near the open.
Conditions for a valid hammer:
- A preceding downtrend must exist
- The lower wick must be at least 2 times the body length
- There should be no or very little upper wick
- Confirmation from the next candle (bullish candle appearance) is needed
Inverted Hammer
An inverted form of the hammer, with a small body and a long upper wick above it. When appearing in a downtrend, it can be a signal of a reversal attempt. However, it's less reliable than the hammer, so confirmation from the next candle is essential.
Shooting Star
Same shape as the inverted hammer, but appears at the top of an uptrend. Buying pressure pushed price up, but it was eventually pushed back down by selling pressure, suggesting weakening of the uptrend.
Spinning Top
A candle with a small body and wicks of similar length on both sides. Similar to a doji but with a slightly larger body. It indicates market uncertainty and suggests possible weakening or reversal of the trend.
Key Multi-Candlestick Patterns
Patterns formed by two or more candles are more reliable than single candlestick patterns.
Engulfing Pattern
A pattern where the second candle's body completely engulfs the first candle's body.
- Bullish Engulfing: In a downtrend, a large bullish candle appears after a bearish candle and completely engulfs it. It signifies strong buying pressure entering and is a bullish reversal signal.
- Bearish Engulfing: In an uptrend, a large bearish candle appears after a bullish candle and completely engulfs it. It signifies overwhelming selling pressure and is a bearish reversal signal.
Factors that increase the reliability of engulfing patterns:
- When volume increases significantly on the second candle
- When it occurs near major support or resistance levels
- When the second candle's body is significantly larger than the first
Morning Star
A three-candle pattern appearing at the bottom of a downtrend.
- A long bearish candle (continuation of downtrend)
- A small-bodied candle or doji (selling pressure weakening, equilibrium)
- A long bullish candle (strong buying pressure entering)
If the third candle's close recovers more than halfway into the first candle's body, it's interpreted as a stronger signal.
Evening Star
The opposite pattern of the morning star, appearing at the top of an uptrend.
- A long bullish candle (continuation of uptrend)
- A small-bodied candle or doji (buying pressure weakening)
- A long bearish candle (strong selling pressure entering)
Three White Soldiers
A pattern of three consecutive bullish candles rising in stair-step fashion. Each bullish candle opens within the previous candle's body and closes above the previous candle's high. It indicates strong buying pressure and upward momentum.
Three Black Crows
The opposite pattern of three white soldiers, with three consecutive bearish candles falling in stair-step fashion. It indicates strong selling pressure and downward momentum.
Practical Tips for Candlestick Chart Analysis
Context is Key
Candlestick patterns should not be interpreted in isolation. They must always be interpreted within context.
- Where did it appear: Patterns appearing near major support/resistance levels, trendlines, or moving averages carry more significance.
- In what trend did it appear: Reversal patterns are only valid when there's a clear preceding trend.
- What about volume: Volume changes accompanying the pattern determine the signal's reliability.
Wait for Confirmation
Jumping into a trade immediately when a candlestick pattern appears is risky. It's safer to wait until the next candle confirms the pattern's direction. For example, if a hammer appears, consider entering only after confirming the next candle closes as a bullish candle.
Timeframe and Reliability
Generally, the longer the timeframe, the more reliable the candlestick pattern. An engulfing pattern on the daily chart is much more significant than one on the 5-minute chart. However, patterns on longer timeframes take more time to complete, requiring patience.
Combine with Other Tools
Candlestick patterns are more effective when combined with other technical analysis tools rather than used alone. When a reversal candlestick pattern appears at a support/resistance level or when a doji appears near a moving average, reliability increases significantly.
Common Misconceptions When Reading Candlestick Charts
- A bullish candle isn't necessarily good: A bullish candle with a long upper wick at resistance can actually be a selling pressure signal.
- A bearish candle isn't necessarily bad: A bearish candle with a long lower wick at support shows defensive buying.
- Don't judge major trends from a single candle: One candle is just a small hint. You need to look at the flow of multiple candles and the overall context together.
The ability to read candlestick charts doesn't develop overnight. You need to practice observing countless charts and tracking how price actually moved after patterns appeared. In the next article, we'll explore support and resistance levels—the key price areas where prices react on charts.
Next article: Support and Resistance - Where Prices Stop