Candlestick Chart: Definition and Key Takeaways

Key takeaways
* A candlestick chart displays an asset’s open, high, low, and close for a chosen time period.
* The candlestick’s body and wicks (shadows) visualize whether price moved up or down and the strength of that move.
* Traders use candlestick shapes and multi-candle patterns to spot potential reversals or continuations; context and confirmation are essential.

What is a candlestick chart?

A candlestick chart is a financial charting method that shows price action for a security over a specific time frame (minute, hour, day, etc.). Each candlestick conveys four data points: the opening price, the closing price, the high, and the low. Originating in Japan for tracking rice prices centuries ago, candlesticks are now widely used for stocks, forex, futures, and other liquid assets.

Anatomy of a candlestick

• Real body: The filled or hollow central rectangle. It spans the open to close prices.
• A bullish candle (close > open) is commonly shown in white or green.
• A bearish candle (close < open) is commonly shown in black or red.
• Wicks (shadows): Vertical lines above and below the body showing the session high and low.
• Length interpretation:
• Long body — strong buying (long bullish body) or selling (long bearish body) pressure.
• Short body — little net change between open and close; indecision.
• Long wicks — rejection of higher or lower prices during the period.

Common single-candle shapes
* Hammer (bullish signal near a bottom): Small body near the high with a long lower wick — shows rejection of lower prices.
* Hanging man (bearish signal near a top): Same shape as a hammer but occurs after an uptrend — can indicate a top.
* Doji: Open and close are virtually equal — indicates indecision and potential reversal when placed in context.

Two-candle patterns (short-term signals)
* Engulfing pattern:
* Bullish engulfing: A small bearish candle followed by a larger bullish candle that fully engulfs the prior body — potential reversal after a downtrend.
* Bearish engulfing: A small bullish candle followed by a larger bearish candle that engulfs it — potential reversal after an uptrend.
* Harami:
* A large candle followed by a smaller opposite-colored candle contained within the previous candle’s body — suggests weakening momentum.
* Harami cross: The smaller candle is a doji — stronger sign of possible reversal.

Three-candle patterns
* Morning star (bullish reversal):
* First: long bearish candle.
* Second: small-bodied candle (often gapped down).
* Third: long bullish candle closing above the midpoint of the first — indicates shift to buyers.
* Evening star (bearish reversal):
* First: long bullish candle.
* Second: small-bodied candle (often gapped up).
* Third: long bearish candle closing below the midpoint of the first — indicates shift to sellers.

Explain it like I’m 5

Each candlestick is like a little story of a day’s price: where it started (open), where it ended (close), and how high and low it went. Color and shape tell you quickly whether buyers or sellers were in charge and how strongly.

How traders use candlesticks in real life

• Entry and exit timing: Patterns can suggest likely reversals or continuations to help set entries, stops, and targets.
• Timeframe flexibility: Candlesticks work on any timeframe — from minutes to months — but patterns must be read in the context of the chosen timeframe.
• Combine with other tools: Volume, trendlines, support/resistance, and indicators improve reliability and reduce false signals.
• Forex relevance: Candlesticks are popular in forex because they compactly show short-term price action and help spot reversals and breakout setups.

Interpreting specific elements
* Where is the real body and what does it indicate?
* The real body sits between open and close; its color shows whether the close was higher (bullish) or lower (bearish) than the open and its size indicates strength of the move.
* How to read a Harami Cross:
* A large candle followed by a doji fully contained within it. This pattern signals a possible trend reversal because it shows that momentum has stalled; look for confirmation from the next candles or other indicators.

Practical tips and cautions
* Always consider trend and nearby support/resistance. A bullish pattern inside a strong downtrend is less reliable.
* Larger bodies and volume add conviction; small-bodied patterns in thin markets are easier to misread.
* Use confirmation: Wait for the next candle or supporting signals before acting solely on a pattern.
* Practice pattern recognition on historical charts to understand false positives and typical outcomes.

Bottom line

Candlestick charts compactly reveal price behavior through body size, color, and wicks. Single-candle shapes and multi-candle patterns provide useful clues about market psychology and potential turning points, but they work best when combined with trend context, volume, and other analysis methods.