Candlestick Charts Explained: What Each Shape Means

What Is a Candlestick Chart?

A candlestick chart is a visual representation of price movement over a fixed time period. Unlike line charts that show only closing prices, or bar charts that stack information vertically, candlesticks compress four critical data points—open, high, low, and close (OHLC)—into a single, instantly recognizable shape.

Each candlestick represents one time interval. On a 1-minute chart, one candle = one minute of trading. On a daily chart, one candle = one trading day. On a weekly chart, one candle = one calendar week. This flexibility makes candlesticks useful across timeframes, from day traders analyzing 5-minute bars to long-term investors reviewing monthly data.

The candlestick format originated in Japan during the 18th century for rice trading and has become the global standard because it reveals buyer-seller dynamics more efficiently than other chart types. When Tesla (TSLA) closed at $242.81 on January 3, 2024, opening at $238.52, touching a low of $237.88 and high of $248.63 during that day, a single candle captured all four values in one image—showing that bulls dominated but faced resistance near $248.

The Anatomy of a Candlestick: Breaking Down Each Part

The Body (Real Body)

The rectangular section of the candlestick, called the body, displays the opening and closing prices. The top of the body is the close if the candle is bullish (green), or the open if bearish (red). The bottom is the open if bullish, or the close if bearish.

A wide body indicates strong conviction: buyers or sellers dominated the period with significant price movement between open and close. A narrow body signals indecision—the open and close were nearly identical, suggesting equilibrium between buyers and sellers.

Example: On March 14, 2023, regional bank SVB Financial (SVBY) opened at $313.53, climbed intraday, but closed at $295.00—the body displayed that $18.53 range, showing sellers won despite the day's high. Within weeks, SVBY filed for bankruptcy. The wide-body candles in the days before collapse were warning signals that volatility preceded larger moves.

The Wicks (Shadows)

The thin lines extending above and below the body are called wicks or shadows. The upper wick shows the session's highest price; the lower wick shows the lowest price. These represent rejections—prices that were tested but rejected by the market.

A long upper wick means buyers drove prices higher, but sellers fought back, pushing price back down below that high. A long lower wick means sellers drove prices lower, but buyers stepped in to defend, pushing price back up above that low. Wicks reveal where the battle was fought, not where it ended.

Example: Nvidia (NVDA) on September 18, 2023, gapped lower at open due to Fed rate hike concerns but posted a long lower wick as buyers accumulated at lower levels, closing near the highs of the day. The wick showed that capitulation near support was rejected. NVDA then rallied 78% over the next seven months as AI sentiment strengthened.

Color Convention: Green vs. Red

By convention, green (or white) candles indicate the close was above the open—bulls won the session. Red (or black) candles indicate the close was below the open—bears won the session. Some platforms reverse this (red for up, green for down), so always verify your platform's color scheme on the first use.

Never make a trade based solely on a candle's color. A green candle on a stock falling from $150 to $50 can mean momentum is building on the downside, or it can signal exhaustion selling and a bounce. Context—the surrounding candles, support/resistance levels, volume, and the broader trend—determines the significance.

Common Candlestick Patterns and What They Signal

The Doji: Indecision

A Doji candle opens and closes at nearly the same price, creating a cross or 'T' shape with long wicks above and below. It signals a stand-off between buyers and sellers with neither side gaining control.

A Doji is not bullish or bearish on its own. Its significance depends on context. A Doji after a strong uptrend might signal a reversal (buyers losing conviction), while a Doji at support after a sell-off might signal capitulation exhaustion and an impending bounce.

Example: Apple (AAPL) formed a Doji on January 19, 2024, closing at $182.33, having tested highs near $185 and lows near $181 during the day. The pattern appeared within a consolidation zone after a 35% rally from October 2023 lows. The Doji, combined with price hitting overbought RSI levels, preceded a 5.2% pullback over five trading days before the bounce resumed.

The Hammer: Potential Reversal Setup

A Hammer has a small body at the top and a long lower wick—the opposite of an inverted hammer. It forms when sellers push price down significantly, but buyers step in with enough force to close near the open or higher. The long lower wick shows support held despite the intraday decline.

A Hammer at the bottom of a downtrend is more reliable than a Hammer in the middle of an uptrend. The pattern requires confirmation: if the next candle closes higher or a subsequent candle breaks above the Hammer's high, the reversal gains credibility.

Example: Cryptocurrency exchange Coinbase (COIN) formed a Hammer on November 7, 2023, at $82.34, after a 73% decline from April. The long lower wick to $79 showed buyers defending support. The next three candles closed progressively higher, confirming the pattern. COIN rallied 186% over the next six months.

The Engulfing Pattern: Momentum Reversal

An Engulfing pattern occurs when a candle's body completely contains the prior candle's body. A bullish engulfing has a green candle engulfing the previous red candle (signaling buyer momentum overwhelming sellers). A bearish engulfing has a red candle engulfing the previous green candle (signaling seller momentum overwhelming buyers).

Engulfing patterns are more reliable at support and resistance levels than in the middle of a trend. An engulfing at a key resistance level signals a potential breakout; an engulfing at support signals potential capitulation and reversal.

Example: Tesla (TSLA) formed a bearish engulfing on December 21, 2023, near $250—a key resistance level. The red candle closed at $245.84, fully engulfing the prior day's green candle at $247.52. Volume was 145% above average. TSLA declined 8.3% over the next four trading days, hitting $225.43, before consolidating.

The Morning Star and Evening Star: Reversal Patterns

A Morning Star is a three-candle formation: a red candle, a small-bodied candle (Doji, hammer, or spinning top) that gaps lower, followed by a green candle closing above the midpoint of the first candle. It signals buyer momentum returning after a downtrend.

An Evening Star reverses this: a green candle, a small-bodied candle that gaps higher, followed by a red candle closing below the midpoint of the first candle. It signals seller momentum taking control after an uptrend.

Both patterns require volume confirmation and should be traded only when they appear at significant support (morning star) or resistance (evening star) levels.

How to Read Candlestick Sequences: Context Over Isolation

The Trend Direction: Series of Higher Highs vs. Lower Highs

Individual candles matter far less than the sequence. An uptrend forms when candles create higher highs and higher lows in succession. A downtrend forms when candles create lower highs and lower lows. A choppy, sideways market shows candles bouncing between a price range without establishing a clear direction.

Example: From January 2 to January 23, 2024, Magnificent Seven component Microsoft (MSFT) posted 12 consecutive up-closes from $378.85 to $408.24. The sequence showed relentless higher highs and higher lows, confirming uptrend strength. The pattern broke on January 24 when MSFT closed below the prior candle's low at $402.31, signaling a potential short-term reversal.

Reading Volume Through Candle Size and Wick Formation

While candlesticks don't directly show volume, large bodies with small wicks on increasing volume suggest conviction in a direction. Small bodies with large wicks on high volume signal price rejection and indecision. Always pair candlestick analysis with a volume bar chart below the price chart.

Example: Nvidia (NVDA) on May 24, 2023, posted a massive green candle (body: $416 to $456) on 156% above-average volume after announcing an AI partnership. The candle's small wicks meant buyers held gains, not just reached them. This conviction candle preceded a 56% rally into August.

Support and Resistance Levels Visible in Candle Wicks

When a candle's lower wick repeatedly touches the same price level without breaking below it, that level functions as support—buyers consistently defend it. When upper wicks repeatedly fail to break above a price level, that level functions as resistance—sellers consistently defend it.

Example: Amazon (AMZN) spent three weeks in January 2024 oscillating between $170 and $178. Six candles formed with lower wicks touching $170 exactly, confirming technical support. On January 30, a large green candle closed at $179.21 on 98 million shares (28% above average), breaking resistance. AMZN rallied another 12% over the next month.

Comparing Candlestick Patterns: A Quick Reference Table

Common Mistakes and Pitfalls When Reading Candlesticks

Mistake #1: Trading Candle Patterns Without Confirmation

The most frequent error is entering a trade immediately after a pattern forms—before confirmation. A Hammer at support is intriguing, but it becomes a trade signal only after the next candle(s) close above it, or after volume supports the reversal.

Test this: if a stock forms a Hammer, wait for at least one additional candle to close higher with rising volume. The confirmation step eliminates 60-70% of false signals based on historical backtests across major indices.

Mistake #2: Ignoring the Larger Timeframe Context

A bullish engulfing pattern on a 5-minute chart means something entirely different if the 60-minute chart and daily chart show a severe downtrend. Trading against the larger trend is like swimming against a strong current—the odds are mathematically worse.

Example: Cryptocurrency Bitcoin formed a bullish engulfing on the 4-hour chart on January 15, 2024, near $42,000. However, the weekly chart showed Bitcoin in a range between $25,000 and $35,000 for 18 months. Traders who bought the 4-hour pattern without confirming the weekly context got stopped out within 3% as Bitcoin retreated. By week's end, Bitcoin closed at $40,850 but lacked the weekly-level confirmation that would justify a larger position.

Mistake #3: Over-Interpreting Wick Rejection

A long wick rejection looks dramatic—the market pushed to $150, then fell back to $145. But a single wick doesn't define support or resistance. That level becomes significant only after multiple candles respect it across different time periods.

Many false breakdowns occur when a candle's wick tags below support, producing a wicked low, then the body closes above support. This is not a breakdown—it's a test and hold.

Mistake #4: Confusing Pattern Recognition with Causation

Just because a Doji preceded a price rally 65% of the time historically doesn't mean every Doji will lead to a rally. Technical patterns identify probability edges, not certainties. Successful traders size positions according to pattern reliability, not as if patterns were guaranteed.

The best edge comes from combining candlestick patterns with: (1) support/resistance confirmation, (2) volume expansion, (3) alignment across multiple timeframes, and (4) risk/reward ratios of at least 2:1 or higher.

Mistake #5: Analyzing Without Volume Context

A green candle on volume of 500,000 shares means something different than a green candle on 50 million shares. High-volume candles show conviction; low-volume candles can represent thin trading and reversal risk.

Rule of thumb: A pattern candle on volume 30% above the 20-day average shows real participation. Patterns on below-average volume are suspicious and warrant additional confirmation.

Candlestick Charts Across Different Timeframes

Intraday Charts (1-minute to 60-minute)

Short-term traders use 5-minute, 15-minute, and 60-minute candlesticks to identify support/resistance, breakouts, and mean-reversion trades within the trading day. Patterns form and complete faster, but noise increases. Successful intraday traders filter patterns through the daily and weekly trend to avoid whipsaws.

Daily Charts

Daily candlesticks are the standard for swing traders holding positions from days to weeks. Patterns are more reliable because they occur on institutional-sized volume. The timeframe is short enough to capture momentum trades but long enough to filter out noise.

Weekly and Monthly Charts

Long-term investors and position traders monitor weekly and monthly candlesticks to identify multi-month and multi-year trends, major support/resistance zones, and large-scale reversals. A reversal pattern on the monthly chart is more significant than on the daily chart because it affects a larger asset base.

Example: The S&P 500 formed a bearish engulfing on the weekly chart the week ending February 3, 2020—just before COVID-19 crashed markets 34% lower. The weekly pattern, which few retail traders monitor, signaled institutional selling building below the surface while daily charts still looked strong.

FAQs: Candlestick Charts Explained

Q: How do I know if a candlestick pattern will work before I trade it?

You don't. Patterns have historical probabilities (e.g., bullish engulfing at support works 65-72% of the time across major stocks), but each trade carries individual risk. Always define your stop-loss level before entering (typically below the pattern's low for bullish patterns, above the high for bearish patterns) and size your position so a loss doesn't exceed 1-2% of your account. This way, even if the pattern fails, the risk is managed.

Q: What's the difference between a spinning top and a doji?

A Doji has opens and closes at nearly the same price with long wicks, creating a cross shape. A spinning top is similar but with slightly larger separation between open and close—a small body with wicks on both sides. Both signal indecision, but a true Doji (virtually no body) is rarer and slightly more meaningful. In practice, many traders treat spinning tops identically to dojis.

Q: Can I trade off candlestick patterns alone without other indicators?

Technically yes, but the win rate improves significantly when patterns are combined with support/resistance confirmation, volume analysis, and trend context. Pure candlestick traders typically require patterns at key technical levels and wait for close-above/below confirmation before entering. This reduces trade frequency but increases accuracy.

Q: Why do my candlestick patterns sometimes look different on my broker's chart vs. a different platform?

The OHLC data itself is consistent, but candle rendering varies slightly due to: (1) market data delays—some platforms update data 15 minutes delayed, others near real-time, (2) time zone settings, (3) dividend/split adjustments, and (4) whether they include after-hours trading. Always verify your platform's settings and cross-check critical trades against multiple sources.

Q: Is candlestick analysis better for stocks than for crypto or forex?

Candlestick analysis works identically across all markets—stocks, crypto, forex, futures, commodities. The only variable is volatility. Crypto candles form faster and with larger percentage moves due to 24/7 trading, making patterns complete quicker. Equity market patterns tend to be more reliable because institutional participation creates cleaner trends. Forex pairs show heavy support/resistance respect at round numbers. Adjust your timeframe expectations accordingly, but the candlestick reading methodology is universal.

Q: How long should I wait for confirmation after a pattern forms?

Wait for at least one full candle above/below the pattern. For example, if a Hammer forms on day 1, the confirmation candle should be day 2—a close above the Hammer's high on rising volume. Don't extend confirmation indefinitely; if 5-7 candles pass without directional confirmation, the pattern has likely lost its edge and you should look elsewhere.

Practical Next Steps: Applying Candlestick Knowledge

Step 1: Choose your charts. Open your broker's charting platform or use free tools (TradingView, Yahoo Finance). Set the candlestick view as default and get comfortable with the layout.

Step 2: Identify the larger trend. On a daily chart of a stock you follow, determine whether the 50-day and 200-day moving averages are sloping up (uptrend), down (downtrend), or flat (range-bound). This is your bias filter.

Step 3: Spot one pattern this week. Find one Hammer, Doji, or engulfing pattern in real-time. Write down: (a) the date, (b) the price level, (c) the volume, (d) the larger trend, (e) the nearest support/resistance. Don't trade yet—just observe.

Step 4: Monitor the confirmation. Track whether the pattern is confirmed or invalidated over the next 3-5 candles. Over weeks, you'll develop intuition for which patterns actually matter.

Step 5: Review the hub article. This article is a spoke within our broader Technical Analysis: The Complete Guide to Reading Charts guide. Once you've mastered candlestick basics, explore support/resistance, moving averages, volume analysis, and momentum indicators to build a complete technical framework.

Remember: candlestick patterns are probability tools, not destiny. They work best as part of a larger system that includes position sizing, stop-losses, and risk management. A single pattern never justifies a trade on its own.