The Anatomy of a Candlestick 

Candlesticks are a key piece in the puzzle of technical analysis. At a glance, they show how the price of an asset moved during a specific period. Whether it went up, down, or stayed relatively stable.  

But how do you read a candlestick? Each candlestick displays four key pieces of information. These are: 

• The opening price 
• The highest price 
• The lowest price 
• The closing price 

When placed together on a chart, these candlesticks form patterns that can help traders spot momentum, price reversals, and potential entry or exit points. No matter which market you’re trading in, understanding how to read candlesticks can give you a real edge in the market. 

What is a Candlestick Chart? 

A candlestick chart is a popular chart type used by traders in technical analysis. It shows the high, low, open, and closing price of an asset for a specific timeframe.  

The candlestick originated from Japanese merchants who traded rice long before online trading became popular in the world. It was used to track market prices and momentum. 

A candlestick is composed of 2 parts, which are the body and the wicks. The body indicates the range between the opening and closing price. If the candlestick closes higher than the opening price, the body is shaded green, which indicates a bullish candlestick.  

Conversely, if the candlestick closes below the opening price, the body is colored red which indicates a bearish candlestick. 

The wicks are lines extending above and below the body. They show the highest and lowest price movements during a specific timeframe.  

Origins of the Candlestick Chart 

Candlestick charts are originated in Japan from a Japanese rice trader named Homma Munehisa. Homma was a successful rice trader who used a form of charting to track price movements in the rice markets. 

His method was based on how he observed price fluctuations and market psychology in rice trading.  

Munehisa noticed patterns in how prices were moving based on factors such as supply, demand, and market sentiment. He began documenting these price movements using charts to forecast future trends. These charts used candlesticks to visually represent price action, showing the open, high, low, and close for each period.  

Munehisa revolutionized the charting method into the modern candlesticks form traders use around the world today. 

How to Read a Candlestick 

Each candlestick represents a specific period and is made up of three components. 

Candlestick Body 

The candlestick body is a rectangle that shows the range between the opening and closing prices. Long bodies indicate strong bullish or bearish pressure, while short bodies show indecision. 

Wicks 

Wicks are lines extended either above or below the body, which mark the highest and lowest levels the price reached during a specific period. 

Color of the Candlestick 

The color of the candlestick provides a view of the direction of the price. A bullish candlestick is usually green by default, telling us that the closing price is higher than the opening price. On the other hand, a bearish candlestick is usually red, indicating that the closing price is lower than the opening price. 

By analyzing the open, high, low, and close points over multiple candlesticks, traders can identify market sentiment and how bulls and bears are faring against each other, helping them predict potential price changes. 

Basic Candlestick Patterns 

Candlesticks are created by bullish and bearish movements. These movements form patterns for traders to use for their analysis and trade execution. Patterns are split between bullish and bearish ones.  

Candlestick patterns can be highly effective but are not guaranteed to work alone. Using them alongside indicators and sentiment analysis can help in determining entries and exits more accurately. 

Here are some of the commonly used candlestick patterns. 

Bullish Engulfing Pattern  

The Bullish Engulfing is a two-candle bullish reversal pattern that typically appears after a downtrend. It indicates a potential shift in momentum from sellers to buyers. 

Candle 1: A bearish candle that reflects continued selling pressure. 

Candle 2: A strong bullish candle that opens below the low of Candle 1 and closes above its high, fully engulfing the previous candle’s body. 

This pattern signals that buyers have entered the market with strength, overpowering sellers and suggesting a possible trend reversal to the upside. 

The deeper the engulfing and the higher the volume, the stronger the signal. 

Bearish Engulfing Pattern  

The Bearish Engulfing is a two-candle bearish reversal pattern that typically appears after an uptrend. It signals that selling pressure is increasing and buyers may be losing control. 

Candle 1: A bullish candle showing continued upward momentum. 

Candle 2: A strong bearish candle that opens above the high of Candle 1 and closes below its low, fully engulfing the previous candle’s body. 

This structure indicates that sellers have stepped in aggressively, overpowering buyers and suggesting a potential reversal to the downside. 

The larger the engulfing candle and the higher the volume, the stronger the bearish signal. 

Bullish Morning Star  

The Morning Star is a three-candle bullish reversal pattern that appears after a downtrend. It signals weakening selling pressure and the potential start of a new upward trend. 

Candle 1: A strong bearish candle indicating continued downward momentum. 

Candle 2: A small candle (bullish or bearish) that gaps down, showing indecision and a possible slowdown in selling pressure. 

Candle 3: A strong bullish candle that closes well into the body of Candle 1, confirming that buyers have regained control. 

This structure reflects a shift from strong selling pressure to market hesitation, followed by renewed buying strength. The pattern becomes more reliable when accompanied by high trading volume and when the third candle closes above the midpoint of Candle 1. 

Bearish Evening Star  

The Evening Star is a three-candle bearish reversal pattern that appears after an uptrend. It signals that buying momentum is fading and sellers are starting to take control. 

Candle 1: A strong bullish candle showing continued upward momentum. 

Candle 2: A small candle (bullish or bearish) that gaps up, reflecting indecision and slowdown in buying pressure. 

Candle 3: A strong bearish candle that closes well into the body of Candle 1, confirming the reversal and indicating that sellers have taken control. 

This structure reflects a shift from buyer dominance to market hesitation, followed by decisive selling pressure. 

Rising 3 Methods (Bullish) 

The Rising Three Methods is a five-candle bullish continuation pattern that appears during an uptrend. It signals that, despite temporary selling pressure, buyers remain in control and the upward trend is likely to continue. 

Candle 1: A strong bullish candle showing upward momentum. 

Candles 2, 3, and 4: Three small consecutive bearish or neutral candles that remain within the range of Candle 1. They represent a mild pullback or consolidation without breaking the bullish structure. 

Candle 5: A strong bullish candle that closes above the high of Candle 1, confirming continuation of the uptrend and renewed buying strength. 

This pattern indicates a controlled pause in the uptrend, where sellers attempt to push price lower but fail, allowing the dominant bullish trend to resume. 

The smaller and weaker the middle candles, the more reliable the pattern becomes. 

Falling 3 Methods (Bearish)  

The Falling Three Methods is another five-candle bearish continuation pattern that forms during a downtrend. It shows that despite a brief period of buying or consolidation, sellers remain dominant and the downward trend is likely to resume. 

Candle 1: A strong bearish candle indicating selling pressure. 

Candles 2, 3, and 4: Three small consecutive bullish or neutral candles that remain within the body of Candle 1. These represent a temporary pause or mild correction without breaking the bearish structure. 

Candle 5: A strong bearish candle that closes below the low of Candle 1, confirming the continuation of the downtrend and renewed seller control. 

This pattern reflects a controlled pause in the downtrend, where buyers attempt to push price higher but fail against broader selling momentum. 

The weaker and smaller the middle candles, the more reliable the pattern. 

Conclusion 

Candlestick charts show the open, close, high and low prices of an asset over a specific timeframe, providing traders with a visual understanding of market behaviour. Candlestick patterns help identify potential price movements and market trends, making them a valuable analytical tool. 

However, these patterns should not be used in isolation. For higher accuracy, they must be supported by other technical indicators and price action analysis, as candlesticks alone do not guarantee outcomes. 

In this article, we introduced the anatomy of a candlestick and explored a selection of key reversal and continuation patterns. While these examples lay a strong foundation, there are many additional candlestick patterns that traders can study to deepen their market understanding.

Mastering these techniques, combined with disciplined analysis, can help traders better anticipate potential market direction.