By Charuka Weerakkody &

Shamendra Sen
What is a candlestick chart?
A candlestick chart is a type of financial chart that graphically represents the price moves of
an asset for a given timeframe. As the name suggests, it’s made up of candlesticks, each
representing the same amount of time. The candlesticks can represent virtually any period,
from seconds to years.
Candlestick charts date back to about the 17th century. Their creation as a charting tool is
often credited to a Japanese rice trader called Homma. His ideas were likely what provided
the foundation for what is now used as the modern candlestick chart. Homma’s findings
were refined by many, most notably by Charles Dow, one of the fathers of modern technical
analysis.
While candlestick charts could be used to analyze any other types of data, they are mostly
employed to facilitate the analysis of financial markets. Used correctly, they’re tools that
can help traders gauge the probability of outcomes in the price movement. They can be
useful as they enable traders and investors to form their own ideas based on their analysis
of the market. (Source :- BINANCE ACADEMY)
How do candlestick charts work?

The following price points are needed to create each candlestick:

1. Open — The first recorded trading price of the asset within that particular timeframe.
2. High — The highest recorded trading price of the asset within that particular timeframe.
3. Low — The lowest recorded trading price of the asset within that particular timeframe.
4. Close — The last recorded trading price of the asset within that particular timeframe.
Upper wick / Shadow

Real Body

Lower wick / Shadow

There are two candlestick patterns
1. Reversal pattern
2. Continuation pattern
Marubozu means “close-cropped” Typically, the marubozu is a long candle that implies the day’s
trading range has been large. A marubozu candle lacks either an upper or lower shadow. On rare
occasions it can lack both a upper or lower shadow. When a full marubozu occurs, or one that is very
close to full, it is very well worth noting. If it is a white candle, then it signals extreme conviction
among buyers. Conversely, if it is a dark candle, then it indicates sellers were eager to flee. AS always,
you should pay careful attention to the next day’s trading to see if there is follow through. A full or
nearly full marubozu implies that there is strong buying or selling interest depending on the color. If
there is follow through early the next day, the stock is likely to trend in that same direction for the
next few sessions. That awareness can be important for the trader
Spining Tops

A spinning top is a candlestick pattern with a short real body that's vertically centered
between long upper and lower shadows. The candlestick pattern represents indecision
about the future direction of the asset. Neither the buyers nor the sellers could gain the
upper hand. The buyers pushed the price up during the period, and the sellers pushed
the price down during the period, but ultimately the closing price ended up very close
to the open. After a strong price advance or decline, spinning tops can signal a potential
price reversal, if the candle that follows confirms.
A spinning top can have a close above or below the open, but the two prices need to be
close together
Doji
A Doji forms when the open and the close are the same (or very close to each other). The price
can move above and below the open but eventually closes at or near the open. As such, a Doji
may indicate an indecision point between buying and selling forces. Still, the interpretation of
a Doji is highly dependent on context.

Depending on where the line of the open/close falls, a Doji can be described as:

Standard Doji
Gravestone Doji – Bearish reversal candle with a long upper wick and the open/close near
the low.
Long-legged Doji – Indecisive candle with both a lower and upper wick, and the open/close
near the midpoint.
Dragonfly Doji – Either bullish or bearish candle (depending on context) with a long lower wick
and the open/close near the high.
Hammer (Bullish reversal patterns)
A candlestick with a long lower wick at the bottom of a downtrend, where the lower wick is
at least twice the size of the body.
A hammer shows that even though the selling pressure was high, the bulls drove the price
back up close to the open. A hammer can be either red or green, but green hammers may
indicate a stronger bull reaction.
Inverted hammer (Bullish reversal patterns)

Also called the inverse hammer, it’s just like a hammer, but with a long wick above the body
rather than below. Similar to a hammer, the upper wick should be at least twice the size of
the body.
An inverted hammer occurs at the bottom of a downtrend and may indicate a potential
reversal upward. The upper wick shows that price stopped its continued downward
movement, even though the sellers eventually managed to drive it down near the open. As
such, the inverted hammer may suggest that buyers soon might gain control of the market.
Bearish reversal pattern

Hanging man

The hanging man is the bearish equivalent of a hammer. It typically forms at the end of an
uptrend with a small body and a long lower wick.
The lower wick indicates that there was a large sell-off, but bulls managed to take back
control and drive the price up. Keeping that in mind, after a prolonged uptrend, the sell-off
may act as a warning that the bulls might soon be losing control of the market.
Bearish reversal pattern
Shooting star

The shooting star is made of a candlestick with a long upper wick, little or no lower wick,
and a small body, ideally near the low. The shooting star is a similar shape as the inverted
hammer but is formed at the end of an uptrend.
It indicates that the market reached a high, but then sellers took control and drove the price
back down. Some traders prefer to wait for the next few candlesticks to unfold for
confirmation of the pattern.
Three white soldiers (Bullish reversal patterns)

The three white soldiers pattern consists of three consecutive green candlesticks that all
open within the previous candle’s body, and close at a level exceeding the previous candle’s
high.
Ideally, these candlesticks shouldn’t have long lower wicks, indicating that continuous
buying pressure is driving the price up. The size of the candles and the length of the wicks
can be used to judge the chances of continuation or a possible retracement.
Three black crows (Bearish reversal pattern)

The three black crows are made of three consecutive red candlesticks that open within the
previous candle’s body, and close at a level below the previous candle’s low.
The bearish equivalent of three white soldiers. Ideally, these candlesticks shouldn’t have long
higher wicks, indicating continuous selling pressure driving the price down. The size of the
candles and the length of the wicks can be used to judge the chances of continuation.
Bullish harami (Bullish reversal patterns)

A bullish harami is a long red candle followed by a smaller green candle that’s entirely
contained within the body of the previous candle.
The bullish harami can unfold over two or more days, and it’s a pattern indicating that
selling momentum is slowing down and might be coming to an end.
Bearish harami (Bearish reversal pattern)
The bearish harami is a long green candle followed by a small red candle with a body that’s
entirely contained within the body of the previous candle.
The bearish harami can unfold over two or more days, appears at the end of a downtrend, and
may indicate that buying pressure is decreasing.
Engulfing candles

Engulfing candles tend to signal a reversal of the current trend in the market. This specific
pattern involves two candles with the latter candle ‘engulfing’ the entire body of the candle
before it. The engulfing candle can be bullish or bearish depending on where it forms in
relation to the existing trend. The image below presents the bullish engulfing candle.
Bullish Engulfing

Bearish Engulfing
Bullish reversal pattern
The morning star, that on the first day there is a large dark candle. The middle day is not a perfect
star, because there is a small lower shadow, but the upper shadow on top of a small real body gives it
a star quality. The third candle is a large white candle that completes the reversal. Not how the third
candle recovered nearly to the highs of the first day and occurred on strong volume.
In order for the Morning Star signal to be valid, the following conditions must exist:
• The stock must have been in a definite downtrend before this signal occurs. This can be
visually seen on the chart.
• The first day of the signal must be a long dark body. The second day must be a day of
indecision. The third day should be a long white candle reaching at least halfway into the body
of the first day’s dark candle.
Bearish reversal pattern
The evening star pattern occurs during a sustained uptrend. On the first day we see a candle with a
long white body. Everything looks normal and the bulls appear to have full control of the stock. In the
second day, however, a star candle occur. For this to be a valid evening star pattern, the stock must
gap higher on the day of the star. The star can be either black or white. A star candle has a small real
body and often contains a large upper shadow. On the third day, a candle with a black real body
emerges. This candle retreats substantially into the real body of the first day. The pattern is made
more powerful if there is a gap between the second and third day’s candles. However, this gap is
unusual, particularly when it comes to equity trading. The further this third candle retreats into the
real body of the first day’s candle, the more powerful the reversal signal.
Continuation patterns

Rising three methods

This pattern occurs in an uptrend, where three consecutive red candles with small bodies are
followed by the continuation of the uptrend. Ideally, the red candles shouldn’t breach the range
of the preceding candlestick.
The continuation is confirmed with a green candle with a large body, indicating that bulls are
back in control of the trend’s direction.
Falling three methods

The inverse of rising three methods, indicating the continuation of a downtrend instead.