Anatomy of a Candlestick and Reading Price Action
A candlestick displays four prices for a time period - open, high, low, and close - in a single visual. The rectangular body shows the open and close prices, colored green for up days and red for down days. The thin lines called wicks extend from the body to the high and low prices, revealing intraday extremes. A long green body with small wicks shows strong buying throughout the session. A long red body with small wicks shows strong selling. Small bodies with large wicks indicate indecision and struggle - buyers pushed prices up but sellers knocked them back down, or vice versa. Understanding what each shape conveys about sentiment and strength is the foundation for pattern recognition.
Doji Candles: Signals of Indecision and Reversal
A doji forms when the open and close prices are nearly identical or very close, creating a small body or no body with long wicks extending in both directions. The pattern reveals a battle between buyers and sellers with neither side prevailing decisively. Doji candles appear at market turning points because exhaustion sets in - bulls push prices up then sellers defend, or vice versa. A single doji is not a buy or sell signal by itself but becomes powerful in context. A doji after a long uptrend may signal the rally is stalling and reversal could occur. A doji after a long downtrend may show selling pressure is waning. Traders use doji patterns as alerts to watch for confirmation - if the next candle closes higher after a doji in a downtrend, the reversal is confirmed.
Hammers and Engulfing Candles: Reversal Patterns
A hammer forms when a candle has a small body at the top, a long wick extending downward, and little to no upper wick. The pattern shows sellers pressed prices down sharply, then buyers regained control and pushed the close near the open. Hammers are most meaningful after downtrends where they suggest bulls are regaining power. An engulfing candle occurs when a candle body completely contains the prior candle body - the open and close prices are beyond the previous day range. A bullish engulfing has a green body engulfing a red body, showing buyers overwhelmed sellers. A bearish engulfing has a red body engulfing a green body, showing sellers took over. Both hammer and engulfing patterns are two-candle sequences that suggest momentum is shifting. Combined with volume or other indicators, they provide reasonable probability entry and exit signals.
Using Candlestick Patterns in Trading Context
A critical principle is that candlestick patterns require context - a hammer at the top of a bull run can signal exhaustion, while a hammer during a correction might mean the bottom is forming. Always ask what the price action was leading to the pattern. Did it form after a sharp move or after a period of consolidation. Is the pattern at a key support or resistance level. Are other technical indicators aligned with the pattern signal - is momentum diverging, is volume surging. The most reliable candlestick trades occur when multiple pieces of evidence confirm the same conclusion: pattern plus trend plus support/resistance plus volume. Traders who use patterns in isolation often generate false signals. Those who wait for confirmation across multiple tools dramatically improve their win rate.