Japanese candlesticks: reading a candle, then its patterns

On a chart, each session is summarised by a candle. Its shape condenses, at a glance, the balance of power between buyers and sellers over the period. Technical analysts have given names to certain recurring shapes, such as the doji, the hammer or the engulfing pattern. These patterns are popular, but often misinterpreted: a single candle does not "announce" anything. This article explains how a candle is built, what the main patterns describe and, above all, under what conditions reading them makes sense, and under which it does not.

The anatomy of a candle

A candle represents 4 prices over a period (a session, an hour, a week): the open, the close, the high and the low.

The body is the thick part, between the open and the close.
The wicks (or shadows) are the thin lines above and below the body: they extend to the high and the low of the period.
The colour indicates direction: by common convention, a light or green body signals a close above the open, a dark or red body a close below. The convention varies by platform and country: check your chart's legend.

What the shape tells. A large body shows a clear move in one direction during the period. A long wick shows that the price went far before being pulled back: one side tried and did not hold. A small body with long wicks reflects hesitation.

Patterns of 1 candle

The doji: open and close almost identical, tiny body. It describes indecision, nothing more. Its meaning depends on what precedes it.
The hammer: small body at the top, long lower wick (generally at least 2 times the body), little or no upper wick. It appears after a decline: sellers pushed the price down, then buyers brought it back.
The hanging man: same shape as the hammer, but after a rise. It describes a price heavily sold during the session and then pulled back up; some analysts see a possible exhaustion in it.
The shooting star: small body at the bottom, long upper wick, after a rise. The price rose and was then rejected.
The marubozu: large body with no wick, or almost none. It describes a move without hesitation from open to close.

Patterns of 2 candles

The bullish engulfing: after a decline, a candle with a bullish body fully engulfs the body of the previous bearish candle. It describes a shift in strength in favour of buyers. The bearish engulfing is its mirror image after a rise.
The harami: a small body contained within the large body of the previous candle. It describes a slowing of momentum, without specifying direction.

Patterns of 3 candles

The morning star: a large bearish candle, a small body (or doji) that gaps down (opening gap), then a large bullish candle that recovers a good part of the first. After a decline, it is read, according to some analysts, as a possible change of dynamic.
The evening star: its mirror image after a rise.

Context matters more than shape

The same candle does not mean the same thing everywhere. Analysts look at least at:

The preceding trend. A hammer is mostly interpreted after a decline; the same shape in the middle of a rise is just a candle.
The location. A pattern forming on a zone where the price has already reacted in the past (see support and resistance) is more telling than one in the middle of nowhere.
The volume. A pattern accompanied by high volume is judged more significant: see volume and the confirmation of signals.
The timeframe. A pattern on a weekly chart involves far more trading than one on a 5-minute chart.
The confirmation. Many analysts wait for the next candle to move in the suggested direction before giving credit to the pattern.

The limits: what these readings do not say

A pattern describes, it does not predict. A bullish engulfing does not say the price will rise: it says that, during that session, buyers dominated.
Many patterns, little established reliability. Studies on the predictive power of candlesticks give mixed results, and the apparent advantage shrinks, or disappears, once costs are counted. Their reliability is not robustly established. See the reliability of chart patterns and interpretation biases.
Interpretation is partly subjective. A "hammer" at 2 times the body or at 1.8 times: where does the pattern stop?
They are mostly seen after the fact. Recognising a pattern on a chart already drawn is easy; spotting it in real time, with what follows unknown, is much harder.

Key takeaways

A candle summarises the open, close, high and low of a period.
Patterns (doji, hammer, engulfing, stars) describe a balance of power over 1 to 3 sessions.
Their meaning depends on trend, location, volume, timeframe and confirmation.
They describe what has happened: they do not announce what will happen.

In Earnnest, a stock's chart can display candles on several timeframes, to be read with the indicators and the score described on its page.

This article is for information and education only and does not constitute personalised investment advice. The examples are illustrative. Past performance is not a reliable indicator of future performance.