Here are five reasons why learning how to read and interpret candlesticks will

help you tenfold:

1. It will teach you how to think in probabilities.

2. It greatly improves your odds for a winning trade.
3. You will learn how to come up with your own analysis.
4. You will know who’s winning: buyers (bulls) vs sellers (bears).
5. This will be the “blueprint” for most of the trading setups you’ll trade.

Open, high, low, close, body – the parts of a candlestick

When looking at a candlestick, it is important that you know the open, close, high,
low, as well as what the body and even the range is. For the following examples, we
will use green (when the candle is trading or closes above its open or commonly
known as Bullish Candle) and red (when the candle closes or is trading below its open
or the Bearish Candle) colored candlesticks.

Op
en

This represents the first price bought of the timeframe of your candle. If the
succeeding transactions are higher than the open, then the candlestick will become
color green, but if the next trades after the open are below the open, then the
candlestick will turn red.

High Price

This shows the highest price traded during the period/timeframe of the candle. This is
represented by the upper wick/shadow. If ever there’s no wick/shadow, then the open
or close price is the highest price.

Low Price

This displays the lowest price traded during the period/timeframe of the candle. Same
as what you see in the high price, there should be a wick/shadow but in this case it’s
in the lower part of the candle. No wick/shadow means that the close price is the
lowest price.

Close

This is the last price sold or the last transaction of the timeframe of the candle. This
will ultimately determine the color of the candle. If the last traded price closes above
the open, then the candlestick should be color green. Meanwhile, if the last price
closes below the open, then the candlestick should be of red color. It is the most
important part of the candle as this determines whether the bulls (buyers) or bears
(sellers) won.

Wicks/Shadows

These are simply the lines that represents the high and the low price. The upper
wicks/shadows represent the high price whilst the lower wicks/shadows depict the low
price. Wicks can be long or short depending on volatility.

Range

This is the difference between the high and the low of the candlestick. The bigger the
range, the more volatile the candlestick traded during its timeframe as the buying
pressure battles with selling pressure. The smaller the range, the less volatile it was
(could also represent as consolidation). The formula to compute this is: Range = High
– Low.
Body

This is the color-filled section of the candlestick. The color of the body gives us the
clue as to where the course or the bias of the candlestick is headed (either upwards or
downwards). If a candlestick closed well above its high without lower and upper
wicks, you can expect that buying pressure will carry over somehow on the next
candle.

In InvestaChart, the open, high, low, and close is conspicuous. It can easily be seen on
the right side of the stock’s name just by pointing your mouse over a candlestick.

Here are a few examples of basic candlesticks. The following interpretations are
also indicated:
Some examples of candlestick patterns:

Bullish Engulfing

The candlestick pattern within the blue box in the middle of the chart is called a
“Bullish Engulfing”. A bullish engulfing is a two-candle bullish reversal pattern. It
happens when a candle’s body fully engulfs the body of the previous candle after a
declining trend. It tells you that there’s a high chance that selling is waning down and
that the buyers are now present. The next candles after the pattern shows that the
buyers were indeed present.
Evening Star

What you see here is the “Evening Star” bearish reversal pattern. It’s a three-candle
stick pattern that involves a prior uptrend. The first candle should be strong and
bullish, the middle shows weakness in the trend, while the third and last candle gaps
down, making strong selling pressure felt.
Harami

Another candlestick pattern is called “Harami” whereby the pattern will contain two
candles and the second candle is smaller than the first one. The smaller candle
(second) stays alongside the midriff of the larger candle (first). Note that only the
body needs to be inside the first candle, the wicks are irrelevant. Generally, the
Harami pattern is a sign of a changing trend and can either be bullish or bearish.

“Never invest in a business you cannot understand.” ~ Warren Buffett

There are plenty of other patterns you can trade out of candlestick formations. This
can help you get in and out of your trades with confidence and prudence. Combine
candlestick reading with learning how to draw support and resistances, reading trends,
use momentum indicators, screen stocks, utilize a few indicators, journaling, and risk
management, then you’ll be ready come up with your own trading system.
Afterwards, you should be ready to trade after doing proper back testing of your
setups or strategy.
Once you have trained your eyes on how to read candlesticks, charting will not be
such a mundane task as before. You’ll come to the market well prepared and ready to
face probabilities. And remember, always be responsible for the results of your
market-related decisions and do your own due diligence.

Candlestick Chart Patterns for trend reversals

Hammer Candlestick Pattern

A hammer is a kind of bullish reversal candlestick pattern, consists of only one candle, and
appears after a downtrend. The candle is similar to a hammer, simply because it has a long lower
wick and a short body at the top of the candlestick with almost no upper wick.

The Hammer pattern is created when the open, high, and close are such that the real body is
small. Also, you can find a long lower shadow, 2 times the length as the real body. It should look
just like a capital ‘T’. This signifies the possibility of a hammer candle. The real body can be
black (red in picture above) or white (green in picture above).

When you notice the hammer form in a downtrend, this is an indication of high potential reversal
in the market as the long lower wick signifies a period of trading in which the sellers were
initially in charge but yet the buyers were capable to reverse that control and drive prices back up
to close near the high for the day, as a consequence the short body at the top of the candle. After
noticing this chart pattern form in the market the majority of traders will watch for the next
period to open higher than the close of the previous period to make sure the buyers are actually
in control.

 How does a Hammer Pattern Form?

Hammer candlestick is formed when a stock moves notably lower than the opening price but
rallies in the day to close above or close to the opening price. The larger the lower shadow, the
more significant the candle becomes.
Hammer can be found on any specific time frame candlestick chart. The larger the time frame
chart, the more comprehensive the hammer candlestick is going to be, due to the more
participants involved.

The below chart of Emmbi Industries Ltd (EMMBI) shows a Hammer reversal pattern after
downtrend.

The Hammer is an extremely helpful candlestick pattern to help traders visually see where
support and demand is located. After a downtrend, the Hammer can signal to traders that the
downtrend could be over and that short positions could potentially be covered.
Inverted Hammer Candlestick Pattern
The inverted hammer is a type of candlestick pattern found after a downtrend and is usually
taken to be a trend-reversal signal. The inverted hammer looks like an upside-down version of
the hammer candlestick pattern, and when it appears in an uptrend is called a shooting star.

The pattern is made up of a candle with a small lower body and a long upper wick which is at
least two times as large as the short lower body. The body of the candle should be at the low end
of the trading range and there should be little or no lower wick in the candle.

The long upper wick of the candlestick pattern indicates that the buyers drove prices up at some
point during the period in which the candle was formed, but encountered selling pressure which
drove prices back down to close near to where they opened. When encountering an inverted
hammer, traders often check for a higher open and close on the next period to validate it as a
bullish signal.
Hanging Man Candlestick Pattern
The bearish version of the Hammer is the Hanging Man formation. A hanging man is a type of
bearish reversal pattern, made up of just one candle, found in an uptrend and can act as a warning
of a potential reversal downward.
The Hanging Man formation, similar to the Hammer, is formed when the open, high, and close
are such that the real body is small. Additionally, there is a long lower shadow, which should be
two times greater than the length of the real body. The Hanging Man patterns indicates trend
weakness, and indicates a bearish reversal. Hanging man patterns can be more easily
observed in intraday charts than daily charts. If this pattern is found at the end of a downtrend, it
is generally known as a “hammer“.
A hanging man can be of any color and it does not actually make a difference as long as it
qualifies ‘the shadow to real body’ ratio. In order for a candle to be a valid hanging man the
majority of traders claim the lower wick needs to be 2 times greater than the size of the body
portion of the candle, and the body of the candle needs to be at the upper end of the trading
range. Bearish Hanging Man candles form quite often so you want to use other indicators to
verify potential moves.

Hammer vs Hanging Man

A hanging man candle is similar to the “hammer” candle in its appearance. Their difference can
be found in what type of trend the candle follows. The color of the candlestick in either scenario
is of no consequence.

If the pattern appears in a chart with an upward trend implying a bearish reversal, it is called the
hanging man. If it appears in a downward trend indicating a bullish reversal, it is a hammer.

As Bruce Lee puts it, “I fear not the man who has practiced 10,000 kicks
once, but I fear the man who has practiced one kick 10,000 times.”
Traders say that the trend is your friend

The direction of the trend can be determined using

trend lines, moving averages, peak/trough analysis
or other aspects of technical analysis.
The length and duration will depend on individual
preferences. However, because candlesticks are
short-term in nature, it is usually best to consider the
last 1-4 weeks of price action.