Explaining Candlestick Charts For Newbies

Whats the first thing that comes to your mind when you think of crypto, stocks or forex？ 

Well, besides rich men in suits, we can bet that you think of charts. 

You know, those red and green rectangular shapes that seem cryptic. Well, not anymore.

Because in this blog post, well be breaking down the components of a candlestick chart, what different patterns could indicate and how you can use them to your advantage. 

But first, lets do a little background check.

The origin of candlestick charts

Candlestick charts have a rich history, dating back to over 100 years in Japan. This unique method of tracking market trends was developed by Homma, who realized that the rice market was heavily influenced by the emotions of traders. 

Taking inspiration from this realization, he created a visual representation of price movements in the form of candlestick charts that we know today.

The components of a candlestick chart

The candlestick chart includes four important price points within a specified time frame also known as a session. 

• The Open Price

• The Close Price

• High Price

• Low Price



Moreover, mainly two colors are used. One color represents the buyers sentiment (green) while the other represents the sellers sentiment (red). 

If a candle is green, it means the buyers were in control of the market in a specific session thus driving the price of the asset up. 

If a candle is red, it means the sellers were in control of the market in a specific session thus driving the value of the asset down. 

The real body of a daily candlestick chart represents the price range between the open and close of that day's trading. 

When the real body is filled in, it means the close was lower than the open. In other words, the price went lower.

An empty real body on the other hand indicates the close was higher. In other words, the price of the asset went higher. 

A body also has a line sticking out of it that stretches out from both ends (North and south) These are known as wicks. 

The wicks display the highest and lowest price points of that sessions trading. 

Overall, the relationship between the day's open, high, low, and close determines the appearance of the candlestick.



Candlestick charts are more visually appealing compared to bar charts, as the color coding and thick real bodies effectively highlight the difference between the open and close. 

While both types of charts provide the same information, some traders prefer the clarity of bar charts, while others prefer the visual appeal of candlestick charts.

What do candlestick charts indicate？ (Bullish vs Bearish)

In addition to being visually appealing, candlestick charts also provide valuable information to traders through patterns that can be formed by price movements. 

These patterns can indicate a potential rise or fall in prices, and are categorized as either bullish or bearish. 

A bullish trend is characterized by a rise in prices, and is often associated with optimism about the performance of a particular stock or the overall market. 

Investors who are bullish on a stock tend to believe that prices will continue to rise and are more likely to buy into the market with the hopes of making a profit.

On the other hand, a bearish trend is characterized by a decline in prices, and is often associated with pessimism about the performance of a stock or the overall market. 

Investors who are bearish on a stock or market tend to believe that prices will continue to fall and may be more likely to sell their holdings in the hopes of avoiding further losses.

In technical analysis, bullish patterns refer to chart patterns that indicate the possibility of a stock price increasing in the future, while bearish patterns indicate the possibility of a stock price decreasing in the future. 

These patterns are used by traders and investors to help make investment decisions. Examples of bullish chart patterns include the “Bullish Engulfing pattern,” while examples of bearish chart patterns include the “Bearish Harami” among others. Well discuss them in more detail below. 

Common Candlestick patterns to watch out for

• Bearish Engulfing Pattern



The Bearish Engulfing Pattern is a technical analysis pattern that signals a potential trend reversal from bullish to bearish. This pattern occurs when a small bullish candle is followed by a large bearish candle that completely “engulfs” the previous candle. 

This is seen as a strong bearish signal, as it shows that during the time frame of the bullish candle, the buying pressure was weak, and the selling pressure was strong enough to overwhelm and reverse the trend.

The Bearish Engulfing Pattern is a popular pattern among traders, as it can be used to enter short positions or to exit long positions. It‘s important to note that this pattern should be used in conjunction with other technical analysis tools and shouldn’t be solely relied upon to make trading decisions.

• Bullish Engulfing Pattern



The Bullish Engulfing Pattern is a candlestick formation that signals a potential trend reversal to the upside. It is characterized by a small red candlestick followed by a larger green candlestick, with the latter completely “engulfing” the former.

In a downtrend, the appearance of a Bullish Engulfing Pattern suggests that the bears have lost control and that the bulls are now in control, pushing prices higher. It is a strong signal of bullish sentiment and can be used as a buying opportunity.

• Bearish Evening Star



The Bearish Evening Star is a bearish reversal candlestick pattern thats used by technical analysts to predict a potential price reversal to the downside. This pattern is comprised of three main candles and is formed at the top of an uptrend.

In the Bearish Evening Star, the first candle is a bullish candle that confirms the market is in an uptrend and backed by bullish momentum. The second candle is a small-bodied candle that occurs at the swing high, indicating indecision in the market. And the final candle is a bearish candle that signals the potential change in momentum and a reversal to the downside.

• Bearish Harami



The Bearish Harami is a bearish reversal pattern signaling a negative trend reversal in the stock market. This pattern is composed of two candles, where the first candle is bullish and the second candle is bearish, with its body confined within the range of the previous candle. The Bearish Harami is usually seen at the top of an uptrend.

In technical analysis, stock market trends are calculated using a number of methods, and the Bearish Harami is one of the many indicators used to determine the likelihood of a stock experiencing a bearish momentum following a period of bullish movement.

• Bullish Harami



The Bullish Harami is a bullish reversal pattern that is indicated by a small increase in price. It's a two-candle formation on a candlestick chart and is used to signal a possible trend reversal from bearish to bullish. 

The first candle is bearish, and the second one is bullish, with the latter's body being confined within the range of the previous candle. This pattern is considered significant when it appears after a downtrend and when the market is oversold and likely to bounce back. 

It's important to note that the Bullish Harami shouldnt be traded in isolation but instead should be used in combination with other indicators and technical analysis tools.

• Bearish Harami Cross



The Bearish Harami Cross is a Japanese candlestick pattern used in securities trading to signal a potential bearish trend reversal. 

This pattern consists of two elements: a large green candle on the first day followed by a doji. The large green candle completely engulfs the doji and it occurs in a prevailing uptrend, making it even more significant than a regular Bearish Harami.

Usually, a Bearish harami cross is formed when a large candlestick moves in the direction of the trend, followed by a small doji candlestick.

Harami Cross is a bearish trend reversal pattern, which means that its used to indicate that the value of a stock is likely to experience a downwards, or bearish, momentum following a period of upward, bullish movement.

Traders and investors can use the Bearish Harami Cross pattern to make informed trading decisions. If a trader is entering a short position, they can place a stop-loss above the original candlestick.

• Bullish Harami Cross



The Bullish Harami Cross is a bullish reversal pattern that can be observed in security trading. It is made up of a large down candle followed by a doji and occurs during a downtrend. This pattern is confirmed by an upward price move that takes place after its formation.

In order to make the most out of this pattern, traders will typically place a stop-loss below the low of the original large candlestick, in case their prediction of a reversal does not come to fruition.

• Bullish Rising Three



The Bullish Rising Three is a bullish continuation candlestick pattern that occurs in an uptrend, signifying the resumption of an upward trend. 

Its a five-candle pattern that starts with a long and green bullish candle, followed by three short red bearish candles with bodies inside the range of the first candle. 

The last candle is again a long and green candle that closes above the close of the first candle.

Normally, if you see prices falling, youd think the asset will keep on going down but instead, the 5th candle again records a rise. 

Before you invest..

It‘s important to note that no pattern is a proven predictor of market momentum. Just because you’ve identified and invested in a pattern by the book, it still doesn‘t guarantee 100% profits because there are external factors affecting the market as well. It’s best to do your own research before making any investment decision.  

Furthermore, you should also ensure investing in a platform that's reputable and holds valid licenses. 

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