What Is Candlestick Chart?
Candlestick charts display a stock's open, high, low, and close prices for each period. Green (or white) candles close higher; red (or black) candles close lower.
Definition
A candlestick represents a single time period (1 minute, 1 day, 1 week, etc.) showing four data points: Open, High, Low, Close (OHLC). The rectangular body shows the open-to-close range. The thin lines (wicks or shadows) show the high and low extremes. A green/white candle closed higher than it opened; a red/black candle closed lower.
Candlestick patterns are formations that traders believe predict future price moves. Single-candle patterns: doji (open = close, indecision), hammer (long lower wick = buyers rejected lower prices), shooting star (long upper wick = sellers rejected higher prices). Multi-candle patterns include engulfing, harami, and morning/evening star.
Japanese candlestick charting was developed in 18th-century Japan for rice trading, introduced to Western audiences by Steve Nison. While individual candle patterns are subjective, they provide a visual shorthand for market psychology — who won the battle between buyers and sellers in each period.
Real-World Example
You see a stock that's been declining form a doji candle at a major support level, followed by a large green engulfing candle the next day. This 'bullish engulfing' pattern at support (combined with oversold RSI) is a high-probability reversal signal for a swing trader to go long with a stop below the doji low.
Why It Matters
Candlestick charts are the default chart type for most traders worldwide — they provide more information per period than bar or line charts, and the patterns encode centuries of market psychology into visual signals.
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Frequently Asked Questions
What is a doji candlestick?
A doji forms when the open and close prices are nearly equal, creating a cross or plus-sign shape. It represents indecision — neither buyers nor sellers won the period. Doji candles near support or resistance are particularly significant, suggesting the current trend may be losing momentum.
What is a hammer candlestick?
A hammer has a small body at the top and a long lower wick (at least 2x the body). It forms at the bottom of a downtrend, signaling that sellers drove price down but buyers pushed it back up before the close. It's a bullish reversal signal, especially at support.
Are candlestick patterns reliable?
Candlestick patterns have mixed reliability in isolation. They work best when: at key support/resistance levels, confirmed by volume, aligned with the larger trend, and combined with other indicators. Single patterns without context have only marginally better odds than random.
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