Candlestick CheatSheet – all you need to know about candlesticks

Candlestick patterns are some of the most used and visually appealing tools in technical chart analysis. If you have traded financial markets, you know their importance in helping us to make precise trend predictions. There are almost 75 candlestick patterns that you can observe on the technical charts to determine better entry and exit points on the market. Normally, you cannot know all of them by heart. It is important to know the main types and how to read them properly. In this article, we give you a Japanese candlestick cheatsheet to refer to any time you want to use candlesticks in your trading strategy.

Candlestick Cheatsheet – Candlestick patterns ultimate guide

What is a candlestick pattern?

Candlestick chart patterns are a kind of chart for tracking the prices of financial assets. They originated in the rice trade in Japan. Some traders find them more visually attractive than standard bar charts, and price action is easier to read.

Their name comes from their rectangular shape. And the lines at each end look like a candle with wicks. Candlestick patterns generally represent one day of price data. They are grouped into recognizable formations that traders can use to make buy and sell decisions.

Candlestick patterns can be used to predict price movements, analyze the psychology behind market participants, gauge market sentiment (bullish, bearish, indecisive), and confirm a trade setup based on other technical tools. They help determine gaps, support and resistance levels. 

The basic candlestick formation

The candle consists of a rectangular body and two lines (called wicks or shadows) located at the top and bottom. It can be of different colours. To read a candlestick chart, these different elements must be taken into account.

A black or red candlestick indicates a bearish session (the closing price of which is lower than the open price), while a candle with a green or white body indicates a bullish session (the closing price of which is higher than the opening price). Thus, a succession of green candles expresses an upward trend, while a succession of red candles indicates a bearish trend.

The two sides at the top and bottom of the rectangle indicate the opening and closing prices. If it is a red or black (bearish) candle, the open price is at the top. For green or white (rising) candles, the open price is at the bottom. A very long body indicates a big difference between the price at the opening and closing of the session.

Highlights or shadows indicate the minima and maxima reached during the session, i.e. the price variation during the day. A very long shadow on both sides indicates a strong upward or downward variation from the opening and closing prices.

Now, let’s see what the main types of Japanese candlestick patterns you need to know are.

Reversal Candlestick pattern vs Continuation Candlestick pattern

Besides the two main categories, bearish and bullish, we have reversal and continuation candlestick patterns. Further below, we discuss bearish and bullish reversals. But what exactly is a reversal candlestick? 

A reversal candle pattern is a formation of Japanese candlesticks arranged in such a way as to indicate the end of an existing trend in favor of an opposing one. The Head & Shoulders is one of the most used reversal patterns.

And the continuation pattern? It’s a candlestick that shows the price trend will continue. Two main types of continuation patterns are 

Bullish Reversal Candlestick Patterns

Japanese candlesticks form patterns with imaginative names like an abandoned baby, a morning star, a hammer, and three white soldiers, to name just a few. Candlesticks form over a time frame of one to three weeks. They represent important information about the future direction of an asset’s price. Before looking at individual candlestick uptrends, it is worth noting the following principles:

Bullish trend reversals should form as part of a downtrend. Otherwise, it is not an uptrend but a continuation trend.

Bullish reversal needs trend confirmation. They must be accompanied by an upward price movement which can take the form of a long candlestick bottom or an upward gap and be followed by high trading volumes. You should observe this confirmation for three days at least.

The bullish trend reversal can be confirmed by other traditional means of technical analysis – trend lines, oscillators, volume indicators, and momentum – to confirm buying pressure. There are a large number of candlestick patterns pointing out a buying opportunity.

Some of the most used bullish candlesticks are:

• Morning star. A 3-candle pattern.
• Morning doji star. A 3-candle pattern.
• Piercing line. A 2-candle pattern.
• Bullish harami. A 2-candle pattern.
• Bullish harami cross. A 2-candle pattern
• Three white soldiers. A 3-candle pattern.
• Evening star. A 3-candle pattern.
• Evening doji star.

Bearish Reversal Candlestick Pattern

Analyzing charts with bearish candlestick patterns can indicate the potential for a turnaround in an upward trend or a continuation of a downward trend. Depending on the pattern, this may involve one or multiple candles in a row.

Here are some of the most popular bearish candlestick patterns:

• Hanging Man
• Gravestone Doji
• Bearish Spinning Top
• Bearish Kicker
• Evening Star
• Bearish Engulfing
• Bearish Abandoned Baby
• Three Black Crows
• Evening Doji Star
• Evening Star

Candlestick patterns that are bearish indicate that buyers have not been successful in driving the price up, and sellers have taken control of the market for the period being viewed. This is a sign of a downward trend, which must be validated with a decrease in price after the pattern is formed.

Candlestick CheatSheet – the basic rules of reading

• Analyze the appearance of a candlestick in a price trend that precedes it. For example, a reversal candlestick will not have the same impact in an uptrend or a downtrend as in a congested market.

• Always wait for confirmation during the next session. For example, the appearance of a reversal candlestick in a bullish movement announces that a change in trend is about to appear. The next session may therefore be bullish or bearish. This course is a synthetic summary, classifying Japanese candlesticks into two broad patterns. Those of reversal and those of continuation. They have been broken down into categories I and II. They correspond to their degree of importance. So you must know the candlesticks of category I perfectly, those of category II being of less interest.

• For each configuration, you can have further explanations by clicking on the figure. However, if the diagram is sufficient for understanding and no additional element is of any help to you, you will not have any link for more in-depth detail.

Once again, the criteria of choice help in the definition of the candlesticks, but these are not rigid and can be interpreted differently according to the aspirations of each one.

How to read a single candlestick chart pattern

The candles signify one day of stock cost data for four details: open cost, close cost, high cost, and low cost. The colour of the middle rectangle (known as the real body) can help investors decide if the opening or closing cost is greater. If the candlestick is black or filled, it means the closing price for that period was lower than the opening price; this is seen as bearish and shows selling pressure. 

A white or trough candlestick is indicative of a positive trend, as the closing price is higher than the opening price, indicating buying pressure. The shadows, or the lines at either end, display the range of the stock’s price for the day, from the highest to the lowest. The upper shadow indicates the highest price for the day, while the lower shadow reveals the lowest.

Identification of supports and resistances

Supports and resistances are levels in the price where a change in trend occurs. Japanese candlesticks are used to identify these elements through chart analysis. Indeed, over a long period, the price of candles forms curves, and the tops of these curves represent supports and resistances. These can therefore be used to anticipate future prices and help in the decision to buy or sell.

Identification of a gap

The gap is easily identifiable because it is represented by a hole in the middle of a series of candlesticks. The gap represents a trading interruption, and the bearish gap, in particular, can serve as a buy indicator if it is in an uptrend. Reminder on the “Gap”: this is a gap between the highest price (candlestick 1) and the lowest price (candlestick 2).

The candlesticks should be a decision aid and are in no way attached to rigid rules. They thus form valuable indications when coupled with trend change indicators. For example, the reversal of a stochastic down following the appearance of a hanged man in large volumes.

Candlestick CheatSheet – In Conclusion

We hope the candlestick cheatsheet helped you to grasp the concept of Japanese candles in trading. They are very important tools for determining entry and exit points. We recommend getting to know the main bearish and bullish candlesticks for a start and gradually start using other dojis. In general, several of them would be enough in your everyday trading practice.