What is a candlestick in trading?

What is a candlestick?

A candlestick is a visual representation of price movement over a given time period, whether one minute, one hour, one day or any other interval. Each candlestick shows four pieces of information: the opening price, the closing price, and the highest and lowest prices reached during the period. This makes it significantly more informative than a simple line chart, which shows only the closing price.

Candlestick charts originated in Japan in the 18th century, where rice trader Munehisa Homma developed the technique to track rice futures prices. They became the dominant chart type in Western financial markets from the early 1990s following Steve Nison's publication of 'Japanese Candlestick Charting Techniques'. Today virtually every trading platform, including ours, uses candlestick charts as the default display.

Candlestick chart: key facts

How to read a candlestick

Each candlestick has three components: the body, the upper wick (or shadow) and the lower wick.

A large body relative to the wicks indicates strong directional momentum: buyers or sellers were in control throughout the period with little counter-movement. Small bodies with large wicks indicate indecision: price moved significantly in both directions but ended close to where it started. This is the visual language that traders use to interpret market sentiment alongside client sentiment data.

Key candlestick patterns

Traders watch for recurring candlestick formations that have historically preceded directional moves. These are divided into reversal patterns and continuation patterns.

1. Bullish reversal patterns

• Hammer: a small body at the top of the candle with a long lower wick, indicating that sellers pushed the price down during the period but buyers recovered it strongly. It appears at the bottom of downtrends and signals potential reversal.
• Bullish engulfing: a large green candle whose body completely engulfs the previous red candle. It indicates that buying pressure has overwhelmed selling pressure and suggests a possible upward reversal.
• Morning star: a three-candle pattern: a large red candle, followed by a small-bodied 'star' candle (indicating indecision), followed by a large green candle. It signals a transition from bearish to bullish momentum.

2. Bearish reversal patterns

• Shooting star: a small body at the bottom of the candle with a long upper wick. It appears at the top of uptrends and signals that buyers drove the price up during the period but sellers pushed it back down. Often treated as a short-entry signal.
• Bearish engulfing: a large red candle that completely engulfs the previous green candle, indicating a decisive shift from buying to selling pressure.
• Evening star: the bearish mirror of the morning star; a three-candle pattern that signals a transition from bullish to bearish momentum at a market top.

3. Neutral and continuation patterns

• Doji: the open and close are at the same level (or very close), creating a cross shape. It signals indecision and is watched closely when it appears after a strong trend.
• Spinning top: a small body with upper and lower wicks of roughly equal length, indicating balance between buyers and sellers. Context from the surrounding trend determines significance.

Candlestick patterns are most effective when combined with other forms of analysis. The trading hours of the underlying market matter significantly: patterns forming at the open or close of a session, when volume is typically highest, carry more weight than those forming during quiet mid-session periods. For commodity traders, understanding silver trading hours and similar session dynamics helps contextualise the significance of candlestick signals across different markets.

Candlestick charts in different markets

Candlestick analysis works across equities, forex, commodities and indices. Some nuances apply by market. In forex, where trading is near-continuous, session boundaries create natural reference points for daily and weekly candles. In commodity markets, key release times, such as the Wednesday EIA crude oil inventory report, frequently trigger candlestick patterns around the moment of publication that traders watch closely. For commodities trading in particular, overnight gaps between session closes and opens can produce candlestick gaps that are themselves tradeable signals.

Candlestick chart FAQs