A candlestick pattern is a visual representation of price movement within a specific time period, used in technical analysis to identify potential trend reversals or continuation signals. Each candlestick consists of a body (showing opening and closing prices) and wicks or shadows (showing the high and low prices reached during the period).
How Candlestick Patterns Work
Traders analyze the shape and size of candlesticks to interpret market sentiment. A large body with small wicks suggests strong momentum and agreement between buyers and sellers. A small body with long wicks indicates indecision and a potential shift in trend. The color (green or red) shows whether price closed higher or lower than it opened.
Common Reversal Patterns
The Doji pattern has an open and close at nearly the same price, signaling market uncertainty. A Hammer—a small body with a long lower wick—often appears after downtrends and suggests bullish reversal. The Engulfing pattern occurs when one candlestick completely covers the previous one, indicating a change in momentum. Three-candle patterns like Morning Star and Evening Star signal broader reversals across multiple periods.
Limitations and Best Practices
Candlestick patterns alone produce false signals frequently, especially in choppy or ranging markets. Professional traders combine pattern analysis with other technical indicators like moving averages or RSI, and always apply risk management to avoid overcommitting to a single signal.
