The Japanese began using technical analysis to trade rice in the 17th century. This first version of technical analysis was different from the American version launched by Charles Dow around 1900, however, most of the main principles are similar:
Candlesticks appeared in the 1850s. Much of the development of candlesticks and charts is attributed to a rice trader from the city of Sakata named Homma. It is likely that his original ideas were modified and refined over time to finally become the candlestick system that we use today.
Compared with bar charts, candlestick charts are visually more attractive and easier to interpret. Candlesticks allow one to have a clear and quickly recognizable picture of price action. Traders can see and compare the relationship between the opening and closing prices as well as the highest and lowest prices of a given unit of time. In addition, the color of each candle allows one to see the buying or selling pressure.
Highs and lows are obvious, but candlesticks (and bar charts) do not reflect the sequence of events between the opening and closing.
A long white candlestick shows a rise in price during the session. However, it does not indicate the volatility of the session. The image on the left shows two possible sequences that form the same candlestick. The first sequence consists of two small movements and a sharp rise. The second sequence shows three quick movements that covers the entire candlestick. The first sequence is more optimistic, it shows strong pressure from buyers. The second sequence reflects more volatility and shows that there is some selling pressure. These are just two examples, there are hundreds of possible combinations that could result in the same candlestick.
In general, buying or selling pressure is stronger if the body of the candlestick is long. Conversely, small candlesticks reflect a consolidation of forex prices.
The long white candlesticks show strong buying pressure. They are generally optimistic, but this depends on their position within a broader technical configuration. And the opposite is true of long black candlesticks.
Long candlesticks are brothers of the Marubozu. Marubozus have no upper or lower shadows, the high and the low are represented by the opening and closing of the candlestick. A white Marzubozu indicates that buyers controlled price action from the first to the last transaction and vice versa for the bearish Marubozu (black).
Upper and lower candlestick shadows can provide valuable information regarding the trading session. Candlesticks with long upper shadows indicate that buyers dominated during the session but that sellers took over, pushing prices down. And the opposite is true for candlesticks with long lower shadows.
Candlesticks with a small body and long upper and lower shadows are called tops. The shadow represents a reversal and the body represents indecision. The small body shows little movement between the opening and closing of the candlestick and the shadows indicate that sellers and buyers were active during the session.
Dojis are candlesticks that provide important information. They form when the opening and closing price of the candlestick is nearly the same. A doji with an opening price equal to the closing price is considered to be more reliable. The length of the upper and lower shadows can vary and in the end, the candlestick looks either like a cross, an inverted cross or a + sign.
Alone, dojis are neutral models. Any bullish or bearish bias is based on prior price action and future confirmation. A doji that forms among other candlesticks with small bodies is not considered significant. A doji that forms among candlesticks with long bodies is more significant.
The Doji gives meaning to the conflict or indecision between buyers and sellers. The result is a stalemate.
The relevance of a doji depends on the preceding trend or preceding candlesticks. After a long white candlestick, the doji indicates that buying pressure is starting to weaken and the opposite is true with a long black candlestick followed by a doji. The doji indicates that the forces of supply and demand are becoming balanced and that a change in trend may occur.
Long-legged Dojis have upper and lower shadows that are almost equal in length.
They are a sign of great indecision and significant market volatility. This type of candlestick indicates that prices have varied well above and below the opening price and that they have closed at almost the same price.
The flying dragon is a doji that forms when the opening and closing prices and the high are the same and the candlestick's wick forms a long lower shadow. The candlestick looks like a "T". The flying dragon indicates that sellers dominated the trading session, but in the end, buyers pushed prices up to the opening price and the high of the session.
The flying dragon's trend reversal implications depend on the prior price action and future confirmation. The long lower shadow provides clear evidence of pressure from buyers, but the low indicates that many traders are still selling.
After a long downtrend, a long black candlestick or one that is near a significant support level, the flying dragon doji indicates a potential trend reversal to the upside.
After a long uptrend, a long white candlestick or one that is near a significant resistance level, the long lower shadow indicates a potential bearish reversal.
Bullish or bearish confirmation is required for both situations.
The tombstone-shaped doji is formed when the opening, low and closing prices are the same and the candlestick wick forms a long upper shadow. The candlestick looks like an upside-down "T". The tombstone indicates that buyers dominated the trading session, but in the end, sellers pushed prices back down to opening levels and the session low.
As with the flying dragon and other candlestick formations, the consequences of a reversal of the headstone depend on previous price action and future confirmation. Even though the long upper shadow indicates that bullish momentum failed, the high of the day is evidence that there is nevertheless buying pressure.
After a long downtrend, a long black candlestick or near a major support, the tombstone indicates a potential upward reversal of the trend.
After a long uptrend, a long white candlestick or near significant resistance, the long lower shadow indicates a potential bearish reversal.
Bearish or bullish confirmation is required in both cases.
Generally, candlesticks are effective in the short term, so it is preferable to consider the price action that was observed over a few weeks. For a pattern to be considered a trend reversal, there must be an opposite trend beforehand. The direction of the trend can be determined using trendlines, support/resistance levels, moving averages or other technical indicators. The length and duration of the trend depends on a trader's individual preferences.
A candlestick that opens after a gap is in a star position. Usually, but not always, the first candle has a large body, while the second one, which is in a star position, has a small body. The combination of the two candlesticks can be varied, with either white or black candlesticks. Candlesticks with small bodies such as Dojis, hammers, shooting stars and tops can all take on the star position. Later on, we will see examples of 2 and 3 candlesticks that take on the star position.
A candlestick is in a Harami position when it forms within the range of the body of the previous candlestick. The upper and lower shadows of the second candlestick don't necessarily need to be contained in the first, but it is better if they are. Dojis and tops have small bodies and can form in a Harami position.
The hammer and hanging man are similar in appearance but they have different implications with respect to the prior price action. Both candlesticks consist of a small black or white body, a long lower shadow and a short or nonexistent upper shadow. As with most candlestick formations, the hammer and the hanging man require confirmation of price action before any action is taken.
The hammer is formed in a downtrend. It indicates a potential reversal of the trend or the trough of a wave in an uptrend or a downtrend. The price action that follows must confirm the trend reversal, and an increase in volume reinforces the validity of this reversal.
The hanging man is a bearish reversal pattern that can also mark the summit of a wave in an uptrend or a downtrend. The hanging man is formed after a rise, it demonstrates that the pressure of sellers is increasing. As with the hammer, a hanging man requires confirmation before action is taken.
The inverted hammer and the shooting star have different implications in terms of prior price action. Both candlesticks consist of a small white or black body, a long upper shadow and a small or nonexistent lower shadow. These candlesticks suggest a potential trend reversal, but this requires confirmation before action is taken.
The shooting star is a bearish reversal pattern that forms in the star position after prices have risen. The shooting star marks a potential trend reversal or a resistance level. The candlestick forms after a gap (the opening of the candlestick is higher than the close of the previous candlestick). The candlestick is made of a long upper shadow (at least two times larger than the body) and a small black or white body. Confirmation is required after the shooting star; it can take the form of a bearish gap or a long black candlestick with high volume.
The inverted hammer looks like a shooting star, but it forms after prices have decreased. The inverted hammer marks a potential trend reversal or a support level. Bullish confirmation is required before action is taken, it can take the form of a bullish gap or a long white candlestick with high volume.
The merging of two or more candlesticks forms a new candle. This mixed candlestick is formed with the opening of the first candlestick, the end of the last candlestick and the range (high / low) of the candlesticks.
Penetrating pattern = hammer ![]() | Bullish engulfing = hammer ![]() |
Dark cloud cover ![]() | Bearish engulfing ![]() |
Three white soldiers ![]() |
Three black crows ![]() |