Candlestick patterns are shapes formed by one or several candles on a price chart, and traders read them as clues about who is stronger at that moment, buyers or sellers. A candle shows four prices for a period of time: where the price opened, where it closed, and the highest and lowest points it reached. Learning to read candles is a useful first step in chart reading, but the patterns are hints about behaviour, not predictions, and the evidence that they work on their own is weak.
In brief
- A candlestick shows the open, high, low and close of one period, such as a minute, a day or a week, in a single shape.
- The thick part (the body) shows how far the price moved between open and close, and the thin lines (the wicks) show the extremes it touched.
- Named patterns such as the doji, the hammer and the engulfing pattern describe how buying and selling pressure changed, and they are most useful together with the trend, the key price levels and volume.
- Academic tests of candlestick signals on stocks found no reliable ability to predict prices, so a pattern is a reason to look closer, not a reason to trade.
In this article · 11 min read
- Candlestick patterns: what a candle shows
- How to read a single candle
- Common candlestick patterns
- Do candlestick patterns work? What the evidence says
- Candlestick patterns and crypto
- Advantages and limits
- Where this fits: reading charts and automating rules
- How to start, step by step
- Checklist before acting on a pattern
- Who it is for
- Key terms
- Frequently asked questions
- Sources
Candlestick patterns: what a candle shows
A candlestick chart draws one candle for each time period you choose. Kraken's learning centre, in its guide to candlestick charts, explains that each candle shows the open, close, high and low, and that the period can be set from one minute up to one year. The body is the rectangle between the open and the close. The wicks (also called shadows) are the thin lines above and below it, and they mark the highest and lowest price reached in that period.
Colour tells you the direction. On most platforms a green candle closed above its open (a rise) and a red candle closed below its open (a fall). Some platforms use white and black, or let you swap the colours, so check the legend of your own chart. The size of the candle matters too: a long body means a large move in that period, and a short body means the price ended near where it started.
According to John Bax, in Lazy Investor, Smart Investor (see the book on Amazon), Japanese candlesticks were developed centuries ago by Japanese rice traders and are still one of the most widely used tools of technical analysis, meaning the study of past prices and volumes to judge what might come next. He lists them among the five essential concepts of the field, together with support, resistance, trendlines and moving averages.
How to read a single candle
- Choose the timeframe. One candle can be one minute, one hour or one day. Kraken ranks monthly and weekly candles as more important than daily, hourly and minute candles, so the same shape on a weekly chart carries more weight than on a 15-minute chart.
- Read the body. A long green body suggests that buyers dominated the period. A long red body suggests that sellers did. A very short body means neither side gained much ground.
- Read the wicks. A long upper wick means the price went up but was pushed back down before the close. A long lower wick means the price fell but buyers brought it back up. Long wicks show a fight that one side did not win cleanly.
- Check the context. The same shape means different things after a long rise, after a long fall, or in a sideways market. Many traders also look at volume, the quantity traded, to see how much conviction stood behind the move.
Common candlestick patterns
Patterns are named combinations of candles. These are the ones beginners meet first. Treat the descriptions as vocabulary, not as signals.
| Pattern | What it looks like | What traders read into it |
|---|---|---|
| Doji | Open and close almost equal, so a very thin body, often with wicks on both sides | Indecision: neither buyers nor sellers won the period |
| Hammer | Small body near the top and a long lower wick, seen after a fall | Sellers pushed the price down, then buyers pushed it back: a possible turn upward |
| Shooting star | Small body near the bottom and a long upper wick, seen after a rise | Buyers pushed the price up, then sellers pushed it back: a possible turn downward |
| Bullish engulfing | A green candle whose body covers the body of the previous red candle | Buyers took control after a fall |
| Bearish engulfing | A red candle whose body covers the body of the previous green candle | Sellers took control after a rise |
Notice the words "possible" and "after a fall". A hammer in the middle of a sideways market says very little. A hammer that appears at a price level where the price has bounced before says more. That is why candles are usually read together with support and resistance, price levels where the price has often paused or turned, and with the trend. Our article on stop loss and take profit shows how traders use such levels to decide where a trade is wrong.
Do candlestick patterns work? What the evidence says
The honest answer is: not reliably on their own. Ben Marshall, Martin Young and Lawrence Rose published a test of candlestick strategies in the Journal of Banking & Finance in 2006, listed in EconPapers. The same authors' related paper, "Market Timing with Candlestick Technical Analysis", is summarised by CXO Advisory on 18 April 2007. They tested 28 candlestick signals on the stocks of the Dow Jones Industrial Average between 1992 and 2002, with a ten-day holding period. After bullish single-day signals, returns were positive less than half the time, and a statistical method called bootstrapping, which does not assume that returns follow a bell curve, found no evidence that any of the signals predicted stock price movements.
Crypto has been studied less. A 2021 paper in the Review of Quantitative Finance and Accounting, "Optimizing candlesticks patterns for Bitcoin's trading systems", tested candlestick rules in automated trading systems on Bitcoin. Its existence shows that researchers take the question seriously, but one paper is not a rule, and a pattern that worked in a past sample can stop working.
Short-term trading itself is hard for most people. In a press release dated 27 March 2018, the European Securities and Markets Authority (ESMA) reported that between 74% and 89% of retail accounts typically lose money on contracts for difference (CFDs), leveraged products. CFDs are not the same as buying crypto on a spot market, but the figure is a reminder of how often people lose when they trade often on short-term signals.
In our experience, the readers who get the most out of candles are those who use them to describe what is happening, for example "buyers failed twice at this level", and not to predict the next candle.
What is a candlestick chart? Basics of technical analysis (CA Rachana Ranade) (in English)
Candlestick patterns and crypto
Crypto trades around the clock, so a daily candle in crypto covers 24 hours instead of one market session, and there are no overnight gaps in the usual sense. Liquidity also varies widely. John Bax makes this point in Lazy Investor, Smart Investor: large coins such as Bitcoin and Ethereum, with high trading volumes, tend to produce more consistent price patterns, which makes technical analysis more meaningful, while small, thinly traded altcoins move erratically and chart reading tells little about them. For those, he points to a different approach based on blockchain data, which he calls on-chain analysis.
John Bax's view
For John Bax, chart reading is a tool for the assets where it can say something, and the more liquid the market, the more a pattern has to say. That is a useful filter: before you read a candle, ask whether enough people trade this asset for its chart to mean anything.
Advantages and limits
What candles do well
- Four prices in one shape. You see the open, close, high and low at a glance.
- A picture of the fight. Long wicks and bodies show how strongly each side pushed.
- A common language. Most charting platforms and exchanges use them, so you can discuss a chart with others.
Where they fall short
- Subjectivity. Two people can read the same candle differently, and a pattern can be drawn after the fact.
- False signals. Many patterns are followed by nothing, or by the opposite move.
- Noise on short timeframes. One-minute candles are more random than weekly ones.
- Risk. Trading on a pattern without a plan can lose money quickly, especially with leverage, which multiplies losses as well as gains.
Where this fits: reading charts and automating rules
If you want to test whether a pattern would have worked, write it as a rule and check it on past data, as we explain in our article on backtesting a trading strategy. A rule such as "a hammer at this level, with the stop loss below the wick" can be tested, while "it looks like a bottom" cannot. Our article on risk management in trading covers how much to risk when a pattern turns out wrong, and swing trading shows how some traders use daily and weekly candles.
Our guide to the crypto trading bot explains how automated trading works. Crypto Go Bot, which we built, trades your own Kraken account with rules decided in advance, so it does not depend on a person reading a chart in the moment. Trading always carries risk, and past results do not guarantee future ones.
How to start, step by step
- Open a chart on your exchange or on a charting site and set it to candles.
- Start with the daily timeframe. It has less noise than the minute charts.
- Describe, do not predict. For each of the last 20 candles, write one line: who won the period, and where the wicks point.
- Mark a few price levels where the price turned before, then see which candles formed there.
- Look up one pattern at a time (doji, hammer, engulfing) and find three examples on your chart. Note what followed each one.
- Test before risking money. Write a rule, check it on past data and, if you go further, use a small amount you can afford to lose.
Checklist before acting on a pattern
- I know the timeframe and whether the legend says green means up.
- I have looked at the trend and at the nearby price levels, not only at the candle.
- I know where the idea is wrong (my stop loss) before I enter.
- I am not using leverage I do not understand.
- The amount is one I can afford to lose, because crypto is volatile and past results do not guarantee future ones.
Who it is for
Reading candles helps anyone who looks at price charts, in different ways.
- Beginner opening a chart for the first time: learning the anatomy of a candle makes any chart readable, as long as you treat patterns as vocabulary and not as promises.
- Long-term holder who buys in instalments: candles on weekly charts can show where the price has paused, which helps you stay calm, provided you do not turn it into frequent trading.
- Active trader who plans entries and exits: candles at key levels help to place stops and targets, with a written plan and a limit on how much to risk.
- User of an automated tool: knowing what a candle shows helps you read what your tool does, even if you never trade by hand.
Key terms
- Candlestick: a shape that shows the open, high, low and close of one period.
- Body: the rectangle between the open and the close of a candle.
- Wick (shadow): the thin line above or below the body, marking the highest or lowest price of the period.
- Doji: a candle whose open and close are almost the same, a sign of indecision.
- Engulfing pattern: two candles in which the body of the second covers the body of the first.
- Timeframe: the length of time one candle covers, such as one hour or one day.
Frequently asked questions
What are candlestick patterns?
They are shapes made by one or more candles on a price chart, such as the doji, the hammer or the engulfing pattern. Traders read them as hints of whether buyers or sellers were stronger in a period.
How do you read a candlestick chart?
Choose a timeframe, then look at each candle's body to see the direction and size of the move, and at its wicks to see the extremes. Add the trend and key price levels before drawing any conclusion.
What do green and red candles mean?
On most platforms a green candle closed above its open and a red candle closed below it. Some platforms use other colours, so check the legend of your chart.
Which candlestick pattern is the most reliable?
None is reliable on its own. A study of 28 signals on Dow Jones stocks between 1992 and 2002 found no evidence that they predicted price movements, so patterns work best as one input among several.
Do candlestick patterns work in crypto?
Sometimes a pattern describes what happened, but there is no guarantee it predicts what comes next. Patterns tend to say more on liquid coins such as Bitcoin and Ethereum than on thinly traded altcoins.
Which timeframe should a beginner use?
The daily chart is a good start because it has less noise than minute charts. Longer timeframes such as the weekly carry more weight than shorter ones.
Can I automate a candlestick strategy?
Yes, if the pattern can be written as a precise rule with an entry, a stop loss and a size. Test it on past data first, and remember that past results do not guarantee future ones.
Sources
- Kraken Learn, What are candlestick charts?
- Marshall, Young and Rose, Candlestick technical trading strategies: Can they create value for investors?, Journal of Banking & Finance, 2006
- CXO Advisory, Candlesticks? Fiddlesticks!, 18 April 2007
- Cohen, Optimizing candlesticks patterns for Bitcoin's trading systems, Review of Quantitative Finance and Accounting, 11 March 2021
- ESMA, ESMA agrees to prohibit binary options and restrict CFDs to protect retail investors, 27 March 2018
- Wikipedia, Candlestick pattern
