Candlestick Charts

Can you even imagine executing 100 consecutive winning trades? Well, believe it or not, that's exactly what Munehisa Honma achieved back in the 1700s, using candlestick charting to predict the prices for rice! Suffice to say, it allowed him to amass a fortune.

I prefer using candlestick charts because of their ability to not only depict the price action of the underlying security or index, but also the emotional context in which it is taking place. Below are a few examples of typical candlestick charts. This is by no means an exhaustive list, as the use of candlestick chart patterns techniques is a study in itself.

Candlestick charts have individual lines that look like candles, hence their name. Candlestick lines consist of a rectangular "real body," which defines the closing and opening prices for the session. When the close is higher than the open, the real body is white. A black real body forms when the close is lower than the opening.


The thin lines above and below the real body are called "shadows." They represent the extreme highs and lows of the session. The bottom of the lower shadow underneath the real body is the low of the session. The top of the upper shadow is the high of the session.

The use of candlestick charts in finding top stock picks is subjective and depends upon their context. For example, whether they are appearing during an uptrend or downtrend, whether there are other candlesticks confirming their validity, whether they occur near areas of price support or resistance, etc.

One Candlestick Chart Patterns

The simplest form of candlesticks are called "umbrella lines." They are the simplest lines because they do not necessarily have to be spotted in combination with other candles to have some validity. Their shadows should be at least twice the length of their real bodies and their real bodies should be small. The two forms of umbrella lines are the "hanging man" and the "hammer."


The hanging man appears during an uptrend, and its real body can be either black or white. While it signifies a potential top reversal, it requires confirmation during the next trading session. The hanging man usually has little or no upper shadow.


The hammer appears during a downtrend, and can be either black or white. It signifies a potential bottom reversal and, like the hanging man, has little, if any, upper shadow.

Other candlesticks similar to the hanging man and hammer are the "shooting star," and the "inverted hammer." Both have small real bodies and can be either black or white but they both have long upper shadows, and have very little or no lower shadows.


The shooting star is a bearish candle and appears in an uptrend.


The inverted hammer is a bullish candle and appears in a downtrend.

Two Candlestick Chart Patterns

"Engulfing patterns" are two-candle chart patterns which are either bullish or bearish, depending upon whether they occur during an uptrend or downtrend.


A "bullish engulfing pattern" signifies that the buyers are overwhelming the sellers, and consists of a large white real body that engulfs a small black real body during a downtrend.

A "bearish engulfing pattern," on the other hand, occurs when the sellers are overwhelming the buyers. It consists of a long black body real body engulfing a small white real body.


A "dark cloud cover" is a bearish reversal signal that occurs during an uptrend. It consists of a long white candlestick that is followed by a black candlestick that opens higher than the prior white candlestick's high, and that closes at least half-way into the white candlestick's real body.


The bullish counterpart to the dark cloud cover is the "bullish piercing pattern." It occurs during a downtrend, and consists of a long black candlestick followed by a gap lower open during the next session, but which closes at least halfway into the prior black candlestick's real body.

Another two-candle reversal pattern is the "harami."


In uptrends, the harami consists of a large white candle followed by a small white or black candle (usually black) that is within the previous session's large real body.

In downtrends, the harami consists of a large black candle followed by a small white or black candle (usually white) that is within the previous session's large real body. This pattern signifies that the immediately preceding trend may be concluding, and that the bulls and bears have called a truce.


When the second candlestick is a doji, which is a candle with an almost non-existent real body, these patterns are called "harami crosses."

Three Candlestick Chart Patterns

There are also three candlestick charts. Two of these are the "evening star" and the "morning star."


The evening star is a top reversal pattern formed by a tall white body candle, a second candle with a small real body that gaps above the first real body to form a "star," and a third black candle that closes well into the first session's white real body.


The morning star is the reverse of the evening star, and is a bottom reversal pattern formed by a tall black body candle, a second candle with a small real body that gaps below the first real body to form a star, and a third white candle that closes well into the first session's black real body.

If the middle candle of either of these two patterns is a doji, these two patterns are called evening star or morning star dojis.