Ch2. Reading Candlesticks — Candle Psychology and Key Patterns

Overview: One Candle Is One Period’s Psychology

Candlestick charts originated in Japan’s Edo-era rice trading and are now the global standard. A single candle holds four prices — open, high, low, close — and the tug-of-war between buyers and sellers within that period.

Goal of this lesson: Dissect candle structure and read the key reversal/continuation patterns together with the buy/sell psychology behind them.

1. Candle Structure

   high ─┬─          high ─┬─
         │ upper wick      │
       ┌─┴─┐ close       ┌─┴─┐ open
       │   │             │▓▓▓│
       │   │ bullish     │▓▓▓│ bearish
       └─┬─┘ open        └─┬─┘ close
         │ lower wick      │
   low ─┴─          low ─┴─

Part	Meaning
Body	Between open and close. Longer = stronger one-sided force
Bullish	Close > open (up). Often green/white
Bearish	Close < open (down). Often red/black
Upper wick	Pushed up to the high then rejected → selling pressure
Lower wick	Dropped to the low then recovered → buying support

Wicks are the record of “failed prices.” A long upper wick says “tried to rise but was pushed down by sellers”; a long lower wick says “tried to fall but was caught by buyers.”

2. Single-Candle Patterns

Doji — open ≈ close

A cross shape with almost no body. A state of indecision where buyers and sellers are balanced; appearing at the end of a trend it can signal a reversal.

Hammer — long lower wick

A long lower wick at the bottom of a downtrend means buying interest and is read as a bounce signal. The same shape at the top of an uptrend (Hanging Man) warns of a fall.

Shooting Star — long upper wick

A long upper wick at the top of an uptrend suggests a possible shift to selling.

Long Bullish / Bearish Candle

A very long body. Signals one side’s strong conviction and often marks the start of a trend.

3. Multi-Candle Patterns (2–3 candles)

Pattern	Composition	Meaning
Bullish engulfing	Small bearish → large bullish that fully covers it	Strong buy reversal at a bottom
Bearish engulfing	Small bullish → large bearish that covers it	Sell reversal at a top
Morning star	Bearish → doji → bullish	Bottom reversal
Evening star	Bullish → doji → bearish	Top reversal
Three white soldiers	Three consecutive bullish	Upside acceleration
Three black crows	Three consecutive bearish	Downside acceleration

Rather than memorizing names, read “who is winning.” Engulfing simply means “today completely overturned yesterday’s flow.”

4. Principles for Using Candle Patterns

Location decides meaning — a hammer at a bottom signals a bounce; in the middle of nowhere it’s meaningless.
Read it with volume — engulfing and long candles are more reliable when volume comes in (Lesson 5).
Never trade it alone — bet only when candle signals overlap with support/resistance, moving averages, and other evidence.

Candle patterns are probabilistic signals, not guarantees. Not “a morning star appeared, so it must rise,” but “the odds of a bounce improved, so set a stop and consider entering.”

Key Takeaways

A candle holds open/high/low/close and the buy/sell psychology inside.
Wicks record “failed prices” — upper = selling pressure, lower = buying support.
Single patterns (doji, hammer, shooting star) and multi patterns (engulfing, star) suggest reversals.
A pattern’s reliability depends on where it appears and the accompanying volume.

Next lesson: We cover moving averages, which show the flow candles create at a glance — golden/dead crosses and ribbon alignment for judging trend.