Module 3
Module 3: Candlestick Fundamentals
Candlestick charts are the most widely used chart type in day trading because they display four data points per period: open, high, low, and close.[^13]
Anatomy of a Candlestick
- Body: The solid area between the open and close prices. A green/white body means the close was higher than the open (bullish). A red/black body means the close was lower than the open (bearish).[^13]
- Upper Wick (Shadow): The thin line above the body, representing the high of the period.
- Lower Wick (Shadow): The thin line below the body, representing the low of the period.
- Full-bodied candles (large bodies, small wicks) indicate strong conviction.
- Doji candles (tiny body, long wicks) indicate indecision between buyers and sellers.
Essential Single-Candle Patterns
| Pattern | Appearance | Signal |
|---|---|---|
| Hammer | Small body at top, long lower wick (2x body length). Appears at bottom of downtrend. | Bullish reversal[^14] |
| Inverted Hammer | Small body at bottom, long upper wick. Appears at bottom of downtrend. | Bullish reversal[^15] |
| Shooting Star | Small body at bottom, long upper wick. Appears at top of uptrend. | Bearish reversal |
| Hanging Man | Small body at top, long lower wick. Appears at top of uptrend. | Bearish reversal[^1] |
| Doji | Virtually no body, wicks on both sides. | Indecision / potential reversal[^13] |
| Marubozu | Full body with no wicks. | Strong momentum in candle direction |
Essential Multi-Candle Patterns
Bullish Engulfing: A small red candle followed by a larger green candle whose body completely engulfs the previous candle's body. Signals buyers overwhelming sellers.[^14][^13]
Bearish Engulfing: A small green candle followed by a larger red candle whose body completely engulfs the previous candle's body. Signals sellers overwhelming buyers.[^13]
Morning Star: A three-candle bullish reversal pattern: (1) large red candle, (2) small-bodied candle or doji gapping lower, (3) large green candle closing above the midpoint of candle 1. The small middle candle represents exhaustion of selling pressure.[^15][^1]
Evening Star: The bearish opposite of the Morning Star: (1) large green candle, (2) small-bodied candle or doji gapping higher, (3) large red candle closing below the midpoint of candle 1.[^1]
Tweezer Tops/Bottoms: Two consecutive candles with nearly identical highs (tweezer top) or lows (tweezer bottom), signaling a reversal at a key level.[^15]
How to Use Candlestick Patterns Effectively
Candlestick patterns are not standalone signals. They are most reliable when they appear:
- At key support or resistance levels
- At supply or demand zones
- In confluence with the prevailing trend
- With confirming volume[^14][^8]
A hammer at a random price level is meaningless. A hammer at a strong demand zone in an uptrend is a high-probability signal.
Checkpoint Quiz
Quick self-check to lock in the concepts from this module.
Quiz coming soon.