Candlestick charts have become the preferred chart form for many traders using technical analysis. Learn to identify candlestick patterns with this introduction.
Looking to identify chart patterns? Many traders would say there’s no need to read tea leaves, lunar cycles, or your palms—learn how to read candlesticks.
Candlestick charts have been around since at least the 19th century (though some estimate the technique, invented by Japanese rice merchants seeking a way to predict price movements, to be much older).
But until 1991, they were all but unknown to those outside Japan. Author Steven Nison introduced the concept to Western traders with his book Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East. Nowadays, candlestick charts are the default form of charting for many traders.
The chart “candles” are made up of two parts:
The short answer on how to read candlesticks: The shape of each day’s candle can give you visual cues as to the possible strength and conviction of the price activity in the period. The size of a candle’s real body varies depending on the difference between its opening and closing price. When the opening and closing prices are the same, the body is represented by a single horizontal line called a doji. Not all candles have shadows; the opening and/or closing prices may be the extremes of a given day’s range (see figure 1).
FIGURE 1: CLOSEUP VIEW OF A CANDLESTICK CHART. This image shows up (green) and down (red) candles, as well as an unchanged doji candle. The shadows are the vertical lines above and below the candles’ real bodies. Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only.
Thanks to their unique presentation, candlestick chart patterns are readily visible. The patterns are generally described in two categories:
Explore our expanded education library.
Patterns can be bullish or bearish and can consist of a single candle or a group of candles. These patterns can be identified in any time frame—hourly, daily, weekly, monthly—and any asset class: stocks, commodities, currencies, and so on. A full rundown of bullish and bearish candlestick patterns can be found in the thinkorswim Learning Center. Or, if you’ve pulled up a chart in the thinkorswim platform, you can choose from more than 50 candlestick studies. Conduct your own experiments to see what might strike your fancy (see figure 2).
As with any type of pattern recognition, there are no guarantees for which way price will go, but candlestick patterns can help alert you to possible outcomes. The thinkorswim platform allows you to scan automatically for traditional candlestick patterns or create your own using the candlestick pattern editor. And when you create a custom pattern, you get to choose a custom name.
The more you learn about technical analysis, the more you might see how it can potentially help you in your trading decisions. As a TD Ameritrade client, you can access a full range of education resources, including a fully immersive technical analysis curriculum. Or start with the video below.
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.