Why Skip Technical Indicators (For Now)
Technical indicators take the raw data of a candlestick chart and compress it into a simplified buy/sell signal. In doing so, a lot of nuance and detail is lost in translation from the raw source.
A second major flaw is lag: an indicator can only calculate after a candle closes, meaning its signal always arrives behind the raw chart. Reading candlesticks directly means you can act faster — the first trader to spot a breakout, or the first to exit before a rollover, captures the most profit.
What Is a Candlestick Chart?
Candlestick charts originated in Japan hundreds of years ago, originally used to track rice futures prices. Each individual shape on the chart is called a candlestick, and each represents one defined time period (e.g., 1 minute, 5 minutes, 1 day). Everything that happened to the price during that time period is encoded in that single candle’s shape.
Anatomy of a Single Candlestick
Every candlestick contains exactly four pieces of data:
- Open – The price at which the period began
- Close – The price at which the period ended
- High – The highest price reached during the period
- Low – The lowest price reached during the period
The rectangular section between open and close is called the body. The thin lines extending above and below are called wicks (or shadows).
Color convention:
- Green candle → price went UP → open is at the bottom of the body, close is at the top
- Red candle → price went DOWN → open is at the top of the body, close is at the bottom
Key wick rule to memorize:
- Upper wicks = bearish (price tried to go higher but got rejected and sold back down)
- Lower wicks = bullish (price dipped lower but buyers defended and rallied it back up)
The Role of Context
Individual candlestick shapes are like letters of an alphabet — they only form meaningful words (buy/sell signals) in context. When price is moving sideways, individual shapes carry little meaning because indecision is already the dominant theme. Candlestick patterns matter most when price is trending strongly up or down, since that is where reversals become high-probability and high-impact.
Important: Sideways price movement can’t really be read, it is a tug of war between buyers and sellers.
Additionally, the relative size of consecutive candles tells a story. A sequence of big candles followed by progressively smaller candles suggests the trend is becoming exhausted, even before a reversal candle appears.
The 11 Candlestick Shapes
1. Small Body Candle
A candle with a relatively small body (either red or green). Signals reduced momentum and mild conviction in either direction. A small green candle is mildly bullish (+); a small red candle is mildly bearish (−).
2. Large Body Candle
A candle with a significantly larger body (either red or green). Signals strong momentum and high conviction. A large green candle is super bullish (++); a large red candle is super bearish (−−). These are the candles you want to see when entering a trend.
3. Standard Doji
A candle where the open and close are at nearly the same price, resulting in a very thin or nonexistent body. Has upper and lower wicks of roughly equal or moderate length. Represents a tug-of-war between buyers and sellers with neither side winning — the candle communicates indecision/neutrality.
After a run of strong large-body candles, a doji is a warning sign that the trend may be exhausting. Confirmation of a reversal comes only if the next candle breaks in the reversal direction.
Here are the 4 types of dojis, explanation to follow.
4. Long-Legged Doji
A doji where both the upper and lower wicks are very long relative to the body. Opens and closes at about the same price, but there was a dramatic whip in price action during the period — big swings both up and down. Represents extreme indecision and a heightened tug-of-war. Considered neutral but a strong caution flag in a trending environment.
5. Gravestone Doji
A doji that opens and closes at the same price at the low of the candle, with only an upper wick and no lower wick. The price opened, surged up, then sellers pulled it completely back down to close at the open price. This is an ominous, bearish signal — it shows that bulls tried to push higher but were completely overpowered by sellers.
6. Dragonfly Doji
The opposite of the gravestone — opens and closes at the same price at the high of the candle, with only a lower wick and no upper wick. Price opened, dropped down (sellers tried to take control), but buyers defended the lows and rallied the price all the way back up to the open. The bulls won the battle. Considered slightly bullish — a potential reversal signal to the upside when appearing at a low.
7. Hammer
A candle (red or green) that has a significant lower wick (bottoming tail) and a small-to-medium body at the top of the candle range. It looks like a mallet — the name comes from the idea of it “hammering out a base” (support level).
- The long lower wick shows price sold off hard, but buyers stepped in and rallied it back
- A green hammer is more bullish than a red hammer, but both are bullish signals
- The key defining feature is the bottom tail — without it, the candle is just a regular red candle, not a hammer
- Typically signals a potential reversal from down to up and the formation of a support level
8. Shooting Star
A candle with a significant upper wick (topping tail) and a small-to-medium body at the bottom of the candle range — essentially the upside-down version of a hammer. Price opened, squeezed up briefly, then came back down to close near the open or below it (closing red).
- A red shooting star means the reversal has already begun during the candle period — you don’t need to wait for it to close
- The moment it turns red, it signals a likely pullback
- Typically signals a potential reversal from up to down
- The topping tail is the defining bearish feature — sellers overwhelmed buyers at the highs
Multi-Candle Patterns
9. Candle Over Candle (Bullish)
A pattern where one candle opens and breaks above the high of the previous candle. This is a bullish confirmation signal — it indicates buyers are in control and price is continuing higher.
Entry tip: When watching for a candle-over-candle breakout, identify the high of the prior candle as your trigger level. The moment price ticks above that level in real time (e.g., $4.25 breaks to $4.26), that is your buy signal — no need to wait for the candle to close. Waiting for a technical indicator would mean getting in 25+ cents later.
10. Candle Under Candle (Bearish)
A pattern where one candle opens and breaks below the low of the previous candle. This is a bearish confirmation signal — it indicates sellers are in control and price is continuing lower. After a doji appears, a candle-under-candle on the next bar confirms the reversal downward.
Putting It All Together — A Typical Reversal Sequence
A full reversal pattern might look like this in sequence:
- Large body candles in the direction of the trend (strong momentum)
- Doji appears — indecision, tug-of-war, first warning flag
- Candle under candle (breaks the doji’s low) — confirms the reversal downward
- Hammer forms at the bottom — buyers step in, bottoming tail visible
- Candle over candle — buyers break above the hammer’s high, confirming the move back up
- Re-entry signal triggers; new uptrend leg begins
The most critical candles to watch are at pivot points — the apex of a move up or the bottom of a pullback — since that is where reversals carry the highest probability and where being first to act makes the biggest difference.
Quick Reference: Sentiment Summary
| Candlestick | Bias | Key Feature |
|---|---|---|
| Large body green | Super bullish | Big body, upward |
| Small body green | Mildly bullish | Small body, upward |
| Small body red | Mildly bearish | Small body, downward |
| Large body red | Super bearish | Big body, downward |
| Standard Doji | Neutral | Open ≈ close, balanced wicks |
| Long-Legged Doji | Neutral (high volatility) | Open ≈ close, very long wicks both sides |
| Gravestone Doji | Bearish | Open ≈ close at lows, only upper wick |
| Dragonfly Doji | Slightly bullish | Open ≈ close at highs, only lower wick |
| Hammer | Bullish | Lower wick (bottoming tail), body at top |
| Shooting Star | Bearish | Upper wick (topping tail), body at bottom |
| Candle Over Candle | Bullish | Next candle breaks above prior high |
| Candle Under Candle | Bearish | Next candle breaks below prior low |
Key Takeaways
- Candlestick charts are the raw data source — technical indicators are just derived from this data, always arriving late
- Every candlestick has four data points: open, close, high, low
- Upper wicks = bearish pressure; lower wicks = bullish pressure — always
- Individual shapes only matter in context (trending price action, not sideways)
- The best trade entries come by reading candles in real time, not waiting for indicator signals to confirm after the candle closes
