How Candlesticks Encode Information
A candlestick shows open, high, low, and close for each period. The body spans open to close; green if close > open, red if close < open. The wicks show the high and low. The shape tells you how buyers and sellers fought during that period.
1. Doji
A doji has open and close essentially equal, producing a body that looks like a horizontal line with wicks on both sides. Indecision. Doji at the end of a clear trend often precedes a reversal. Doji mid-range mean nothing.
2. Hammer and Inverted Hammer
A hammer has a small body at the top, a long lower wick (at least twice the body), and little upper wick. At the bottom of a downtrend it signals sellers pushed price down but buyers reclaimed all of it. Strong bullish reversal — confirm with the next candle. Inverted hammer is the mirror at the top of an uptrend.
3. Engulfing
A bullish engulfing pattern is two candles where the second green candle completely covers the body of the previous red one. Signals a strong shift from selling to buying. Bearish engulfing is the inverse. Most reliable at trend ends after multiple opposite-direction candles.
4. Harami
A harami is two candles where the second sits inside the body of the first. Less powerful than engulfing but useful. Bullish harami: red then small green inside it — strong selling suddenly evaporates.
5. Shooting Star
A small body at the bottom, long upper wick at the top of an uptrend. Buyers were rejected and sellers closed the bar low. Bearish reversal signal — most reliable after a clear uptrend.
Universal Rule
Single candles are never tradeable alone. Require: (1) a clear preceding trend, (2) confirmation from the next candle, (3) ideally alignment with a S/R level. Trade as one of three or four factors lining up.