Candlestick Chart Basics
— the Complete Guide to Bullish, Bearish, Doji, and Hammer Candles

What Is a Candlestick Chart?

The candlestick chart is a charting format widely said to have originated in 18th-century Japanese rice trading, and it's the foundation of modern technical analysis (the specific person and period behind its origin aren't clearly verified by historical sources, and several accounts exist). It's the default chart format in HTS/MTS trading platforms for US stocks.

1 candle holds the open, high, low, and close for whichever time unit you've chosen (daily, weekly, hourly). One daily candle shows, at a glance, the result of that day's tug-of-war between buyers and sellers.

The Basic Structure of a Candle

• Body: the range between the Open and the Close. The bigger it is, the stronger the buying or selling pressure in that direction
• Upper Wick (Shadow): from the top of the body to the high. A trace of the price rising intraday and then getting pushed back — evidence of selling pressure
• Lower Wick (Shadow): from the bottom of the body to the low. A trace of the price falling intraday and then recovering — evidence of buying pressure
• Bullish Candle (White/Green): Close > Open = buyers had the edge over that period
• Bearish Candle (Black/Red): Close < Open = sellers had the edge over that period

Worked Example — Measuring the Body and Wicks

Example (illustrative numbers — not the actual price of any real stock): say a daily candle opens at 100,000 won, highs at 100,200 won, lows at 90,000 won, and closes at 99,000 won. The body size is |Open−Close| = |100,000−99,000| = 1,000 won, the lower wick is min(Open,Close)−Low = 99,000−90,000 = 9,000 won, and the upper wick is High−max(Open,Close) = 100,200−100,000 = 200 won. Applying the hammer condition — "the lower wick is at least 2x the body" — gives 9,000 ÷ 1,000 = 9x, well past the threshold, so this qualifies as a hammer. If this candle appeared at the tail end of a downtrend and the next day closed at 103,000 won (a bullish confirmation), then of the hammer's 3 core conditions (appearing after a downtrend, rising volume, next-candle bullish confirmation), only volume is left to check separately before all the conditions for a reversal signal are met.

Key Single-Candle Patterns

🟢 Long Bullish Candle (Long White/Green Candle)

A bullish candle where the close is much higher than the open, with almost no wick. Buyers were in complete control from the open all the way to the close. Combined with a volume surge at a breakout zone, it signals a strong trend starting or accelerating. The gap-breakout signals the DawnScan scanner catches often show up as a long bullish candle.

⬜ Doji

A candle with an extremely thin body because the open and close are nearly identical. It forms a cross (+) or a T shape. It means buyers and sellers reached a tight standoff. Appearing during a strong trend can be read as a warning of a trend reversal. That said, don't judge direction from a single doji alone — confirm it with how the next candle moves.

• Standard Doji: both wicks are similar in length. A fully balanced state
• Dragonfly Doji: only a long lower wick, no upper wick. A strong buying bounce after a decline
• Gravestone Doji: only a long upper wick, no lower wick. Strong selling pressure after a rise

→ The criteria for telling these forms apart, and how to interpret them by position, are covered in detail in how to tell doji candles apart.

🔨 Hammer

A candle with a small body and a lower wick at least 2x the body's length. It shows the price falling sharply intraday, then bouncing back strongly. Appearing at the tail end of a downtrend, it's read as a reversal signal. The core conditions: ① it appears after a downtrend, ② volume rises, ③ the next candle confirms with a bullish close.

→ The same shape appearing at the end of an uptrend becomes a Hanging Man. The two names, split by position, are covered in the hammer and hanging man.

🔃 Inverted Hammer

A candle with an upper wick at least 2x the body's length and almost no lower wick — a hammer flipped upside down. It shows a buying attempt intraday that got pushed back, but positioned at a low, it suggests reversal potential. It's less reliable than a hammer, so it must be confirmed by a strong bullish candle the next day.

⭐ Shooting Star

The same shape as an inverted hammer, but it appears at the peak of an uptrend. It shows the price rising sharply intraday and then getting pushed down to a lower close by strong selling pressure. It's a warning signal of an uptrend reversal, and the longer the upper wick, the stronger the selling pressure was.

→ The difference from an inverted hammer, and how to tell it apart from a gravestone doji, are covered in the shooting star and inverted hammer.

Multi-Candle Patterns — Candle Combinations

A pattern across 2–3 consecutive candles gives a stronger signal than a single candle.

• Bullish Engulfing: a bigger bullish candle the day after a bearish one that completely engulfs it. A strong reversal signal
• Bearish Engulfing: a bigger bearish candle the day after a bullish one. A warning of a downtrend reversal
• Morning Star: a 3-candle combination — bearish → doji/small candle → strong bullish. A downtrend-reversal signal
• Evening Star: bullish → doji/small candle → strong bearish. A warning of an uptrend reversal

→ The criteria for judging an engulfing pattern (body only, or the wick too) are covered in engulfing candles; the 3-stage structure and gap requirement for the morning and evening star are covered in the morning star and evening star. Three white soldiers and three black crows, where the same direction repeats 3 times, is a continuation signal, not a reversal one.

Caveats When Using Candle Patterns

Context is everything for a candle pattern. The same hammer isn't a reversal signal if it shows up in the middle of an uptrend. Always check the following alongside a pattern.

• The current trend direction (based on a trendline or moving average)
• Where it sits relative to support and resistance (see the complete guide to support and resistance)
• Volume — a volume surge alongside the pattern raises reliability
• The next candle (the confirmation candle) — always check whether the price actually moves in the pattern's direction afterward

Deciding to enter on a candle pattern alone is risky. Reliability rises when it's combined with a strategy that has a clear rule, like breakout trading. Check today's scan for stocks showing a volume surge or a long bullish candle.

When This Pattern Is Wrong

Even a hammer that meets every condition from the worked example above (a lower wick 2x+ the body, appearing after a downtrend, next-candle bullish confirmation) can still fail to reverse. ① It shows up at an ambiguous location — not near a clear prior low or moving average that would act as support. ② Volume stays flat or even shrinks (a long wick with no real buying pressure behind it). ③ The confirmation candle the next day is only a small-bodied bullish candle, and buying doesn't follow through. And the same shape appearing in the middle of an uptrend was never treated as a reversal signal in the first place — context comes first.

A single candle pattern involves a person visually judging the ratio of body to wick, so DawnScan does not register patterns like "hammer" or "doji" themselves as discrete quantitative signals with a published measured success rate. The volume surge this article recommends checking alongside a candle pattern is a signal DawnScan does actually track, and its measured hit rate against the full stock universe is available, updated daily, on the Base Rate page — this article does not invent a figure like "a hammer leads to a bounce X% of the time."

Push one step further and a question remains — "how do I know this pattern is actually valid?" There are so many pattern types that testing several at once makes it look like at least one of them happens to fit by chance. The method for filtering out this illusion is multiple-testing correction, and the trap of building a rule that only fits historical data is overfitting. These are also the two gates DawnScan always runs a signal through before adopting it.