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 devised by the 18th-century Japanese rice trader Homma Munehisa, and it's the foundation of modern technical analysis. 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

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.

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.