Candlestick patterns are one of the most widely used tools in technical analysis, providing valuable insights into market psychology, price movements, and potential trend reversals or continuations. Originating in 18th century Japan, candlestick charts have evolved into a global standard for analysing price action across various financial markets, including stocks, forex, and commodities.
1. Origin and Development of Candlestick Patterns
- Munehisa Homma (18th Century) – A Japanese rice trader who developed candlestick charting based on Sakata Rules, recognizing the influence of market psychology on prices.
- Steve Nison (1990s) – Introduced Japanese candlestick charts to Western traders through books like Japanese Candlestick Charting Techniques, making them popular worldwide.
- Thomas Bulkowski (Modern Era) – Conducted extensive research on candlestick patterns, analysing their statistical reliability and effectiveness in Encyclopaedia of Chart Patterns.
- Evolution & Adaptation – Traders have refined traditional candlestick formations using modern strategies, incorporating technical indicators and algorithmic analysis for better accuracy.
2. Why Candlestick Patterns Matter?
- Easy to Read – They visually show price movements in a simple, clear way.
- Reflect Market Sentiment – Each pattern reveals whether traders are feeling bullish (positive) or bearish (negative).
- Identify Trends – Helps spot trend reversals, continuations, or breakouts.
- Works Everywhere – Useful for different timeframes and asset types, benefiting both short-term traders and long-term investors.
A. Candlestick Anatomy
- Body: The area between the open and close price.
- Bullish (Green/White): Close price is higher than open price.
- Bearish (Red/Black): Open price is higher than close price.
- Wick (Shadow): The thin lines above and below the body, representing the highest and lowest prices during the time period.
- Upper Wick: Shows the highest price.
- Lower Wick: Shows the lowest price.
B. Basic Types of Candlesticks
Here are the most common individual candlestick types: