Basics of Candlestick Charting

DeeBit Exchange Futures Beginner Course: Helps users build a framework for technical analysis, including candlestick basics, technical patterns, moving averages, trendlines, and the application of technical indicators.

This Session: As the second lesson of "Mastering Technical Analysis," it introduces the basics of candlestick charts, including their origin, types, and technical meanings.

Candlestick charts, also known as Japanese candlesticks, originated in 18th-century Japan during the Tokugawa shogunate. Initially used to record rice market price fluctuations, they are now the most widely used technical analysis tool in capital markets.

 

A candlestick is drawn using the opening, highest, lowest, and closing prices of a specific trading period (e.g., weekly, daily, or minute-based). The rectangle between the opening and closing prices is called the "body." The line connecting the highest price and the body is the "upper shadow," while the line connecting the lowest price and the body is the "lower shadow."

 

A candlestick with a closing price higher than the opening price is called a "bullish candle" and is represented by a green body. Conversely, a "bearish candle" is represented by a red body. See Figure 2-1 below:

Based on the timeframe of each candlestick, candlesticks can be categorized into 1-minute, 5-minute, 15-minute, 30-minute, 60-minute, daily, weekly, monthly, and yearly candlesticks. On DeeBit Exchange's futures trading interface, users can select the desired timeframe. See the figure below:

 

Different timeframes represent different meanings. Ultra-short-term traders need to monitor 10-minute, 30-minute, 60-minute, or even 1-minute candlesticks closely. Long-term traders, on the other hand, should focus on weekly, monthly, and yearly candlesticks to understand medium- to long-term market trends. However, regardless of whether you are a long-term, medium-term, or short-term trader, daily candlesticks are essential and must be carefully observed.

Candlesticks are a unique market language, with different patterns conveying different market meanings. To profit through technical analysis, understanding candlesticks is a fundamental requirement. Candlesticks and their combinations can be divided into two categories: candlestick patterns and technical formations.

Candlestick patterns are formed by two or more candlesticks. 

 

Based on their technical meanings, candlestick patterns can be categorized into three types: 

A. Patterns indicating both upward (bottoming) and downward (topping) movements. 

B. Patterns indicating bottoming and upward movements. 

C. Patterns indicating topping and downward movements. 

In later lessons, we will analyze common bullish and bearish candlestick patterns in detail.

 

Another common classification divides candlestick patterns into reversal patterns and continuation patterns. Patterns signaling tops or bottoms are reversal patterns, while bullish or bearish patterns are continuation patterns.

 

Candlestick patterns mostly represent short-term trends, occasionally medium-term trends, and rarely long-term trends at the extremes.

 

A.Technical Formations 

Technical formations are divided into two types: reversal formations and consolidation formations.

 

After a reversal formation appears, the price direction changes, shifting from an uptrend to a downtrend or vice versa.

 

Also known as continuation patterns, consolidation formations indicate that the price will break out upward or downward. We will analyze candlestick formations in detail in later lessons.

Some say that candlesticks are the footprints of human nature's dance. Is this true?

 

Each individual trade has a definite price, time, and volume, so there is no inherent upward or downward trend. However, the funds behind the trades have a clear direction. Buyers believe future prices will be higher, while sellers believe the opposite. Over time, as trading volume accumulates, the market eventually moves in favor of one side, and price trends become apparent.

 

In other words, while each trade is deterministic, the collective behavior of many trades exhibits trends. These trends are probabilistic—while we cannot predict exactly how prices will move or where they will go, long-term observation and analysis can help us roughly determine future price trends.

 

On the other hand, human greed significantly influences market trends. The market is a unique place where price fluctuations and profit/loss are immediate, massive, and rapid. Price movements constantly challenge traders' desires, willpower, and rationality.

 

In a sense, trends are the footprints of human greed, oscillating between excitement and despair in an endless cycle. Candlesticks faithfully record this dance, making them the footprints of greed. Reading candlesticks is like reading human nature.

Like all technical indicators, candlestick patterns convey probabilistic information about price movements. However, determining when the probability of a rise or fall is high or low, and when candlestick theory is applicable, is a common challenge for traders.

 

Without understanding the underlying logic, blindly following candlestick signals often leads to losses—buying before a drop or selling before a rise. After repeated failures, many traders lose faith in candlestick theory.

 

In practice, candlestick pattern analysis is only an auxiliary tool. Most candlestick patterns reflect short-term or, at most, medium-term trends. Traders should combine candlestick analysis with other technical tools like moving averages, trendlines, and volume for a comprehensive judgment. Relying solely on candlestick patterns rarely leads to high-probability success.

 

In summary, candlesticks and their patterns are intuitive, concise, and vivid representations of the balance of power between buyers and sellers. They have strong technical meanings and can effectively guide trading decisions.

 

Compared to other technical analysis methods, candlesticks are sensitive and timely, helping traders detect trend reversals and continuations earlier.

 

However, since they represent only one or a few days of price movements, candlestick patterns mostly reflect short- to medium-term trends. For long-term trends and overall price direction, traders should rely more on Dow Theory, technical formations, moving averages, and trendlines.

As the most basic unit of technical analysis, candlesticks are the first lesson for beginners transitioning to professional trading. A deep understanding of candlestick formation and meaning lays a solid foundation for future technical analysis.

 

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This article is for informational purposes only. The information provided by DeeBit Exchange does not constitute investment advice and is not responsible for any investment decisions. Topics such as technical analysis, market trends, trading techniques, and trader insights may involve potential risks, investment variables, and uncertainties. This article does not provide or imply any guarantees of profit.