Over three centuries ago, rice-futures traders noticed the repetitive patterns in candlestick charts, which predicted future price movements in the commodity contracts traded. It should be noted that candlestick analysis is somewhat more sensitive than regular daily chart analysis in that it generates more signals. Given this profusion of signals, it is important to be aware of when those patterns appear in the trend so that more or less weight can be assigned to them in your analysis. If a candlestick reversal pattern appears at the end of an extended trend, you tend to believe it more than a reversal pattern that appears at the beginning of a new trend.

Patterns formed using multiple candlesticks tend to carry more weight than single candlestick patterns. We will begin with analysis of specific, well-known single-candlestick formations, which will become part of multicandlestick formations as we progress.

The „doji“, as illustrated in the below figure, is a warning signal. It signifies equal strength between those who are bullish and those who are bearish on a security (or whatever is the subject of the candlestick study). As such, the doji by itself can indicate an uncertain future, since neither the bulls nor the bears have the upper hand. When the doji appears in multicandlestick formations, it makes those formations more accurate in their prediction of future price action.

The single-candlestick patterns are typically indicators of reversals. There are two other singlecandlestick formations of note, the „hanging man,“ and the „hammer.“ As with all single-event patterns, they are difficult to use and are only of real value when they appear in multicandlestick formations. ***The hanging man reverses an upward trend, whereas the hammer reverses a downward trend**, as shown in the below figure.

These are essentially the inverse of each other. The hanging man has more predictive quality when it is black, indicating a lower close, and the hammer has more predictive quality when it is white, indicating a higher close.

Two-candlestick patterns all consist of one candlestick of each color in the pattern and are most commonly reversal patterns. The second candlestick will be black if the pattern is predicting the end of an upward trend, and white if predicting the end of a downward trend. The first two that we will look at are variations on a theme and are illustrated as topping formations. The first pattern is known as „dark cloud cover,“ the concepts of which are extended to form a bearish engulfing line. Both are depicted in the below figure.

In this figure, the candle on the left is the final white candle in the upward trend. The next candle initiates the first downward move, with the price closing lower than it opened. When the real body of the second candle extends down into the body of the first candle, the formation is considered dark cloud cover. When the second real body extends down lower than the close in the previous candle, it is known as a „bearish engulfment.“

These two candle reversal patterns are complemented with continuation patterns, which are called Hirami patterns, and are shown in the below figure.

These are considered weaker reversal patterns and therefore are taken to be a sign of a continuation. As you can see in this figure, the second candle has its real body within the range of the previous candle's real body. These patterns have more potency if the second candle is a doji rather than a candle with a real body.

The most common three-candle patterns to look for are the „morning star“ and „evening star.“ The morning star occurs after a downward trend. The first element is a strong black candle, which indicates that most of the pessimism in the market is being expended, followed by two white candles, the second of which needs to make significant inroads into the real body of the first candle. The evening star is essentially the inverse. It starts with a strong white candle that indicates the bulls have bought all they can. The pattern is followed by two black candles, the second of which must extend well into the body of the first candle. Both of these patterns are shown in the below figure. 

There is one seven-candle pattern that is worth noting, the „tower“ pattern. This pattern is shown in the below figure, for the tower top and tower bottom. The elements of bulls and bears exchanging leadership are essentially the same as for the star patterns noted previously. This can only be taken as an introduction to the subject of candlestick charting analysis.

The important point to keep in mind when looking at candlestick charts is that the white candles show bulls having the upper hand, and black candles show bears having the last word. Should strength be shifting from one group to the other, it will show up first in a candlestick chart, which could change the bias for the type of positions you look for in your day-trading opportunities.