Japanese Candlestick Patterns
Read basic candlesticks + 12 essential patterns you must remember
What Are Japanese Candlesticks?
Japanese Candlesticks are the most fundamental tool in technical analysis. They provide a visual representation of price action that conveys more information than line charts or bar charts, and they are the foundation every trader must understand before learning anything else.
History of Candlesticks
Japanese candlesticks were invented by Munehisa Homma, an 18th-century rice trader at the Dojima Rice Exchange in Osaka, Japan.
Homma observed that rice prices were not driven solely by supply and demand, but also by the emotions of traders. He developed a system of recording prices that reflected market psychology through candlestick formations.
In 1991, Steve Nison introduced this technique to the Western world through his book "Japanese Candlestick Charting Techniques," and it has since become the global standard for chart analysis.
Candlestick Anatomy
Each candlestick contains four price values known as OHLC:
The Four Price Values
- Open - The price at the beginning of the time period
- High - The highest price reached during the time period
- Low - The lowest price reached during the time period
- Close - The price at the end of the time period
Candlestick Components
1. Body (Real Body) - The thick rectangle between the Open and Close prices
2. Upper Shadow (Wick) - The thin line above the body extending to the High
3. Lower Shadow (Tail) - The thin line below the body extending to the Low
Bullish vs Bearish Candles
- Bullish Candle (typically green or white): Close is higher than Open. The market moved up during this period
- Bearish Candle (typically red or black): Close is lower than Open. The market moved down during this period
What the Shadows Tell Us
- Long upper shadow = Sellers pushed price down from the high. Selling pressure was present
- Long lower shadow = Buyers pushed price up from the low. Buying pressure was present
- No shadows = Strong conviction in the direction (Open was the High/Low, Close was the Low/High)
- Equal shadows = Indecision between buyers and sellers
Single Candlestick Patterns
1. Doji
A candle where the Open and Close are virtually the same, creating a cross-like appearance.
Meaning: Indecision in the market. Neither buyers nor sellers have control.
Types of Doji:
- Standard Doji - Small body with equal upper and lower shadows
- Long-Legged Doji - Very long shadows on both sides. High indecision
- Dragonfly Doji - Long lower shadow, no upper shadow. Potential bullish reversal when found at support
- Gravestone Doji - Long upper shadow, no lower shadow. Potential bearish reversal when found at resistance
Important: A Doji alone is not a trading signal. Its significance depends on the preceding trend and the context (support/resistance levels).
2. Marubozu
A candle with no shadows at all. The Open equals the High (bearish) or the Low (bullish), and the Close equals the opposite extreme.
- Bullish Marubozu - Opens at the low and closes at the high. Extremely strong buying pressure
- Bearish Marubozu - Opens at the high and closes at the low. Extremely strong selling pressure
3. Hammer
A candle with a small body at the top and a long lower shadow (at least 2x the body length). Little or no upper shadow.
Meaning: Appears after a downtrend. Sellers pushed the price down but buyers aggressively bought it back up. Potential bullish reversal signal.
Confirmation: Wait for the next candle to close above the Hammer's body.
4. Hanging Man
Visually identical to a Hammer, but appears after an uptrend.
Meaning: Although the candle looks bullish, its appearance after an uptrend suggests that selling pressure is emerging. Potential bearish reversal signal.
5. Inverted Hammer
A candle with a small body at the bottom and a long upper shadow. Little or no lower shadow. Appears after a downtrend.
Meaning: Buyers attempted to push the price higher. If confirmed by a bullish candle afterward, it signals a potential bullish reversal.
6. Shooting Star
Visually identical to an Inverted Hammer, but appears after an uptrend.
Meaning: Buyers pushed higher but sellers overwhelmed them, pushing the price back down near the open. Strong bearish reversal signal.
7. Spinning Top
A candle with a small body and moderate upper and lower shadows of roughly equal length.
Meaning: Indecision. Similar to a Doji but with a slightly wider body. The market is uncertain about direction.
Double Candlestick Patterns
1. Bullish Engulfing
- First candle: Small bearish candle
- Second candle: Large bullish candle that completely engulfs (covers) the first candle's body
Strength factors:
- The larger the engulfing candle, the stronger the signal
- High volume on the engulfing candle adds confirmation
- More significant when occurring at a support level
2. Bearish Engulfing
- First candle: Small bullish candle
- Second candle: Large bearish candle that completely engulfs the first candle's body
3. Tweezer Bottom
- Two candles at the bottom of a downtrend
- Both have the same (or very similar) low prices
- First candle is bearish, second is bullish
4. Tweezer Top
- Two candles at the top of an uptrend
- Both have the same (or very similar) high prices
- First candle is bullish, second is bearish
5. Piercing Line
- First candle: Large bearish candle
- Second candle: Bullish candle that opens below the first candle's low but closes above the midpoint of the first candle's body
6. Dark Cloud Cover
- First candle: Large bullish candle
- Second candle: Bearish candle that opens above the first candle's high but closes below the midpoint of the first candle's body
Triple Candlestick Patterns
1. Morning Star
A three-candle bullish reversal pattern:
1. First candle: Large bearish candle (the downtrend continues)
2. Second candle: Small-bodied candle (Doji or Spinning Top) that gaps down - represents indecision
3. Third candle: Large bullish candle that closes above the midpoint of the first candle
Meaning: The downtrend is losing steam (candle 2), and buyers are taking over (candle 3). Strong bullish reversal.
2. Evening Star
The bearish counterpart to the Morning Star:
1. First candle: Large bullish candle
2. Second candle: Small-bodied candle that gaps up
3. Third candle: Large bearish candle that closes below the midpoint of the first candle
Meaning: The uptrend is losing steam, and sellers are taking over. Strong bearish reversal.
3. Three White Soldiers
Three consecutive large bullish candles, each opening within the body of the previous candle and closing near its high.
Meaning: Strong bullish continuation signal. Buyers are firmly in control.
Caution: If the candles are excessively large, the market may be overextended and due for a pullback.
4. Three Black Crows
Three consecutive large bearish candles, each opening within the body of the previous candle and closing near its low.
Meaning: Strong bearish continuation signal. Sellers are firmly in control.
How to Trade Candlestick Patterns
Rule 1: Context is Everything
A pattern's significance depends entirely on where it appears:
- A Hammer at a major support level is much more meaningful than one in the middle of nowhere
- An Engulfing pattern at a trendline is more reliable than one without supporting levels
Rule 2: Always Wait for Confirmation
Never trade a pattern based on one candle alone. Wait for the next candle to confirm the direction:
- For bullish patterns: Wait for the next candle to close above the pattern's high
- For bearish patterns: Wait for the next candle to close below the pattern's low
Rule 3: Use Multiple Timeframes
- Identify the trend on a higher timeframe (e.g., Daily)
- Look for entry patterns on a lower timeframe (e.g., 4-Hour or 1-Hour)
- Patterns aligned with the higher timeframe trend are more reliable
Rule 4: Combine with Other Tools
Candlestick patterns are most powerful when combined with:
- Support and Resistance levels
- Trendlines
- Moving Averages
- Volume analysis
- RSI or MACD divergence
Rule 5: Manage Your Risk
- Place your Stop Loss beyond the pattern's extreme (low for bullish patterns, high for bearish patterns)
- Use a minimum 1:2 risk-reward ratio
- Never risk more than 1-2% of your account on a single trade
Common Mistakes with Candlestick Analysis
1. Trading patterns in isolation - Always consider the broader market context
2. Seeing patterns that are not there - Be strict about pattern criteria
3. Ignoring the timeframe - A pattern on a 1-minute chart is far less significant than one on a daily chart
4. Forgetting about the trend - Counter-trend patterns have a much lower success rate
5. Over-relying on candlesticks alone - They should be one tool among many in your analysis
Key Takeaways
- Candlestick charts display four data points per candle: Open, High, Low, and Close
- Single candle patterns (Doji, Hammer, Shooting Star) signal potential turning points
- Double candle patterns (Engulfing, Tweezers) provide stronger reversal signals
- Triple candle patterns (Morning/Evening Star, Three Soldiers/Crows) are the most reliable
- Context matters more than the pattern itself; always consider location, trend, and volume
- Always wait for confirmation and combine candlestick analysis with other technical tools
- Proper risk management remains essential regardless of how strong a pattern appears
Next Lesson: In the next lesson, we will learn about Support and Resistance - the most important concept in technical analysis.