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Japanese candlestick trading guide – Poonit Rathore

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Japanese candlestick trading guide - Poonit Rathore
Japanese candlestick trading guide – Poonit Rathore

Japanese candlestick charting is a technical analysis tool used to identify potential trades in financial markets. Each candlestick represents the price action during a specific time period, with the “real body” indicating the price range between the open and close, and the “shadows” indicating the high and low prices for the period. There are many different types of candlestick patterns that traders use to make decisions, such as bullish and bearish patterns, reversal patterns, and continuation patterns. To start using Japanese candlestick charting, you should learn about the basic patterns and how to read them. Additionally, it is important to understand the context of the market you are analyzing, including trends, support and resistance levels, and other indicators.

Japanese candlestick charting is a popular method of technical analysis that has been used for centuries by traders in Japan. The method was introduced to the Western world by Steve Nison in his book “Japanese Candlestick Charting Techniques” which was first published in 1991.

One of the main advantages of candlestick charting is that it allows traders to quickly identify patterns and potential trades in the market. Candlestick patterns can indicate potential bullish or bearish market trends, potential reversal or continuation of the current trend, and areas of potential support or resistance.

When reading candlestick charts, traders will typically focus on the color and shape of the candlesticks. A white candlestick with a long real body indicates strong buying pressure, while a black candlestick with a long real body indicates strong selling pressure. The length of the real body and the shadows can also provide information about the market sentiment.

There are many different candlestick patterns that traders use, including:

  • Bullish patterns: such as the Bullish Engulfing, Bullish Hammer, and Bullish Harami
  • Bearish patterns: such as the Bearish Engulfing, Bearish Hammer, and Bearish Harami
  • Reversal patterns: such as the Doji, Shooting Star, and Hanging Man
  • Continuation patterns: such as the Bullish and Bearish Pennant, Bullish and Bearish Flag.

Here’s our rundown of the 18 Japanese candlestick patterns you need to know, plus a cheat sheet reference guide to help you spot opportunities as soon as they arise.

What is a Japanese candlestick?

A Japanese candlestick is a type of price chart that shows the opening, closing, high, and low price points for each given period. It was invented by Japanese rice merchants centuries ago, and popularised among Western traders by a broker called Steve Nison in the 1990s.

An example of a green and red candlestick
(Image Credit: IG.com)

Today, Japanese candlestick charts are the most popular way to quickly analyze price action, particularly with technical traders. They offer much more information visually than traditional line charts, showing a market’s highest point, lowest point, opening price, and the closing price at a glance.

High Low Open Close (HLOC) charts display a similar level of detail to candlesticks – but traders tend to favor the latter, finding them easier to analyze quickly than HLOC. It’s worth trying out both and seeing which works best for you.

As well as using them to track previous price movements, technical traders look for Japanese candlestick patterns for clues on where a market’s headed next. They do this by looking for recognizable shapes that often lead to continuations or reversals.

Candlesticks can be used to examine price action over any timeframe, from one second up to an entire year.

High-Probability Japanese Candlestick Patterns For Day Trading & Swing Trading (For Beginners)

(Video Credit: The Secret Mindset)

How to read Japanese candlestick patterns

To read Japanese candlestick patterns, you’ll need to familiarise yourself with three elements of each candle: its colour, its body, and its wick. Its colour tells you the direction of movement within the period, its body displays the market’s opening and closing levels and its wick shows the high/low range.

  • On most charts today, green candlesticks indicate upward movement, and red ones a move down. However, occasionally white (up) and black (down) are used instead
  • On a green candle, the top of the body is closed and the bottom is open. On a red one, the opposite is true
  • On both red and green sticks, the top of the wick (sometimes called the shadow) is the highest point that the market has hit within the period – and the bottom is the lowest
An example of a green and red candlestick
(Image Credit: IG.com)

Using those three elements, you can learn a lot about a market’s movement within a particular period. A long body on a green candlestick, for example, tells you that significant bullish price action occurred.

If the wick is even taller than a long body, it shows that there was a high level of volatility within the period. So bulls and bears may have been vying for control, with bulls eventually winning out.

A short red body with a high upper wick, meanwhile, indicates that bulls pushed a market’s price higher, but were beaten back by bears before close. And if there’s no wick at all, you know that the open or closing price was also the high/low.

Some patterns are taken as indications of probable future movement by technical traders. The theory here is straightforward – these patterns reveal particular behavior that has often led to specific outcomes in the past.

There are three types of candlestick patterns: single, double, and triple. This is based on the number of sticks that make up the pattern.

While past performance is no guarantee of future price movement, these patterns can be useful when spotting opportunities. Let’s take a look at some popular examples.

Top 18 Japanese candlestick patterns

SentimentType
Spinning topNeutralSingle
Green marubozuBullishSingle
Red marubozuBearishSingle
DojiNeutralSingle
HammerBullishSingle
Inverted hammerBullishSingle
Hanging manBearishSingle
Shooting starBearishSingle
EngulfingEitherDouble
HaramiEitherDouble
Harami crossEitherDouble
Homing pigeonBullishDouble
TweezersEitherDouble
Morning starBullishTriple
Evening starBearishTriple
Three white soldiersBullishTriple
Three black crowsBearishTriple
Three inside upBullishTriple
Three inside downBearishTriple
Rising threeBullishTriple
Falling threeBearishTriple

Single candlestick patterns

These are some of the simplest patterns you can find, comprising just one trading period. Often, they form the building blocks of longer patterns.

Spinning tops

A spinning top is formed when a candlestick has a long wick both above and below a narrow body. So the market had an extensive trading range, but little difference between its open and close.

Spinning top Japanese candlestick patterns

Unlike most candle patterns, it doesn’t really matter if a spinning top is formed on a red or green stick – there just needs to be a small body and a long wick.

In a spinning top, there’s a tug-of-war between buyers and sellers. But the bears and bulls are canceling each other out, so there’s little in the way of actual movement.

Technical traders take spinning tops as an indication of weakness in an ongoing trend. If a market forms a spinning top after a lengthy bull run, then positive sentiment may be running out. After a downtrend, meanwhile, the bullish opinion may be gaining strength.

Marubozu

Marubozu comes from the Japanese word for ‘bald’. It means a candlestick that has no wick whatsoever.

  • A green marubozu opened and closed at its lowest and highest levels respectively
  • A red marubozu opened and closed at its highest and lowest levels respectively

If we visualize the movement within a green marubzuo, there’d be no price action above or below the open and close prices:

A green marubozu candlestick

As you can see, this makes a bald green stick an indication of clear bullish sentiment. Bulls pushed the market’s price higher with little fightback from bears.

If this occurs as part of an uptrend, technical traders see it as a sign that the upward movement will continue. If it happens after a downtrend, a reversal may be on the cards.

A red marubozu candlestick

Red marubozu, meanwhile, is the exact opposite. They tell you that bears were in almost total control of a session – and therefore that a downtrend could continue or an uptrend may reverse.

Doji

In a Doji pattern, the open and close prices are exactly equal (or almost exactly equal). So the body appears as a very thin line – typically less than 5% of the total range of the period.

Like spinning tops, this can tell you that the bulls and bears have canceled each other out by the end of the session.

There are four main types of Doji to watch out for:

  • Long-legged Doji has a lengthy wick both above and below the body
  • Gravestone Doji has a high wick above the body and nothing underneath
  • Dragonfly Doji has a long wick beneath the body and little to no wick above it
  • Four-price Doji has no wick at all
The four types of doji candlestick. From left to right: the long-legged doji, the gravestone doji, the dragonfly doji, and the four-price doji

Doji are often taken as an indication of an upcoming reversal. If a market forms after an extensive uptrend, then it may be about to head back down. After a bear move, selling sentiment could be exhausted, meaning bulls are about to take over.

Hammer

If a market forms a hammer after an extended move down, then technical traders believe that it might be about to mount a bullish fightback.

You can spot a hammer by its long wick below a comparatively short body, with little to no wick above. The body should be two to three times shorter than the lower wick.

The hammer candlestick

This shows that the market hit a new low during the session, but bounced back and closed much higher. So while there was significant selling pressure, buyers stepped in to push back the bears before close.

While bearish sentiment is weakening, that doesn’t necessarily mean a reversal is imminent. So most technical traders will wait for a confirmation before opening a position on a hammer – usually a strong upward move in the next period.

Inverted hammer

Inverted hammers look exactly the same as hammers, just upside down. So there’s a comparatively short body underneath a high upper wick, with little range below.

The inverted hammer candlestick

They also appear after downtrends and are taken as a possible signal that a reversal is on the way. However, the price action within an inverted hammer is a little different.

The upper wick shows that buyers took control of the market within the session, but were met with resistance from the sellers. However, sellers were unable to push its price further down, meaning that bearish sentiment may be on the wane.

As with hammers, it’s best to wait for confirmation – usually in the form of a bullish candlestick immediately after – before opening a buy position.

Hanging man

A hanging man looks identical to a hammer, the only difference being where it crops up.

While a hammer appears after a bear market, a hanging man will do so after an uptrend. They’re taken as a sign that selling sentiment is growing against buyers, and therefore that a reversal may be coming soon.

The price action within a hanging man might look like this:

The hanging man candlestick

Sellers had control of the market but met strong resistance. However, that resistance only managed to keep the price in check, it didn’t continue the bull run. So sentiment may be about to swing.

A red-hanging man is usually taken as a stronger signal than a green one – though both are considered bearish patterns.

Shooting star

A shooting star, meanwhile, is a doppelgänger of an inverted hammer. But like the hanging man, a shooting star will appear at the crest of an uptrend instead of the trough of a downtrend.

The inverted hammer candlestick

In a shooting star, the session starts with the bulls still in control. But bears take over, dragging the asset’s price back down.

  • In a green shooting star, they’ve pulled it back to just above the open
  • In a red shooting star, they’ve pulled it down below the open

Both indicate that a reversal may be imminent. But like the hammer, inverted hammer, and hanging man, it’s often a good idea to wait for signs of a new bear market before trading.

Double candlestick patterns

When a signal is formed from two consecutive periods, it’s known as a double candlestick pattern. These often hint at upcoming trend reversals, but can also be used to identify continuations.

Engulfing

In the engulfing pattern, a candlestick is immediately followed by another larger one in the opposite direction.

Bullish engulfing pattern
Bearish engulfing pattern

In the bullish engulfing, a red candle is dwarfed by the green one that follows it. Technical traders might take this as a sign that positive opinion is taking hold, so a significant move up may be on the way – particularly if a bullish engulfing appears after a period of consolidation.

A bearish engulfing arises when a bullish stick is then swallowed by a subsequent bearish one. So negative opinions may be forming.

Harami

A harami is essentially a backward engulfing pattern: a candlestick is followed by a much smaller one in the opposite direction.

The name harami comes from the Japanese for pregnant, because some believe that the pattern resembles a pregnant person.

In a bullish harami, a red candlestick is followed by a green one that is completely contained within the body of the previous candle. This is often taken as a sign that a downtrend may be ending.

Bullish harami example
Bearish harami example

In a bearish harami, the opposite happens: a green candle followed by a smaller red one. In both cases, the size of the second stick is used to determine the strength of the signal: the smaller the better.

An example of a harami cross
An example of a harami cross

If a harami is followed by a doji – the smallest possible candle body – then it’s known as a harami cross.

Homing pigeon

A bullish homing pigeon, meanwhile, looks similar to a harami – except that both candlesticks are red.

The second candle’s body is contained entirely within the first’s. This is taken as a sign that an uptrend may be about to commence.

Traders searching for homing pigeons will look for downtrends that are weakening or nearing a key point of support. Homing pigeons are considered less useful in highly volatile conditions.

Tweezers

In a tweezers pattern, two identical candlesticks in opposite directions appear after a bull or bear market. Tweezers are taken as a sign of an upcoming reversal.

The first candle in a tweezer matches the previous trend. So in an uptrend, it’d be green. It should have a short body at the top, with a lengthy wick beneath. In a downtrend, it’d be red with a short body at the bottom and a tall wick above.

The second candle is the opposite colour, but otherwise identical. So together, the two look like a pair of tweezers.

An example of a tweezer bottom
An example of a tweezer top

Triple candlestick patterns

The longest patterns we’ll cover in this article are triples, which are made across three consecutive periods. Triple candlestick patterns are often seen as some of the strongest signals of an upcoming move.

Morning star

A morning star plays out as a market hits a point of indecision after an extended downward movement, then begins to recover. It consists of three candlesticks:

  1. A red one with a large body, which is part of the downtrend
  2. A candle with a short body – often a spinning top – indicates that bulls are entering the session
  3. A green stick with a tall body confirms that a reversal has begun
An example of a morning star pattern

Traders may take this as a sign that the recovery will turn into a lasting uptrend.

Evening star

An evening star is the opposite of a morning star, showing a bull market that hits a point of indecision and then begins to retrace.

It looks the same as a morning star, but with a green candle at the beginning – after an extended uptrend – and a red one at the end.

An example of an evening star pattern

Both evening and morning stars can be formed with a Doji in the middle. This indicates a stronger period of indecision and is sometimes taken as a sign that the subsequent move will be more pronounced.

Three white soldiers

The three white soldiers’ pattern appears after an extended downtrend and small consolidation. Technical traders use it as one of the clearest signs that the bear market is over.

The three soldiers are:

  1. A green candle after a downward move
  2. Another green candle, with a bigger body than the first and little to no upper wick
  3. A third green candle, with a body that at least matches the second and little to no wick whatsoever
An example of the three white soldiers pattern

Three black crows

The three black crows’ pattern is the opposite of the three white soldiers. It appears after an uptrend, consists of three consecutively longer red candles and is taken as a strong signal that the bull market is over.

The second candle should have a short or non-existent lower wick, and the third should have close to no wick at all.

A technical trader may take the three black crows as an opportunity to open a short position to attempt to profit from the following bear run.

An example of the three black crows pattern

Three inside up

The three-inside-up pattern is another trend reversal indicator, appearing after a downtrend and signaling the beginning of a potential reversal.

The three candles in an inside-up pattern are:

  1. A substantial red one that continues the previous downtrend
  2. A green stick with a body that closes at least halfway up the previous candle’s – so the market has recovered half of the last period’s losses
  3. A green candle that closes above the high of the first one
An example of the inside up pattern

Buyers should now have overpowered sellers, arresting the market’s decline and possibly kicking off a new bull trend.

Three inside down

The three inside down is a reversed inside up. It consists of a long green candle, followed by a red candle that closes at least halfway down the one before. Then another red candlestick closes below the low set by the first.

An example of the three inside down pattern

When a three-inside down appears after a bull market, traders who watch for patterns might see an opportunity for a profitable short position.

Rising and falling three

The rising three (or rising three methods) is a candlestick pattern that occurs within an uptrend and is used to identify an impending continuation.

An example of the rising three pattern

The three sticks within a rising three all occur after a green candle with a large body. They are all typically bearish, and trade within the range set by the previous bullish candle. Here, the uptrend has paused while buyers wait to see whether sentiment is turning.

But after the rising three, another large green stick shows that the bull market is back on.

In a falling three, the opposite happens. A tall red candle is followed by three smaller green ones – then another tall red candle resumes the bear run.

An example of the falling three pattern

How to trade using Japanese candlesticks?

Trading using Japanese candlestick charting involves identifying patterns and signals in the market and then making trades based on those signals. Here are the general steps for trading using Japanese candlesticks:

  1. Learn the basics of candlestick charting and become familiar with the different types of patterns, including bullish and bearish patterns, reversal patterns, and continuation patterns.
  2. Analyze the market using candlestick charts. This involves looking at the color, shape, and size of the candlesticks to identify patterns and signals.
  3. Identify potential trades based on the patterns and signals identified in step 2. This can include identifying potential bullish or bearish market trends, potential reversal or continuation of the current trend, and areas of potential support or resistance.
  4. Use other technical indicators and fundamental analysis to confirm the trades identified in step 3. This can include using moving averages, trend lines, and other chart patterns to confirm the signals identified in step 2.
  5. Determine your risk management strategy. This includes setting stop-loss levels, determining the size of your position, and managing your overall risk exposure.
  6. Execute the trades identified in step 3, and monitor the market to see if the trades are working out as expected. Make adjustments to your trades as needed based on the market conditions and your risk management strategy.

It is important to note that no single method of analysis can guarantee success in trading and it is important to always consider the underlying market conditions, volatility, and other parameters. Additionally, it is important to have a solid understanding of risk management and money management techniques when trading with Japanese candlesticks or any other technical analysis method.

Japanese candlesticks summary

Japanese Candlestick Charting is a technical analysis tool that uses candlestick charts to identify potential trades in financial markets. Each candlestick represents the price action over a specific time period, with the “real body” indicating the price range between the open and close, and the “shadows” indicating the high and low prices for that period. Traders use different types of candlestick patterns, such as bullish and bearish patterns, reversal patterns, and continuation patterns, to make trading decisions. To use Japanese Candlestick Charting, traders should learn about the basic patterns and how to read them, and also consider the context of the market, including trends, support and resistance levels, and other indicators. It’s important to use other technical indicators and fundamental analysis to confirm the trades identified, and to have a solid understanding of risk management and money management techniques when trading with Japanese candlesticks.

ULTIMATE Candlestick Patterns Trading Guide *EXPERT INSTANTLY*

(Video Credit: The Trading Geek)

Happy Reading & Investing!

Poonit Rathore

My name is Poonit Rathore. I am a Blogger, Content-writer, and Freelancer. Currently, I am pursuing my CMA final from ICAI. I live in India.

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