By
David Dombrowsky

How to Read and Trade Japanese Candlesticks

Published on
June 22, 2023

Japanese candlesticks are some of the most popular tools technical traders use in financial market analysis. They are patterns or motifs that appear on price charts. The patterns consist of bars showing the opening, closing, and high and low price points at different times.


How to Read Japanese Candlesticks

Japanese candlesticks come in different sizes and shapes, all affirm different sentiments in the market. In addition, it is essential to familiarize oneself with the candlestick's color, body and wick.

In most cases, the color will tell whether the prevailing market condition is bullish or bearish, signaling who has the upper hand. The body displays the opening and closing prices, while the wicks show the highest and lowest ranges.

In most price charts, it is common to find green Japanese candlesticks associated with upward movement or bullish momentum. The candlesticks signal buyers are in control and looking to push prices higher. On the other hand, red candlesticks are associated with downward movement or bearish momentum. The candlestick underscores sellers or bears in control and looks to push prices lower.


How to Trade Japanese Candlesticks

In addition to the color coding, the bigger the body of the candlestick, the stronger the momentum. For instance, if the green candlestick has a big body with small wicks, it signals strong bullish momentum affirming bulls in control. Likewise, a red candlestick with a big body affirms strong bearish momentum, implying sellers are in control and likely to push prices lower.


Image showing Japanese candlestick

Source: Ig.com


On top of the candlestick, the body is the opening price affirming the level at which the price is opened at a given period. The bottom of the candlestick body signals the closing price or the level at which the price closed at a given period.

The highest point of the wick on either bearish or bullish candlestick signals the highest price level reached at a given time, while the lowest point of the wick signals the lowest point.

Whenever the wick is bigger than the body of the Japanese candlestick, it implies heightened volatility during the given period. Therefore, buyers and sellers were vying for control. On the other hand, if the long wick occurs at the top of the candlestick body, it implies that users tried to push the price higher but came under pressure from bears who pushed the price lower.

Similarly, if the long wick occurs below the candlestick body, it implies sellers tried to push the price lower but came under pressure from bulls. Consequently, the bulls pushed the price higher, resulting in a small body and a long wick to the downside.


Types of Japanese Candlesticks

Japanese candlesticks are broadly classified into three types:

  • Single candlestick
  • Double candlestick
  • Tipple Candlestick

Japanese Candlesticks Explained


Single Candlestick

They are the simplest forms of Japanese candlestick patterns made up of one candlestick that forms the building blocks of longer patterns. Below are some of the top single candlestick patterns.


Spinning Tops

It is a candlestick with a long wick on either side and a small or narrow body. The candlestick can be bullish and bearish, depending on where it occurs.

The occurrence of the candlestick implies a fierce tug of war between buyers and sellers, resulting in price opening and closing almost at the same level. However, the canceling action between buyers and sellers results in little or no actual movement.


Spinning tops pattern

Source: Ig.com


If the spinning top were to occur at the top of an uptrend, it would imply the upward momentum is fading as buyers come under pressure. Instead, price opening and closing almost at the same level imply sellers are pilling pressure and that a reversal could be in the offing.

Similarly, if the spinning top occurs at the base of a downtrend, it would imply waning downward momentum as bulls enter the market and pile pressure on sellers. Consequently, the prospect of price bouncing back with the entry of buyers into the market is usually high.


Marubozu

A Marubozu is a candlestick with no wick on either side. In the case of a bullish candlestick, the price opens at its lowest level and closes at its highest level. Likewise, a bearish candlestick price opens at its highest level and closes at its lowest level.


Marubozu patterns

Source: Howtotradeblog.com


A green Marubozu candlestick implies solid momentum upward, with bulls pushing the price higher against little or no seller resistance. If it occurs as part of an uptrend, the price will likely continue increasing. Similarly, if it occurs in a downtrend, it implies that the price is about to reverse as bulls flock to the market.

A red Marubozu candlestick implies sellers are in control and pushing the price lower with little or no buyer resistance. If it occurs in a downtrend, it suggests price will likely continue moving lower. If it happens in an uptrend, the price is expected to reverse and move lower as short sellers flock to the market.


Doji

Another popular candlestick appears as a very thin line with no body but long wicks. The lack of body implies a balance in the market as bears and bulls cancel each other's actions. The occurrence of a Doji is usually an early indication of an upcoming reversal.


Doji candlestick types

Source: dailyfx.com


Consequently, if the price was in an uptrend and a Doji occurred, it implies waning upward momentum and the prospect of price reversing and moving lower. Likewise, if it occurs in a downtrend, it implies a weakening downward momentum and higher prospects of price correcting and moving up.

Other popular single Japanese candlestick patterns include Hammer and invested Hammer, hanging man and shooting star.


Double Candlestick Patterns

Double Japanese candlesticks generate a trading signal or share sentiments on price action from two candlesticks instead of one. While such patterns mostly hint at potential reversals, they may also affirm continuation.


Bullish and Bearish Engulfing

They are the most popular double candlestick patterns that affirm potential price reversal. For example, a bullish engulfing candlestick is characterized by a large bullish candlestick that engulfs the previous bearish candlestick. The pattern indicates that bulls have overwhelmed bears and are ready to drive prices higher.


Bearish and bullish engulfing patterns

Source: Forextraininggroup.com


The bearish engulfing occurred at the top of an uptrend and was characterized by a large bearish candlestick engulfing the previous bullish candlestick. The pattern suggests that bears have dominated bulls and are ready to push prices lower.


Harami

It is a backward engulfing pattern whereby a large bullish or bearish candlestick is followed by a smaller one in the opposite direction. A bullish harami pattern comprises a large bearish candlestick followed by a small bullish candlestick that opens and closes within the body of the bearish candlestick.


Bullish and bearish harami

Source: dailyfx.com


The emergence of the small bullish candlestick contained within the bearish candlestick implies the downtrend momentum is waning, and a reversal to the upside could be in play.

A bearish harami comprises a large bullish candlestick followed by a small bearish candlestick contained within the body of the first. The smaller bullish candlestick implies the bearish momentum is waning, and that price will likely bounce back and edge higher.


Tweezers

It comprises two identical candlesticks in opposite directions. The emergence of the candlesticks implies the prospects of an upcoming reversal.


Tweezers in a downtrend

Source: Ig.com


If it were to happen in an uptrend, it would appear as a green candlestick with a small wick at the top, followed by a red bearish candlestick of the same size and the same wick. The prospect of price edging lower is usually high.


Tweezers in an uptrend

Source: Ig.com


In a downtrend, the tweezer will appear as a red candlestick with a small wick at the bottom, followed by a green candlestick with a small wick at the bottom. The prospect of the price bouncing back is usually high following the pattern.


Triple Candlestick Patterns

Tipple Japanese candlestick patterns are made across three consecutive periods. Therefore, they consist of three candlesticks used to provide trading signals. They stand out as they provide some of the strongest signals.


Morning Star

It occurs after the price has moved lower significantly to the point of indecision. The first candlestick is usually bearish, signaling bears are in control and likely to lower prices. However, it is followed by an indecision candlestick, such as a spinning top or doji, that implies exhaustion to the downside.


Morning star

Source: Ig.com


The appearance of a third bullish candlestick affirms bulls have overpowered bears and are now poised to push prices higher.


Evening Star

It occurs at the top of an uptrend. It starts with a large bullish candlestick that affirms bulls are in control and likely to push prices higher. The candlestick is followed by an indecision candlestick, such as a spinning top or doji, implying waning upward momentum.


Evening star

Source: Ig.com


The appearance of a large bearish candlestick implies bears have overpowered bulls and are poised to lower prices.


Three White Soldiers and Three Black Crows

Three white soldiers appear after an extended downtrend followed by consolidation. It comprises three candlesticks. The first opens within the previous bear candlestick and closes slightly above. The second candlestick opens above the first and closes above with a bigger body than the first. Finally, the third candlestick, with a much bigger body than the first two, opens and closes slightly above.


Three White Soldiers

Source: Ig.com


The appearance of three consecutive bullish candlesticks affirms a buildup in upward momentum. Consequently, the prospect of price edging higher is usually high.


Three black crows

Source: Ig.com


Three black crows are the opposite of the Three white soldiers, comprising three bearish candlesticks, each opening and closing below the previous one. Additionally, their sizes keep on increasing. Their appearance affirms a buildup in selling pressure, suggesting it is time to short eye positions.


Understanding Japanese Candlesticks

Japanese candlesticks stand out for their ability to provide valuable information on price action better than traditional line charts. Their ability to show the high and low points and the opening and closing price levels allows traders to understand market sentiments.

Traders rely on these candlestick patterns to ascertain the market's direction based on previous price action. While trading Japanese candlesticks, traders look at the patterns and shapes created by the candlesticks as they oscillate up and down.


Bottom Line

Japanese candlesticks are vital trading tools that display data to traders that affirm the state of the market. Based on the various patterns, traders can better understand the prevailing trend and which side has the upper hand. Consequently, technical traders use them to predict future price action on understanding the prevailing market sentiment.

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