Japanese Candlesticks

Starting
to trade

Introduction to
Japanese Candlesticks

The Japanese Candles were brought to the West by Steve Nison who, when he got to know this technique of reading charts thanks to a colleague of his in a Japanese broker, decided to spread it. Steve Nison became a great student of Japanese candles, it is like that who started writing a lot about them and the various types of Japanese candles that exist.

Japanese candles are a graphical tool that provide a lot of information about the price of a financial instrument. Most, if not all, trading and analysis platforms include the option to view prices in Japanese candles.

Here you can see an example of a candlestick chart:

Elements of the
Japanese Candlesticks

A Japanese candle is made up of the following elements:

Opening Price

It is the price at which the currency pair started its trading in a given period of time.

Closing Price

It is the price at which the currency pair closed its price in a certain period of time.

Lower Shadow

It captures all the low levels of the price that the quotation of the currency pair had in a certain period of time.

Upper Shadow

It collects all the high levels of the price that the quotation of the currency pair had in a certain period of time.

Minimum

It represents the minimum price at which the price of the pair reached in a given period of time.

Maximum

It represents the maximum price at which the price of the pair reached in a given period of time.

Body of the Candle

It collects all the prices reached during the session and that are between the closing price and the opening price.

There are two important points to consider:

There is something important that you should know, Japanese candles take many different forms and each of these forms shows us different information regarding the behavior of the price in a certain period of time.

Bodies and Shadows of
Japanese Candlesticks

Here we will see a little more about the bodies and shadows:

Candle Bodies

As we have mentioned, there are candle bodies of different sizes. For example, long bodies indicate a strong buying or selling force. The longer the body of the main candle is the buying or selling force.

In contrast, short bodies indicate very little buying or selling activity.

In the case of the long green candle, this indicates that there was strong buying pressure in that session. The longer the green candle, the higher the closing price relative to the opening price, which means that prices rose considerably from open to close due to pressure from buyers.

In the case of the long red candle, it indicates a strong selling pressure. The longer the red candle, the closing price will be much lower than the opening price, which indicates that the price fell considerably due to pressure from sellers.

Candle Shadows

The upper shadows indicate the higher prices reached during the session while the lower shadows refer to the lower prices reached during the session.

Those candles that have long shadows mean that during the session there were many operations that were carried out at price levels beyond the closing and opening ones. The candles with small shadows indicate that during the session the operations were concentrated in price levels close to the opening and closing.

If a candle has a long upper shadow and a short lower shadow it means that the buyers were exerting pressure to raise the price but that the sellers exerted counter-pressure and managed to bring the price to a level close to the opening.

If a candle has a long lower shadow and a short upper shadow, it means that the sellers were exerting pressure for the price to fall but that the buyers managed to push the price higher.

Basic Candle Patterns

Spinning Tops

Candles that have long upper and lower shadows and small bodies are called spinning tops. In this type of candle the color of the body is not relevant.

This candlestick pattern indicates indecision between buyers and sellers.

The small real body (regardless of whether it is bullish or bearish) shows us that there was little price movement between the close and the open, however, the long upper and lower shadows indicate that during the session there was a strong fight between buyers and sellers, but no one won.

What does this mean? That the session opened and closed without major changes but that in the meantime there was a strong battle between buyers and sellers that ended in a tie.

Marubozu

A marubozu is a type of candle that has no shadows, only long bodies.

The green marubozu has a long green body without shadows. The opening price is the equivalent of the minimum price while the closing price is the equivalent of the maximum price.

This type of candle represents strong upward pressure on price as it shows that buyers were in control throughout the session. A green marubozu usually appears at the beginning of an uptrend or as part of a reversal pattern.

The red marubozu has a long, shadowless red body. The open is equal to the maximum price and the close is equal to the minimum price.

It is a candle that represents strong downward pressure as sellers controlled the session. It usually occurs at the beginning of a downtrend or in some trend reversal pattern.

Doji

Doji candles are those that have the same open and close price or, they have really small bodies. A Doji will have a very small body to almost resemble a line.

A Doji represents indecision in the market or a fight for control of the session by buyers and sellers. There are four special types of Doji:

When forming a doji it is important to pay attention to the market context and previous candles.

For example, if a doji forms after a series of candles with long green bodies (bullish), the doji may be indicating that the strength of the buyers is weakening and a change in trend is possible.

Remember that the fact that a doji appears after an uptrend does not immediately mean that a change in trend will occur, it is important that there is a confirmation.

In this case, the confirmation will be given with the appearance of a red long-body candle.

In the event of a downtrend, the appearance of a doji may indicate that sellers are losing steam and a trend reversal is likely to occur. It is important that there is a confirmation with the appearance of a long-bodied green candle before you can think about a change in trend.

Trend Change
Patterns

Something very important that you should always take into account when talking about trend reversal patterns is the trend. Before even thinking about any of these patterns, you should verify that there is a solid previous trend in the price, either up or down.

How can you determine a trend? 

You can use technical indicators like moving averages, apply trend lines or others.

Candle Pattern – Hammer

The hammer and the hanging man are very similar candle patterns, what’s more, their shape is identical. However, the meaning of each of them is different, since the position they occupy in the graph gives them a different interpretation.

The hammer is an uptrend reversal pattern, that is, it forms after a downtrend and indicates possible bullish momentum.

When the price comes in a downtrend (that is, falling) the appearance of a hammer indicates a possible bottom or floor from which the price will start a new uptrend. This interpretation is within the same reading of the candle, the long lower shadow indicates that the selling force pushed the price down, however, the buying force had much more presence and was able to overcome the selling force, causing that the price closes very close to the opening.

Criteria for recognition of a hammer:

TIP: It is a much more reliable pattern if it appears in a consolidated support zone (we will see support and resistance in the next section).

Chart example of a Hammer

IMPORTANT: The fact that a hammer appears after a downtrend does not automatically mean that you should open a buy trade, there are other factors to take into account, such as confirmation with the appearance of a long-bodied bullish candle after the hammer.

Candle Pattern – Hanging Man

The hanging man is a downtrend reversal pattern, that is, it forms after an uptrend and indicates a possible bearish momentum.

When the price comes in an uptrend (that is, rising) the appearance of a hanging man indicates a possible top or ceiling from which the price will initiate a new downtrend. This interpretation is within the same reading of the candle , the long lower shadow indicates that the selling force pushed the price down, the buying force was able to outperform the selling force causing the price to close very close to the opening. This is an alarm signal, as it indicates that the selling force is starting to gain momentum.

Criteria for the recognition of a hanged man:

TIP: It is a much more reliable pattern if it appears in a zone of consolidated resistance (we will see support and resistance in the next section).

Chart example of a Hanged Man

IMPORTANT: The fact that a hanging man appears after an uptrend does not automatically mean that you should open a sell operation, there are other factors to take into account, such as confirmation with the appearance of a long-bodied bearish candle after the hanging man.

Candle Pattern – Inverted Hammer

The inverted hammer and the shooting star are very similar candle patterns, what’s more, their shape is identical. However, the meaning of each of them is different, since the position they occupy in the graph gives them a different interpretation.

The inverted hammer is an uptrend reversal pattern, that is, it forms after a downtrend and indicates possible bullish momentum.

When the price comes in a downtrend (that is, falling) the appearance of an inverted hammer indicates a possible bottom or floor from which the price will start a new uptrend. This interpretation is within the same reading of the candle, the long upper shadow indicates that the buying force pushed the price up, the selling force had much more presence making the price close very close to the opening. This is a red flag, as it tells us that the buying force is starting to gain momentum.

Recognition criteria for an inverted hammer:

TIP: It is a much more reliable pattern if it appears in a consolidated support zone (we will see support and resistance in the next section).

Chart example of an Inverted Hammer

IMPORTANT: The fact that an inverted hammer appears after a downtrend does not automatically mean that you should open a buy operation, there are other factors to take into account, such as confirmation with the appearance of a long-bodied bullish candle after the inverted hammer.

Candle Pattern – Shooting Star

The shooting star is a downtrend reversal pattern, that is, it forms after an uptrend and indicates a possible bearish momentum.

When the price comes in an uptrend (that is, going up) the appearance of a shooting star indicates a possible top or ceiling from which the price will start a new downtrend. This interpretation is within the same reading of the candle , the long upper shadow indicates that the buying force pushed the price up, however, the selling force had much more presence and was able to outperform the buying force, making the price close very close to the opening.

Criteria for recognition of a shooting star:

TIP: It is a much more reliable pattern if it appears in a zone of consolidated resistance (we will see support and resistance in the next section).

Chart example of a Shooting Star

IMPORTANT: The fact that a shooting star appears after an uptrend does not automatically mean that you should open a sell trade, there are other factors to take into account, such as confirmation with the appearance of a long-bodied bearish candle after the shooting star.