I believe Japanese candlestick trading patterns are one of the best ways to understand price movement in the market. These patterns give us important clues, like how people feel about the market or when a big change might happen. They show price changes in a specific way that can be very helpful.
In this article, I’ve shared the top 10 Japanese candlestick trading patterns. These patterns are special because they put a lot of information into just one price bar. This makes them more useful than the usual methods, like simple high-low-close bars or straight lines, which just show closing prices.
Japanese candlesticks form patterns that can predict where prices will go next. When you use the right colors, these patterns become even more powerful. It’s amazing to think that these techniques were first used by Japanese rice traders in the 1700s!
Steve Nison is the person who introduced these Japanese candlestick patterns to the Western world in his famous 1991 book, Japanese Candlestick Charting Techniques. Because of him, many traders, including myself, can now spot these patterns easily.
Some of these patterns have interesting names, like "dark cloud cover," "evening star," and "three black crows." There are also single-bar patterns, like the Doji and Hammer, which have become key parts of many trading strategies, both for buying and selling. I find these patterns not just useful, but also fascinating because of their history and effectiveness.
What Is the Japanese Candlestick Trading Pattern?
I think Japanese candlestick trading patterns are a really smart way to look at price charts. These patterns show the opening, closing, high, and low price points for a certain period. What’s interesting is that Japanese rice traders came up with this method hundreds of years ago. Later, in the 1990s, a trader named Steve Nison helped make these patterns popular among Western traders. Thanks to him, many people, including myself, use these patterns to make better trading decisions.
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In my opinion, the Japanese candlestick trading patterns strategy is one of the best and most popular ways to quickly analyze price movements, especially for technical traders. These patterns give you a lot more visual information than regular line charts. They show you a market’s highest and lowest points, as well as the opening and closing prices, all at once.
While High Low Open Close (HLOC) charts also provide a similar level of detail, many traders, including myself, find Japanese candlesticks easier and faster to analyze. It’s worth trying out both types of charts to see which one works best for you. Personally, I prefer using Japanese candlesticks because they make it easier to track past price movements.
Technical traders like me use Japanese candlestick patterns to get clues about where the market might go next. We do this by looking for specific shapes that often lead to either a continuation of the current trend or a reversal. What’s great about this strategy is that you can use it to analyze price movements over any time period, from just one second to an entire year.
The Top 10 Japanese Candlestick Trading Patterns
Some Japanese candlestick trading patterns can be strong indicators of future price movements for technical traders. The idea behind this strategy is solid - these patterns reveal specific behaviors that have often led to accurate predictions in the past.
Of course, it’s important to remember that just because something has worked before doesn’t mean it’s guaranteed to work again. However, these patterns can still be very useful for spotting trading opportunities. Below, I’ve discussed the top ten Japanese candlestick trading patterns.
1. Spinning Tops
A spinning top forms when a candlestick has a long wick both above and below a small body. This shows that the market had a wide trading range, but there wasn’t much difference between the opening and closing prices. Unlike many other candlestick patterns, it doesn’t really matter if the spinning top appears on a red or green candlestick.
What’s important is that the body is small, and the wicks are long. In a spinning top, there’s a battle going on between buyers and sellers, but neither side is winning decisively. Technical traders like me see spinning tops as a sign of weakness in a current trend.
If a spinning top forms after a long upward trend, it could mean that the positive sentiment is running out of steam. On the other hand, if it appears after a downtrend, it might indicate that bullish sentiment is starting to gain strength. This pattern is a great example of how candlestick patterns can give us clues about what might happen next in the market.
2. Marubozu
The term Marubozu comes from the Japanese word for "bald," which is a perfect description because a Marubozu candlestick has no wick at all. In other words, it’s all body. A green Marubozu opens at the lowest price and closes at the highest price.
If we think about what happens during the formation of a green Marubozu, there’s no price movement above or below the opening and closing prices. This makes a green Marubozu a clear sign of strong bullish sentiment. The bulls pushed the market’s price higher without much resistance from the bears, which shows their dominance.
On the other hand, a red Marubozu opens at the highest price and closes at the lowest price, making it the exact opposite of the green Marubozu. A red Marubozu tells us that the bears were in almost complete control during the session. Because of this, a downtrend might continue, or an uptrend could reverse.
In my opinion, the Marubozu is one of the most straightforward and reliable candlestick patterns to read. It gives a very clear picture of who’s in charge - bulls or bears - and can help traders make informed decisions about where the market might be headed next.
3. Hammer
If a market forms a hammer after a long downward trend, technical traders like me often see it as a sign that the market might be ready to stage a bullish comeback. You can spot a hammer by its long wick below a relatively short body, with little to no wick above.
The body should be several times shorter than the lower wick. This pattern shows that the market hit a new low during the session, but then bounced back and closed much higher. So, while there was a lot of selling pressure, buyers stepped in and pushed the price up before the session ended.
In my experience, the hammer pattern is a powerful indicator that the bears might be losing control, and the bulls are starting to fight back. It’s one of those patterns that really stands out on a chart, making it easier to spot potential reversals and take advantage of them.
4. Hanging Man
A hanging man looks almost exactly like a hammer, but the key difference is where it appears. While a hammer shows up after a downtrend, a hanging man appears after an uptrend.
Traders like me see the hanging man as a sign that selling pressure is building up against buyers, which means a reversal could be coming soon. A red hanging man is usually seen as a stronger signal than a green one, but both are considered bearish patterns.
In my view, the hanging man is a warning that the market might be about to turn, so it’s a pattern I always watch out for when I’m analyzing charts. It’s a great way to spot potential changes in market sentiment and prepare for what might happen next.
5. Engulfing
In an engulfing Japanese candlestick pattern, one candlestick is immediately followed by a larger one in the opposite direction. In a bullish engulfing pattern, a red candlestick is completely overshadowed by a green one that comes right after it. Traders like me might see this as a sign that the market’s optimism is gaining strength.
When a bullish engulfing pattern appears, especially after a period of sideways movement or consolidation, it could mean that a big upward move is on the way. On the other hand, a bearish engulfing pattern happens when a bearish candlestick follows and engulfs a smaller bullish one. This could be a sign that negative sentiment is starting to take hold.
In my opinion, the engulfing pattern is one of the most reliable indicators of a potential market shift. Whether it’s bullish or bearish, this pattern can provide a clear signal of a significant move in the market, making it a valuable tool for traders looking to anticipate the next big trend.
6. Harami
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In a bullish harami, a red candle is followed by a green one that stays within the body of the previous candlestick. This is often seen as a sign that a downtrend might be coming to an end. The opposite happens in a bearish harami, where a green candlestick is followed by a small red one. In both cases, the size of the second candlestick is used to determine the strength of the signal.
In my view, the harami pattern is a subtle but important indicator that a trend might be about to change. While it’s not as bold as some other patterns, it’s still a valuable tool for traders like me who are looking to catch early signs of a market reversal. The size of the second candlestick is crucial in judging the strength of this signal, so it’s something I always pay close attention to when analyzing charts.
7. Homing Pigeon
A bullish homing pigeon is a pattern that looks similar to a harami, but with a twist. In this pattern, both candles are red, and the body of the second candlestick is completely contained within the body of the first. This pattern is often seen as a sign that an uptrend might be about to start.
Traders like me look for homing pigeons during downtrends that seem to be weakening or when the market is approaching a key support level. However, it’s important to note that the homing pigeon pattern is considered less reliable in highly volatile conditions.
In my opinion, the bullish homing pigeon is a more subtle pattern, and while it can be a useful signal in calmer markets, it’s not something I rely on when the market is moving wildly. It’s a pattern that requires careful observation and is best used in combination with other indicators to confirm its signal.
8. Morning Star
A morning star pattern appears when a market reaches a point of uncertainty after a long downward movement and then starts to recover. Traders like me see this as a sign that the recovery might turn into a lasting uptrend. The morning star pattern is made up of three candlesticks:
- A red candlestick with a large body – This represents the continuation of the downtrend.
- A candlestick with a short body, often a spinning top – This shows that the bulls are beginning to enter the session, signaling uncertainty.
- A green candlestick with a tall body – This confirms that a reversal has started, indicating that the uptrend may be underway.
In my experience, the morning star is a powerful pattern that can signal the beginning of a strong upward movement. It’s one of those patterns that I always keep an eye out for when analyzing a market that’s been in decline, as it often marks a turning point where the bulls start to take control.
9. Evening Star
An evening star is the opposite of a morning star. It shows a bull market that reaches a point of uncertainty and then begins to reverse. The pattern looks similar to a morning star, but it starts with a green candlestick after a long uptrend and ends with a red one.
Both evening and morning stars can also be formed with a Doji in the middle. A Doji represents a period of greater uncertainty and can sometimes be seen as a sign that the upcoming move will be more pronounced.
In my view, the evening star is a key pattern to watch for when a market has been rising for a while. It can signal that the upward trend is losing steam and that a downward reversal might be on the way. The presence of a Doji in the middle makes this pattern even more significant, as it highlights the market’s indecision and increases the likelihood of a sharp move in the opposite direction.
10. Three Black Crows
Three Black Crows pattern is a strong indicator that an uptrend might be coming to an end. This pattern appears after a period of upward movement and consists of three consecutive red candlesticks, each longer than the last.
For this pattern to be most effective, the second candlestick should have a short or nonexistent lower wick, and the third should have almost no wick at all. This shows that sellers are gaining control and pushing prices down steadily. When I see the Three Black Crows pattern, I consider it a good opportunity to think about opening a short position to potentially profit from the upcoming downtrend.
How to Analyze Japanese Candlestick Trading Pattern
Understanding and analyzing Japanese candlestick patterns has been incredibly helpful in my trading journey. To read these patterns effectively, I focus on three main parts of each candle: the color, the body, and the wick.
- Color: The color tells you the direction of the price movement during that period. Green candles show that prices went up, while red candles indicate that prices went down.
- Body: The body shows the opening and closing prices. On a green candle, the bottom of the body is the opening price, and the top is the closing price. For a red candle, it's the opposite.
- Wick (or Shadow): The wick shows the highest and lowest prices reached during the period. The top of the wick is the highest point, and the bottom is the lowest.
By looking at these three elements, you can learn a lot about how the market moved during a specific time frame. For example, a long green body tells me that there was strong buying pressure, while a candle with a long wick might indicate high volatility and a battle between buyers and sellers.
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Conclusion
I believe that Japanese candlestick patterns are a valuable tool for traders looking to identify investment opportunities over various time frames. Whether you're investing for the long term or making quick trades in fast-moving markets like forex, these patterns can help you time your entry and exit points more effectively.
However, it's important to remember that no single tool can guarantee success in trading. I always combine candlestick analysis with other forms of research and risk management strategies to make informed decisions. Practice and experience are also key in learning how to read and interpret these patterns accurately.
Before you start trading using Japanese candlestick patterns, make sure to educate yourself thoroughly and consider seeking advice from experienced traders or financial advisors. Trading always involves risk, and it's essential to be prepared and informed before making any investment decisions.
Should you use the Japanese candlestick trading patterns on your own at all?
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This article has been updated by Aman Sonewane on 23rd August 2024.