Mastering Japanese Candlestick Patterns for Successful Trading

Japanese candlestick patterns are powerful tools for traders looking to predict future price action and find new opportunities. These patterns, which originated in Japan centuries ago for rice trading, consist of a rectangle with lines extending from both ends, representing the opening, closing, highest and lowest prices for a timeframe. In this article, you'll discover the basics of Japanese forex candlesticks and how to read them on forex charts and gain access to a cheat sheet of common patterns.

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What is a Japanese Candlestick?

A Japanese candlestick chart displays a security's opening, closing, high and low prices for a given period. The central part of the candlestick, or the body, represents the difference between the security's opening and closing prices. The upper shadow or wick shows the price distance between the highest point of the trading period and the top of the body, while the lower shadow shows the price distance between the lowest point of the trading period and the bottom of the body.

The color of the candlestick's body indicates whether the security is bullish or bearish. A white or green body is usually used to represent a security that closed at a higher price than it opened, while a black or filled-up body is typically used for a security that closed at a lower price than it opened.

How to Read Japanese Candlestick Patterns on Charts

Understanding Japanese candlestick charts requires knowing the color, body and shadow. The color shows direction; the body indicates opening/closing levels; shadows display the high/low range.

White or green candlesticks typically signify an upward trend, while black ones indicate a downward movement. The body of a white candle has a closed top and an open bottom, whereas a black candle has the opposite. The top of the shadow represents the highest point the market has reached in a given period, while the bottom represents the lowest point, regardless of the color of the candlestick.

Analyzing these three elements, you can learn much about the market's movement during a specific period. For example, a white candlestick with a long body indicates a significant bullish price action. If the wick is taller than the long body, it suggests that volatility was high during that period.

Japanese Candlesticks Cheat Sheet

With the basics firmly in place, it's time to delve into the different kinds of candlestick patterns and their respective meanings.

Single Candlestick Patterns

Single candlestick patterns are formed by just one candlestick and can provide quick insights about potential market turns or continuations.

• Spinning tops: Spinning tops have long upper and lower shadows with small bodies. They indicate indecision in the market.
• Doji: This pattern virtually has no body and forms when opening and closing prices are the same or very close. It reveals indecision in the market.
• Hanging man: The hanging man has a small body near the top of the range with little or no upper shadow and a long lower shadow. It implies a potential bearish reversal.
• Hammer: This pattern has a small body near the top of the range with little or no upper shadow and a long lower shadow. It suggests a potential bullish reversal.
• Inverted hammer: The inverted hammer has a small body near the bottom of the range with a long upper shadow and little or no lower shadow. It indicates a potential bullish reversal.
• Shooting star: This pattern has a small body near the bottom of the range with a long upper shadow and little or no lower shadow. It indicates a potential bearish reversal.
• Marubozu: The marubozu has no shadows with a long body. It reflects strong buying or selling pressure.

Double Candlestick Patterns

These patterns, formed by two candlesticks, provide deeper insight into market psychology.

• Engulfing: The engulfing pattern forms when the second body completely engulfs the first body. It indicates a potential reversal.
• Tweezers: Tweezers comprise two consecutive candlesticks with the same high or low and signify a potential reversal.
• Harami: Occurring when the second body is contained within the first body, a harami shows a potential reversal.
• Homing pigeon: The homing pigeon consists of two consecutive black candles with a second body within the first body. It indicates a potential bullish reversal.

Triple Candlestick Patterns

Formed by three candlesticks, triple candlesticks give traders a more comprehensive picture of market trends.

• Morning star: The morning star forms when the first black candle is followed by a small-bodied candle, then a white candle that closes above the midpoint of the first black candle's body. It indicates a potential bullish reversal.
• Evening star: This pattern emerges when the first white candle is followed by a small-bodied candle, then a black candle that closes below the midpoint of the first white candle's body. It suggests a possible shift towards a bearish trend.
• Rising three methods: The rising three methods pattern forms when three small-bodied black candles follow a long white candle and then another long white candle that closes above the first white candle's close. It suggests that the uptrend will continue.
• Falling three methods: This pattern appears when the long black candle is followed by three small-bodied white candles, then another long black candle that closes below the first black candle's close. It indicates a continuation of the downtrend.
• Three black crows: Three black crows occurs when three consecutive long black candles trend downwards, each opening below the previous day's open and closing progressively downward to establish a new near-term low. It indicates a potential bearish reversal.
• Three white soldiers: They consist of three long, white (or green) candlesticks that trend upward, each opening above the previous day's open and closing progressively upward to establish a new near-term high. This pattern signals a possible bullish reversal.
• Three inside up: This pattern forms when the first black candle is followed by a white candle that closes within the first black candle's body, then another white candle that closes above the first black candle's high. It indicates a potential bullish reversal.
• Three inside down: Three inside down pattern appears when the first white candle is followed by a black candle that closes within the first white candle's body, then another black candle that closes below the first white candle's low. It shows a potential bearish reversal.

Decoding the Market with Japanese Candlestick Patterns

Learning about Japanese candlestick patterns can give traders valuable insights into market movements, enabling them to make smarter decisions. By understanding the fundamentals of these patterns and knowing how to interpret them on charts, traders can enhance their chances of success in forex trading.

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