Japanese Candlestick Patterns

In the world of trading it is imperative to be aware of price changes and developments, so candlestick patterns have become a strategic tool for financial analysis and the correct direction of asset prices.

This time we bring you the most relevant points of the Japanese candlestick patterns so that you have a guide that gives you the basis to help you perform an effective technical analysis and understand in a simple way this important part of trading.

In other words, the Japanese candlestick patterns will allow you to graphically analyze the evolution of an asset, so you can interpret in advance what is going to happen, considering that each candlestick represents the price in the financial market.

Anatomy of a Japanese candle

A Japanese candlestick anatomically consists of a body and two wicks which are also known as shadows. If we look at it from a geometrical point of view, it is as simple as the body of the candlestick is represented by a rectangle, which points to an opening price and a closing price.

The body of the candlestick is presented with two vertical lines, which we recognize as wicks, of which one is projected from the top and the other from the bottom. This trading tool allows us a better visualization in a graphical way.

Meaning of colors and shades

Due to their structure and characteristics, Japanese candlesticks will give you a better interpretation of the direction of financial trends. The relevance of this type of charts is that they indicate the information of the price movements through the body, the color and the shadows.

The color
The color of the candlestick will indicate whether we are in an upward or downward trend, which means that, according to the color of the candlestick, we can analyze whether the price of the asset is increasing or decreasing.

An uptrend candlestick is represented with green color and in some analytical platforms, it can be reflected with white color, while bearish candlesticks are represented with red or black color. However, there are now platforms that allow you to customize the color of the candlestick.

The shadows

The length of the shadows indicates valuable information for technical analysis, in which a shadow or wick indicates the minimum and maximum of prices at the moment and according to its length we can determine the level of volatility of the market.

In this way we can say that by observing the upper shadow of the candlestick, we can easily visualize the maximum price that has been reached at a given time, as well as the minimum price by observing the lower shadow.

Basic types of candles

The basic Japanese candlestick patterns that we find are:

• Bullish candlestick pattern: this candlestick pattern indicates that the trend will change and that the price of the asset is rising.
• Bearish candlestick pattern: in contrast to the uptrend, this pattern signals the decline of the market.
• Continuation pattern: This pattern tells us that the current trend will continue on a continuing basis.

48 Fundamental Candlestick Patterns

If you want to excel in the stock market and make the best financial decisions, it is important that you learn to recognize Japanese candlestick patterns. And yes, there are more than 40 patterns at your disposal to achieve the best trading strategy.

Here are some of them so that you can familiarize yourself with them, but don't worry, with this orientation and your common sense it will be a simple task to advance positively in the financial market.

Single-handed sailing skippers

A candlestick pattern characterized by a single candlestick. An example of this type of pattern is the inverted hammer pattern.

Double candlestick patterns

This Japanese candlestick pattern is presented to us with two consecutive candlesticks, such as the bullish engulfing pattern.

Triple candlestick patterns

As its name indicates, this pattern is made up of a sequence of three candlesticks, which in this case, are in charge of announcing the market trend. An example is the pattern of three white soldiers.

Bullish Trend Change Patterns

Hammer and Inverted Hammer

The hammer is represented by a short upper body and a long lower wick, this individual pattern signals an approaching uptrend.

The inverted hammer, this pattern is presented with a short body candlestick at the bottom and a long wick at the top, this pattern is formed during the downtrend.

Bullish Envelope

This pattern is formed by two candlesticks, in which a bearish candlestick is displayed and next to it a larger bullish candlestick that pretends to wrap it, which is interpreted that the low closing prices will give a change to the uptrend. This pattern is formed in a downtrend.

Morning Star

This pattern of three consecutive candlesticks, arises at the end of a downtrend. This pattern stands out because the first candlestick is bearish, and the second candlestick is bearish but small in size, denoting the indecision of the market, however the third candlestick is bullish, indicating the positive change in prices.

Bearish Trend Change Patterns

Shooting Star

This pattern shows a small candlestick at the bottom and a long upper wick. The shooting star emerges during an uptrend, in which its long wick reflects the attempt to increase the price and on the other hand the size of the body towards the bottom, indicates that this attempt is unsuccessful and the price will be in a downtrend.

Bearish Envelope

This pattern is formed by two candlesticks, in which a bullish candlestick is displayed and next to it a larger bearish candlestick that seeks to wrap the bullish candlestick, this indicates that the high closing prices will give a change to the downtrend. This pattern is formed in an uptrend.

Based on this orientation, you will be able to analyze other bearish reversal patterns, such as the three black crows pattern and the Hanging Man pattern.

Continuation Patterns

After reviewing the bullish and bearish trend change patterns, we also find the continuation patterns, which, although their name indicates it, each pattern has its variants.

Doji and its variants

The Doji is a continuation pattern that signals price neutrality. This pattern shows us a very small or almost non-existent candlestick body, which indicates that the opening price and closing price is the same or very similar and in turn is presented with long lower and upper wicks.

This candlestick, which resembles a cross, can appear in bullish as well as bearish markets. So it is useful to be alert to upcoming market changes after what is considered a period of uncertainty.

Other relevant continuation candlestick patterns are the Bullish and Bearish Harami, the Three-Way Ascending and Descending.

How to Interpret Candlestick Patterns

The interpretation of candlestick patterns is as simple as recognizing the characteristics of the actual body of the candlestick and its shadows at a given time.

Reading of wicks and bodies

The body of the candlestick is delimited by the opening and closing of the price of an asset, and as a general rule we can see it in green or red colors, according to whether the trend is bullish or bearish.

As for the highlights or also known as shadows, it indicates the rises and falls.

Measurement of signal strength

Japanese candlesticks allow a considerably accurate interpretation of market volatility, direction, slope and price movement at a given time....

The size of the candlestick body, the length of the lower and upper wicks and the color of the candlestick are the major indicators that give us the signals we require to make financial decisions over a range of time.

Combination with other indicators

This is a tool that graphically provides signals with a high percentage of accuracy, however in times of uncertainty or a market that is presented with a neutrality between opening and closing, it is common to combine it with other indicators, such as moving averages and oscillators, among others.
In some cases it may help to combine basic candlestick patterns with more complex patterns.

Trading Strategies with Candlestick Patterns

Thanks to candlestick patterns it is possible to make better financial decisions and plan more successful trading strategies.

Real-time pattern identification

By having the facility to observe and predict market changes with real-time candlestick patterns, you will be able to identify and visualize upward or downward price trends and anticipate them in order to make the most suitable decision.

Risk management

In the area of trading it is of vital importance to ensure the profitability of investments, so it is essential to have a good risk management.

The analysis of short line candlestick patterns allows to obtain accurate data of the market situation in a short period of time, to predict price changes and possible risks.

Signal validation

The validation of signals in candlestick patterns is fundamental in technical analysis, so once trends are identified and influential factors are recognized at that moment, it is very helpful to rely on other indicators to validate all the information.