Discover the 16 essential Japanese candlestick patterns for investors

Japanese candlesticks are a powerful visual tool for analyzing market movements. In this article, we will explore 16 fundamental candlestick patterns that every investor should know to identify potential trading opportunities.

Understanding Japanese Candles

Japanese candlesticks are graphical representations of price movements in financial markets. They are a key component of technical analysis, allowing traders to gain valuable insights into price quickly and efficiently.

In a daily chart, each candle represents the trading activity of a full day. The candles have three main characteristics:

1. The body, which shows the range between the open and the close.
2. The wicks or shadows, which indicate the highs and lows reached during the session.
3. The color, which indicates the direction of movement. A green ( or white ) body indicates a price increase, while a red ( or black ) one reflects a decrease.

Over time, individual candles form patterns that investors can use to identify important support and resistance levels. Some patterns provide insights into the balance between buying and selling pressure, while others indicate continuation or indecision in the market.

Before you start trading, it is crucial to familiarize yourself with the fundamentals of candlestick patterns and how they can aid in decision-making for trading.

Six Bullish Candlestick Patterns

Bullish patterns often appear after a downtrend, indicating a possible reversal in price movement. These patterns suggest that investors consider opening long positions to benefit from a potential upward movement.

Hammer

This pattern is characterized by a small body with a long lower wick, appearing at the end of a downtrend.

A hammer indicates that, despite selling pressure during the session, strong buying pressure was able to push the price up at the close. Although the color of the body may vary, green hammers generally indicate a stronger bullish sentiment than red ones.

Inverted Hammer

Similar to the hammer, but with a long upper wick and a short lower wick.

This pattern suggests strong buying pressure followed by selling that failed to push the price significantly lower. The inverted hammer indicates that buyers may soon take control of the market.

Bullish Envelope

Formed by two candles, this pattern shows a small red body completely engulfed by a larger green candle the next day.

Although the second day opens lower, the bullish momentum drives prices up, resulting in gains for investors who held their positions.

Piercing pattern

Another two-candle pattern consists of a long red candle followed by a long green one.

There is usually a significant bearish gap between the close of the first day and the open of the second. This indicates strong buying pressure, as the price rises to or above the midpoint of the previous candle.

Morning Star

Considered a ray of hope in a bearish trend, this three-candle pattern consists of a small body between two larger candles, one red and one green. Traditionally, the “star” does not overlap with the large bodies, creating gaps both at the open and at the close.

It indicates that the selling pressure on the first day is decreasing, anticipating a possible bullish movement.

Three white soldiers

It occurs over three consecutive days, showing a series of long green ( or white ) candles with small shadows, each opening and closing progressively higher than the previous one.

It is a strong bullish signal after a bearish trend, indicating a steady increase in buying pressure.

Six bearish candlestick patterns

Bearish patterns typically form after a bullish trend, signaling a possible resistance point. A pessimistic sentiment about the market price generally leads investors to close long positions and consider opening short positions to take advantage of the expected decline.

Hanging Man

It is the bearish version of the hammer: it has the same shape but appears at the end of a bullish trend.

It indicates that there were significant sales during the session, although buyers managed to push the price up at the close. However, this important sale is seen as a sign that the bullish trend may be losing strength.

Shooting Star

It has the same shape as the inverted hammer, but it forms in an upward trend: small body and long upper wick.

Typically, the market experiences a small bullish gap at the opening, followed by an intraday rally before closing near the opening price, similar to a falling shooting star.

Bearish Envelope

It appears at the end of a bullish trend. The first candle has a small green body that is completely wrapped by a large red candle the next day.

It suggests the peak or deceleration of price movement and indicates a possible imminent market drop. The lower the second candle closes, the greater the likelihood that the trend will be significant.

Evening Star

It is the bearish equivalent of the morning star. It consists of three candles: a small one between a large green and a large red.

Indicates a possible reversal of the bullish trend and is especially significant when the third candle erases the gains of the first.

Three black crows

It consists of three long red candles with short or nonexistent shadows. Each session opens near the previous close, but the selling pressure pushes the price lower and lower at each close.

Investors interpret this pattern as the start of a bearish trend, as sellers outnumber buyers for three consecutive days.

Dark Cloud

Indicates a bearish reversal, like a dark cloud over the optimism of the previous day. It consists of two candles: a red one that opens above the green body of the previous day and closes below its midpoint.

It indicates that sellers have taken control of the session, resulting in a significant price drop. Short shadows suggest that the bearish trend was decisive.

Four continuation candlestick patterns

When a candlestick pattern does not indicate a change in market direction, it is known as a continuation pattern. These can help investors identify periods of consolidation, indecision, or neutral price movements.

Doji

When the market opens and closes at practically the same price, the candle resembles a cross or plus sign. Investors should look for a very small or nonexistent body with variable length wicks.

The Doji represents a struggle between buyers and sellers that ends without a clear winner. By itself, a Doji is a neutral signal, but it can be part of reversal patterns such as the bullish morning star or the bearish evening star.

Spinning Top

These patterns have a small body centered between similarly long wicks. They indicate indecision in the market, resulting in little net change in price: the bulls have pushed the price up, but the bears have pushed it back down. Spinning tops are generally interpreted as a period of consolidation or pause, which could be followed by a continuation of the previous trend or a reversal.

On its own, a spinning top is a relatively neutral signal, but it can be interpreted as a sign that the market is ready to move, as it implies that the current market pressure is weakening.

Three bearish methods

This pattern is used to predict the continuation of the current trend, whether bullish or bearish.

The bearish variant is known as “three bearish methods.” It consists of a long red candle, followed by three small green candles, and ends with another long red candle. The green candles remain within the range of the body of the first bearish candle. This shows investors that the bulls do not have enough strength to reverse the trend.

Three bullish methods

It is the opposite of the previous pattern, being bullish, and is known as “three advancing methods”. It consists of three small red candles between two long green candles. The pattern shows investors that, despite some selling pressure, buyers maintain control of the market.

Perfect your Japanese candlestick reading

The best way to master reading Japanese candlesticks is to practice trading based on the signals they provide. If you don't feel ready to trade in real markets, you can develop your skills risk-free by using a demo account on Gate.

When using any candlestick pattern, it is essential to remember that, although they are useful for quickly predicting trends, they should be used in conjunction with other forms of technical analysis to confirm the trend.