The 12 Most Essential Japanese Candlestick Patterns: Your Complete Guide to Understanding Financial Market Movements

Japanese candlesticks represent one of the most powerful analytical tools used by traders across financial markets, particularly in forex and CFDs on stocks and indices. These patterns enable traders to identify potential market trends, reversal points, and emerging directions. Below, we examine 12 of the most significant candlestick patterns that every technical trader should master:

1. Hammer Candlestick

The hammer is characterized by a long lower shadow that's at least twice the length of the real body. This pattern typically appears at the end of downtrends and signals a potential bullish reversal. The pattern's reliability increases significantly when the body is bullish (green or blue).

Key characteristics:

• Small body at the upper part of the trading range
• Long lower shadow indicating rejected selling pressure
• Minimal or no upper shadow
• Most effective when appearing after a clear downtrend

2. Inverted Hammer

The inverted hammer has a similar structure to the hammer, but with the long shadow appearing above rather than below. This pattern emerges at downtrend bottoms and signals a possible bullish reversal despite continued selling pressure.

Market significance:

• Indicates buyers attempting to push prices higher during the session
• Shows bulls gaining momentum despite selling pressure
• Requires confirmation with a bullish candle in the following session
• Strength increases when formed at key support levels

3. Harami Pattern

This two-candle formation appears during established trends. The first candle shows strong trend movement, while the second, smaller candle is completely contained within the range of the first candle's body. This pattern suggests potential trend exhaustion and reversal.

Two key variations:

• Bullish Harami: First candle is bearish, followed by a smaller bullish candle within the first candle's body
• Bearish Harami: First candle is bullish, followed by a smaller bearish candle within the first candle's body

4. Shooting Star

The shooting star emerges during uptrends, featuring a small body at the bottom with a long upper shadow. This pattern indicates significant selling pressure at higher levels, suggesting a potential bearish reversal.

Recognition factors:

• Small body at the lower end of the trading range
• Long upper shadow at least twice the body length
• Little to no lower shadow
• Higher reliability when formed after a strong price advance

5. Hanging Man

Similar to the hammer in appearance, the hanging man candlestick appears at the peak of uptrends and signals a potential bearish reversal. The long lower shadow indicates selling pressure beginning to emerge despite the uptrend.

Trading considerations:

• Requires confirmation from the next candle showing weakness
• More reliable when accompanied by increased volume
• Signals distribution phase beginning as smart money starts selling
• Often precedes significant downward moves

6. Piercing Line

This is a bullish reversal pattern that forms when a strong bearish candle is followed by a bullish candle that opens lower but closes above the midpoint of the previous bearish candle. This pattern demonstrates buyers regaining control of market momentum.

Formation criteria:

• Strong bearish candle in a downtrend
• Gap down at the open of the second candle
• Bullish second candle closing above the midpoint of the first candle
• Higher reliability in oversold market conditions

7. Bullish/Bearish Engulfing

This powerful two-candle pattern signals strong momentum shifts. In a bullish engulfing, a smaller bearish candle is completely engulfed by a larger bullish candle that follows. In a bearish engulfing, a smaller bullish candle is engulfed by a larger bearish candle.

Strength indicators:

• Larger size of engulfing candle indicates stronger reversal potential
• Higher validity when formed at support/resistance levels
• Volume increase on engulfing candle confirms pattern strength
• Complete engulfing of previous candle (including shadows) shows maximum strength

8. Dark Cloud Cover

This bearish reversal signal appears at uptrend peaks. It consists of two candles: a bullish first candle followed by a bearish second candle that opens higher than the first candle's close but closes below the midpoint of the bullish candle's body.

Pattern recognition:

• Strong bullish candle in an established uptrend
• Gap up at the open of the second candle
• Bearish second candle closing below midpoint of first candle
• Often signals distribution phase beginning at market tops

9. Three Black Crows

This pattern features three consecutive bearish candles, each opening within the previous candle's body and closing at progressively lower levels. This formation indicates sustained selling pressure and suggests continuation of the downtrend.

Reliability factors:

• Each candle should close near its low
• Progressive lower closes indicate increasing bearish momentum
• Little to no lower shadows shows sustained selling
• More significant when formed after an extended uptrend

10. Three White Soldiers

In an uptrend, three consecutive bullish candles appear, with each candle opening and closing at higher levels than the previous. This pattern demonstrates persistent buying pressure and suggests continuation of the bullish trend.

Key validation points:

• Each candle should close near its high
• Progressive higher closes show increasing bullish momentum
• Minimal upper shadows indicate strong buying pressure
• Most reliable when formed after a downtrend or consolidation

11. Morning Star

This three-candle pattern emerges at downtrend bottoms. It begins with a bearish candle, followed by a small-bodied candle (often a Doji) that gaps down, then a strong bullish candle that closes well into the first candle's body. This formation signals a potential bullish reversal.

Structure elements:

• Strong bearish candle showing downtrend momentum
• Small middle candle indicating uncertainty/indecision
• Strong bullish third candle showing buying pressure
• Gap between first and second candles increases pattern strength

12. Evening Star

This pattern forms at uptrend peaks and consists of three candles: a bullish first candle, followed by a small-bodied candle that gaps up, then a strong bearish candle that closes deep into the first candle's body, signaling a potential bearish reversal.

Pattern effectiveness:

• Strong bullish first candle showing uptrend strength
• Small middle candle revealing diminishing momentum
• Strong bearish third candle confirming reversal
• Particularly reliable when third candle erases most of first candle's gains

Important note: Past performance of candlestick patterns does not guarantee future results. It's always recommended to test these patterns on a demo account before implementing them in live trading environments, and to use them in conjunction with other technical analysis tools for confirmation.