Master Japanese Candlesticks: The Foundation of Technical Analysis in Trading

Technical analysis is one of the three main approaches in trading, along with fundamental and speculative analysis. If you decide to specialize in analyzing markets through charts and historical patterns, you need to master a fundamental element: Japanese candlesticks. This knowledge is practically mandatory for any trader who wants to trade confidently in currencies, cryptocurrencies, commodities, or stocks.

Origin and Definition of Japanese Candlesticks

Japanese candlesticks have a fascinating history. Their name comes from the rice markets of Dojima in Japan, where traders originally used them to record price fluctuations. Later, the West adopted this tool for modern financial market analysis.

A Japanese candlestick is the visual representation of price action during a specific period. Its structure contains two main components: the body and the wicks. However, each candlestick provides four crucial data points known as OHLC (Open, High, Low, Close).

In most trading platforms, green candles indicate bullish movements while red candles signal bearish movements. You can customize these colors according to your preference. Hovering over a candlestick will display the OHLC values, percentage change, and the corresponding timeframe.

Let’s take a practical example: a 1-hour candle in EUR/USD with an open at 1.02704, high at 1.02839, low at 1.02680, and close at 1.02801. This represents a gain of 0.10%. The body shows the open and close, the wicks indicate highs and lows, and the color communicates whether it was bullish or bearish.

Main Japanese Candlestick Patterns

Engulfing Candle

This is a pattern of two candles of different colors. The first has a small body, and the second completely engulfs it, surpassing the previous opening price. It generally anticipates trend reversals. If the pattern is confirmed, it can provide a reliable support or resistance level.

A practical example: on a gold chart, a daily engulfing candle can validate a buy entry around 1700 USD when combined with other confluences.

Doji Pattern

The doji is a candle that represents indecision and balance between buyers and sellers. It is characterized by a very small body and long wicks, creating a cross shape. The opening and closing prices are practically identical, even if the price fluctuated significantly during the period.

This pattern requires additional analysis of previous candles to predict future movements. It is a neutral signal indicating market uncertainty. To take advantage of it, look for confluences with other technical indicators.

Spinning Tops

Very similar to doji, spinning tops also reflect balance between buyers and sellers. The difference lies in their bodies being slightly larger than doji. Long wicks indicate transaction volume and the intensity with which different investors participated during the period.

Hammer and Hanging Man

Both patterns have the same visual shape: a small body with a very long wick on one end. The crucial difference is in the preceding candles.

The hammer appears after an uptrend. A candle with a long wick upward suggests buyers lost strength. The price rose, but then sellers regained ground. This is a signal to look for selling positions.

The hanging man shows the same shape but appears within a downtrend. Although it looks similar, its interpretation is opposite: it indicates that sellers are losing control and the market could turn bullish.

Marubozu

This Japanese pattern (whose name means “bald” in reference to the absence of wicks) indicates a strong trend signal. The body is very long, and the wicks are minimal or nonexistent. The larger the body, the greater the trend strength.

A bearish marubozu indicates clear control by sellers after testing resistance. A bullish marubozu reflects dominance by buyers after testing support.

How to Apply Candlesticks in Your Trading Strategy

Identification of Key Levels

Japanese candlesticks are superior to line charts for identifying support and resistance levels. A line chart only considers closing prices, ignoring opens, highs, and lows. The wicks of candlesticks reveal information that line charts would never show.

For example, if a currency tries to break a support level three times and bounces each time, you can identify this level thanks to the wicks of the candles. With line charts, that same support might go completely unnoticed.

Multi-Timeframe Analysis

Candles work across all timeframes: 1 minute, 15 minutes, 1 hour, 1 day, or 1 month. A 1-hour candle contains four 15-minute candles. Each of these contains three 5-minute candles.

Imagine a 1-hour candle with a very long wick upward but closing below the open. When viewed on a 15-minute timeframe, you’ll see the detail: it rose in the first candles, reached highs, but the last candles dropped sharply, causing that close below the open.

This understanding is crucial: long wicks on larger timeframes reflect failed attempts to change direction.

Combination with Other Tools

Don’t trade based solely on candlestick patterns. Professional traders seek confluences: at least three signals confirming the same conclusion.

Example: you find a bearish engulfing candle + the 61.8% Fibonacci retracement level coincides with a support identified + a moving average acts as resistance. These three confluences create a high-quality trading opportunity.

With this triple confirmation, your entry is almost perfect.

Tips to Develop Your Skill

Train your eye constantly: You don’t need to trade while learning. Dedicate several hours daily analyzing charts of different assets in the past. Look for historical patterns. Visualize how they behaved. With consistent practice, you will eventually identify patterns with just one or two candles.

Prioritize higher timeframes: A hammer on a daily chart is much more reliable than one on a 15-minute chart. Signals from larger timeframes are more effective and accurate.

Use demo accounts: Trading platforms offer virtual accounts without real money. Practice there risk-free. Place trades, close them, experiment with different strategies.

Combine technical and fundamental analysis: Professional traders never ignore fundamental analysis. Know what’s happening in the economic, political, and social environment. This contextual information enhances your technical operations.

Professional mindset: Compare trading to professional football. A footballer trains almost 3 hours daily for a 90-minute match. You should analyze the market extensively for hours to find multiple confluences, then open one or two trades and wait for their full development. You don’t need to trade constantly. Quality beats quantity.

Conclusion

Mastering Japanese candlesticks is the first fundamental step in technical analysis. Once you understand what each candle represents, you’ve covered more than 50% of the way to becoming a competent technical analyst. Candles work in all markets: forex, cryptocurrencies, commodities, and stocks, on any timeframe you choose to trade.

Remember: candles are your tool to read the past and project the future of the market. Use them wisely, look for confluences, practice tirelessly, and develop the discipline needed to be a successful trader in the long term.