Japanese candlesticks are an essential tool for every trader looking to understand market behavior through charts. Each candlestick pattern can offer clues about the future price direction and today I am going to show you the most crucial patterns that will help you understand price direction in a simple way. (There is a little gift at the end).
Let's get started:
There are three crucial aspects of Japanese candles that you should keep in mind: their body, their wicks and their placement. (Save this post for reference)
Candle Body: The candle body represents the difference between the opening price and the closing price over a specific period. A large body indicates a strong movement in the direction of the trend, either bullish or bearish. For example, a bullish body (green or white) suggests that buyers have dominated the period, while a bearish body (red or black) indicates that sellers have taken control. The size of the body can also reflect trading volume, which provides insight into the strength behind the price movement.
Candle Wicks: Wicks, or shadows, represent the highs and lows reached during the candle period. A long wick can indicate indecision in the market, suggesting that although there was an attempt to move the price in one direction, it ultimately failed to sustain that move. For example, a candle with a long up wick in an uptrend can signal that buyers are losing strength, which could herald a reversal. On the other hand, short wicks typically indicate that the trend remains strong, as prices do not deviate significantly from the open and close.
Chart Location: Candles that form at support or resistance levels are especially significant. For example, if a reversal candle (price trend change) appears at a resistance level after an uptrend, it may indicate that sellers are beginning to take control, suggesting a possible trend change. Likewise, a bullish candle at a support level may signal that buyers are willing to enter the market, which could lead to a continuation of the uptrend.
Below I summarize 20 Japanese candlestick patterns or configurations that you as a trader should know before buying or selling in the market:
1. Hammer Candle: A candle with a small body and a long downward wick, indicating a possible bullish reversal after a downtrend.
2. Inverted Hammer Candle: Similar to the hammer, but appears in a downtrend. It suggests a possible bullish reversal.
3. Morning Star Candle: Composed of three candles, where the first is bearish, the second is small (doji) and the third is bullish. It indicates a possible change in trend from bearish to bullish.
4. Evening Star Candle: Opposite the Morning Star, it consists of three candles that indicate a change in trend from bullish to bearish.
5. Doji Candle: A candle with a very small body, indicating indecision in the market. Depending on its position, it may signal a change in trend.
6. Bullish Engulfing Candle: This occurs when a bearish candle is followed by a bullish candle that completely engulfs the previous one. It indicates a possible change to an uptrend.
7. Bearish Engulfing Candle: Counterpart to bullish engulfing, where a bullish candle is followed by a bearish candle that engulfs it, suggesting a possible downtrend.
8. Continuation Candle: A candle that continues the direction of the current trend, whether bullish or bearish.
Bullish Continuation Candle: In an uptrend, a continuation candle can appear after a small correction. If this candle is green (or white), it indicates that buyers are ready to push the price up again.
Bearish Continuation Candle: In a downtrend, a continuation candle may appear after a small bounce. If this candle is red (or black), it suggests that sellers are ready to continue pushing the price down.
9. Bullish Harami Candle: A bearish candle followed by a bullish candle that is contained within the body of the previous candle. It indicates a possible change in trend.
10. Bearish Harami Candle: Opposite of the bullish harami, where a bullish candle is followed by a contained bearish candle, suggesting a possible reversal.
11. Three White Soldiers Candle: Three consecutive bullish candles that close near the high, indicating strong buying pressure.
12. Three Black Crows Candle: Three consecutive bearish candles that close near the low, suggesting strong selling pressure.
13. Long Shadow Candle: A candle with a long wick that indicates price rejection at a specific level, which may signal a trend change.
14. Big Body Candle: A candle with a large body that indicates strong price movement, either bullish or bearish.
15. Small Body Candle: Indicates indecision in the market; may be a sign of consolidation before a significant move.
16. Profit Taking Candle: A candle that shows a reversal in the trend due to profit taking by traders.
17. Reversal Candle: A setup that indicates a possible change in price direction, usually after a prolonged trend.
Small or Large Body: Depending on the type of reversal, the candle may have a small body (as in the case of a doji) or a large body indicating a strong change in buying or selling pressure.
Long Wicks: Reversal candles often feature long wicks, indicating that there was a price rejection at specific levels. This suggests that buyers or sellers attempted to push the price in one direction, but were unsuccessful.
Chart Location: These candles often form at support or resistance levels, which increases their relevance as reversal signals. For example, a bullish reversal candle may appear at a support level, while a bearish reversal candle may form at a resistance level.
18. Volatility Candle: A candle that has a large body and long wicks, indicating a period of high volatility in the market.
19. Consolidation Candle: Several small candles that indicate a narrow price range, suggesting that the market is taking a breather before a move.
20. Breakout Candle: A candle that breaks a support or resistance level, indicating that there may be a significant move in the direction of the breakout.
Knowing these Japanese candlestick patterns is essential for any trader who wants to improve their technical analysis and make smart trading decisions. Remember that, although these patterns are useful, it is always advisable to combine them with other indicators and analysis to increase the probability of success in your trades.
In the following chart, what do you consider based on the Japanese candlestick patterns shown is the next price direction?
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Today I leave you with this great quote from Mark Cuban: "It's not about how smart you are, it's about how hard you work and how well you manage your emotions."
These are times of reading.