Japanese Candlesticks: Find Reliable Signals
There are different types of charts. Nevertheless, most traders prefer Japanese candlesticks. The candles provide the full range of information a trader needs to build a successful trade. Moreover, candlesticks combine patterns that serve as reliable signals of the market’s direction. To know more about the most trustworthy patterns and candlesticks’ signals, read on.
What Is Japanese Candle?
Japanese candlesticks are the most comprehensive chart type that shows crucial price points: open, close, high, and low. If we consider other types, such as the line chart, we will notice that it only connects dots of close prices. Thus, it provides a lack of useful information for trading.
Japanese candlesticks are the chart type that provides useful information on market dynamics.
One candle reflects the price’s dynamics within a particular period. The period depends on the timeframe you use for trading.
Japanese Candle: What It Looks Like
A candlestick looks like a bar (body) with or without thin lines (so-called shadows). The body is a range between two major points – open and close prices. Shadows are placed above (upper shadow) and below (lower shadow) the body and correspond to the highest and lowest price points.
Candlesticks have two colors. Usually, traders use either black and white or green and red schemes. Thus, if the candle is white or green, it’s bullish and means the price was growing within the chosen period. If it’s black or red, it’s bearish and reflects the downward price direction within the selected period. Nevertheless, trading platforms allow you to choose the colors you like.
To learn how to read candlestick charts, let’s look at the example. You see a bullish candlestick as it has a green color. We chose a EUR/USD pair and a 1-hour timeframe, so you know how the price of an asset rose within one hour.
1.1363 is the highest point that stands for the highest price within one hour. 1.1338 is the close price, the level at which the candle closed after one hour passed. 1.1233 is the open price, the rate at which the EUR/USD trade opened. 1.1195 is the lowest point the EUR/USD pair reached within one hour.
Here, we showed the bullish candle. If you see the bearish one, it will have a different color and open, and close prices will be placed opposite each other. Thus, the open price will be above the closed one.
However, the whole chart consists of many candlesticks. Consequently, you have the entire picture of the price movement.
Japanese Candlesticks and the Bar Chart
Although both types provide information on four crucial price points, Japanese candlesticks are more convenient. Earlier, bars were depicted only in the color black. Currently, traders can use the same colors as for Japanese candles. However, if you use the black and white scheme, it’s difficult to understand whether bulls or bears are dominant in the market.
Still, when looking for candlestick chart patterns, it’s complicated to determine the bar’s size. The length of the shadows is hardly defined as well. Thus, bar charts are not the best option for trading patterns.
Japanese Candlesticks: Types
There are different types of candles. As we said at the beginning of the article, candlesticks can be either with or without shadows. Moreover, they may have either one shadow or two.
A doji candlestick is a candle with a tiny body that means that opening and close prices were at nearly the same level. It usually has long shadows. Doji candlestick is always a sign of traders’ uncertainty.
Doji doesn’t provide strong signals itself and is considered a “neutral” candle. However, it can be a part of a reliable pattern. If it follows a series of bullish candles, it’s signal bulls have become exhausted, and the trend reversal may happen soon. If doji comes from several bearish candles, it’s a sign of bears’ weakness and a possible reversal up.
At the same time, doji candlestick has four types.
- Long-legged doji. It has long upper and lower shadows with almost the same length. This type reflects the great indecision of investors.
- Dragonfly doji. It’s a strong bullish reversal candlestick that appears at the end of the bearish trend. It has a long lower shadow.
- Gravestone doji. Opposite to dragonfly doji, it occurs at the end of the bullish trend. The candle has a long upper shadow.
- Four price doji. You will barely find such a candle on the chart. It shows total market uncertainty and has no shadows.
The length of shadows represents the strength of market fluctuations. Thus, if a candle has long shadows, it means high volatility occurred during the trading session. If shadows are short, it means the market was stable.
- Long upper shadow. If the candlestick has a long upper shadow and a short lower one, it presents bulls who were more active during the session. Still, they couldn’t keep the control, and bears managed to pull the price lower.
- Long lower shadow. If the candle has a long lower shadow and the short upper one, bears dominated in the market, but bulls were stronger to the end of the session and pushed the price up.
The spinning top looks like a doji candlestick. However, the body of the spinning top is more significant. Still, this type of candle has long shadows. Spinning tops also reflect uncertainties of the market but mean both buyers and sellers were active.
Nevertheless, they couldn’t get the situation under control. Like doji candles, if the spinning top follows bullish candlesticks, it’s a sign of the possible reversal down. If the spinning top appears after bearish candles, you may expect the reversal up.
A Marubozu candle doesn’t have upper or lower shadows. When an open price equals the minimum one, and a close one equals the maximum amount, it’s a bullish Marubozu. Contrary, if the opening price is the same as the maximum price and a close one is similar to the minimum one, it’s a bearish Marubozu.
Japanese Candlesticks: The Most Effective Patterns
Japanese candlesticks are not only a chart type but one of the most effective trader’s tools used in technical analysis. Candlestick patterns are widely used and provide reliable signals. Traders prefer candlestick patterns as they are easily found on the chart and occur often.
Candlestick patterns are widely used and provide reliable signals.
Candlestick patterns can be divided into reversal and continuation. As there is a vast number of them, we will consider those that appear more frequently.
Reversal Patterns: Bullish
Bullish reversal patterns occur at the end of the downward trend and signal reversal up.
It’s a pattern that consists of one candlestick. It has a long lower shadow that should exceed the body at least two times. The color of the candlestick isn’t essential. Still, if it’s a bullish candle, the signal is more robust.
The signal will also be more reliable if the candle after the hammer closes above the open price of the candle before the hammer.
It’s a one-candle pattern. The candlestick has a small body and a long upper shadow that surpasses the body twice. The color of the hammer doesn’t matter. Still, if it’s bullish, the signal is more reliable.
This pattern consists of three candles. The first one is a long bearish one. The next one should open with a gap down. The color of the second candlestick doesn’t matter, but it’s preferable if it’s bullish. The third candlestick should open with a gap up. The gap must cover the previous downward gap.
The gap isn’t necessary, but if it appears, the signal is more potent.
Morning Doji Star
This pattern is similar to the morning star, but the second candle is doji. It is supposed to be more reliable than a simple morning star.
The pattern consists of two candles. The first bearish one should fully contain the second bullish candle. To get the confirmation, the third candlestick should be bullish and long.
Bullish Harami Cross
A similar pattern, but the second candle is doji.
Bullish Engulfing Pattern
It’s a pattern with two candles. The first one is bearish. The second one is bullish, its open price should be below the close price of the previous candle and the close price above the open level of the previous candle. Thus, the bullish candle absorbs the bearish one.
Reversal Patterns: Bearish
These patterns occur at the end of the bullish trend and signal the downward movement.
It is a pattern that is presented by one candle. It has a small body and an upper shadow, which is two times longer than the body. The color doesn’t matter. Still, if it’s bearish, the chance the trend will turn down is higher.
It’s a three-candle pattern. The second candlestick opens with a gap up after the big bullish candle. Usually, the second candle is small. The third candle is bearish and opens with a gap down that covers the previous gap up. However, gaps are not crucial.
Evening Doji Star
It’s similar to the evening star pattern; the only difference is that the second candle is doji. Evening doji star pattern is more reliable than the evening star.
It’s a scary name but a strong pattern. It is presented by one candle. The lower shadow exceeds the body two times. The color doesn’t matter, but the bearish one is preferable. However, to be sure the reversal happens, wait to see whether the next candlestick is bearish and closes lower than the candle before the hanging man.
Bearish Engulfing Pattern
The pattern consists of two candles. The first one is bullish; the second one is bearish. The bearish one should open above the high of the bullish candle and close below the low of the bullish one. The strength of the signal depends on the candlesticks’ size. If they are long, the sign is more durable.
The pattern has two candles. The body of the second one should be “included” in the first one. It’s crucial candlesticks have different colors. The pattern should be confirmed by the bearish candlestick that appears after the second pattern-candle.
Bearish Harami Cross
The pattern differs from the previous one only by the second candlestick, which is doji.
Continuation Patterns: Uptrend
Continuation patterns signal the strength of the current trend and predict its continuation.
Upside Tasuki Gap
A bullish candle opens with a gap up but is followed by a bearish candlestick. The bearish candle should open and close below the close and open prices of the previous bullish candlestick. If the bearish candle does not cover the gap, there is a chance of a continuing uptrend. If the gap is fulfilled, it’s more likely the uptrend has ended.
Rising Three Method
Two to five bearish candlesticks should follow a long bullish candle. However, none of them should close below the opening price of the bullish candle. Shadows of the bearish candles shouldn’t be below the open rate of the bullish candle. The last pattern’s candle should open within the previous candlestick body and close above the first bullish candle's close price.
This pattern looks like the flag pattern.
There should be three bullish candles moving progressively. Then, a big “strike” candle should open above the last bullish candle but close below the first bullish candle of the three. All three candles should have an average size. If they are small, the pattern won’t work.
Continuation Patterns: Downtrend
These patterns signal the market will continue falling.
Downside Tasuki Gap
There should be a gap between two downward candles. The third candle closes and opens higher than the second bearish one. If it doesn’t cover the gap, the downtrend will continue.
Bearish Three-Line Strike
There should be three bearish candles moving progressively and then a bullish “strike” candlestick that opens below the close price of the last bearish candle and closes above the first bearish candle of the three.
Falling Three Method
Two to five bullish candles should follow the extended bearish candle. But none of them should close above the open level of the bearish candle. Their shadows shouldn’t be above the open price as well. The last candle of the pattern should open within the body of the last bullish candle and close below the first bearish candle's close rate.
Japanese Candlestick Strategy
There are many strategies to try while trading, as there is a wide range of candlestick patterns. We will tell you about one of them. Before we start, let’s remind you of the main steps you should follow.
As we mentioned above, candlestick patterns relate to a trend. Thus, the first point is to find a strong trend. The second step is to find a candlestick pattern. If you see the price comes closer to a support or resistance level, it’s worth looking for a reversal pattern. If you trade in a strong trend, find a continuation pattern.
Third Candlestick Strategy
This strategy will work when the market turns to the bearish trend.
- Look for a candlestick whose high and low are above the previous one.
- Check whether the next candle is bearish.
- A sell position should be opened at the opening of the third bearish candle (1). If you get a confirmation from an indicator, for example, an oscillator, the signal will be more reliable.
- Take profit as soon as the third candle closes (2).
- Remember about the stop-loss order that should be placed above the high of the first candlestick (3).
Tips For Traders: How To Avoid Mistakes
There are plenty of guides on how to use Japanese candlesticks and their patterns are simple, but many traders make mistakes. Check the tips below to avoid the most frequent mistakes.
- Find confirmation. Although candlestick patterns are strong, it’s crucial to find approvals. If you need proof of the trend reversal, use such indicators as RSI and MACD. If the trend should continue, look at the Parabolic SAR.
- Know the color. It seems easy, but some traders confuse colors. We recommend using either green and red or white and black schemes.
- Choose bigger timeframes. Candlestick patterns work better on bigger timeframes as the trends are more reliable for them.
Japanese candlesticks are the most popular chart type as they show four crucial points that provide complete information to traders. Moreover, they form some of the most reliable patterns that predict the market’s direction with a high level of accuracy.
Even beginners don’t have difficulties in finding patterns. So, it’s crucial to practice before the implication. For this aim, you can use a Libertex demo account. The broker’s demo account copies the real market but allows trading with fake money to gain more experience and avoid losses in the future.
Read the answers to the most frequently asked questions.
What Are Japanese Candlesticks?
Japanese candlesticks are a chart type that presents the mood of investors and market dynamics. Additionally, Japanese candlesticks are used as patterns that predict the market’s direction.
Do Japanese Candlesticks Work?
Sure. Japanese candles are one of the most reliable traders’ tools that provide strong signals and is easily determined on the chart.
Which Candlestick Pattern Is Most Reliable?
Several patterns provide the most reliable signals. They are morning and evening stars, harami, and hammer.
How Do You Read Japanese Candlesticks?
Japanese candlesticks have four main points. They are open, close, minimum, and maximum prices. These points reflect traders’ sentiment and market fluctuations. Candlesticks with short wicks indicate a stable market. Those with long shadows relate to high volatility.
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