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Forex Education

Japanese Candlesticks

Japanese Candlesticks

Thank you, Mr. Steve Nison, for “discovering” the art of candlesticks!

What is a Japanese Candlestick?

While we briefly covered Japanese candlestick charting analysis in the previous forex lesson, we’ll now dig in a little and discuss them more in detail. Let’s do a quick review first.

Japanese Candlestick Trading

Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. That’s right, rice. A Westerner by the name of Steve Nison “discovered” this secret technique called “Japanese candlesticks,” learning it from a fellow Japanese broker.

Steve Nison

Steve researched, studied, lived, breathed, ate candlesticks, and began to write about it. Slowly, this secret technique grew in popularity in the 90’s.

To make a long story short, without Steve Nison, candlestick charts might have remained a buried secret.

Steve Nison is Mr. Candlestick.

What are Japanese candlesticks?

The best way to explain is by using a picture:

Japanese Candlestick Anatomy

Japanese candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes – whatever you want!

They are used to describe the price action during the given time frame.

Japanese candlesticks are formed using the open, high, low, and close of the chosen time period.

  • If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
  • If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
  • The hollow or filled section of the candlestick is called the “real body” or body.
  • The thin lines poking above and below the body display the high/low range and are called shadows.
  • The top of the upper shadow is the “high”.
  • The bottom of the lower shadow is the “low”.

Japanese Candlestick Anatomy

Let’s break down the different parts of a Japanese candlestick.

Sexy Bodies

Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!

Japanese Candlestick Anatomy

Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.Short bodies imply very little buying or selling activity. In forex lingo, bulls mean buyers and bears mean sellers.

Long vs. Short Japanese Candlesticks

Long white Japanese candlesticks show strong buying pressure.

The longer the white candlestick, the further the close is above the open.

This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears’ butts big time! Long black (filled) candlesticks show strong selling pressure.

The longer the black Japanese candlestick, the further the close is below the open.

This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body-slamming them.

Mysterious Shadows

No, we’re not talking about wearing dark smokey eye shadow.

The upper and lower shadows on Japanese candlesticks provide important clues about the trading session.

Upper shadows signify the session high.

Lower shadows signify the session low.

Candlesticks with long shadows show that trading action occurred well past the open and close.

Japanese candlesticks with short shadows indicate that most of the trading action was confined near the open and close.

Japanese candlesticks with long shadows

If a Japanese candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher.

But for one reason or another, sellers came in and drove prices back down to end the session back near its open price.

If a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced price lower.

But for one reason or another, buyers came in and drove prices back up to end the session back near its open price.

Basic Japanese Candlestick Patterns

Spinning Tops

Japanese candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The color of the real body is not very important.

The pattern indicates the indecision between the buyers and sellers.

Forex Candlestick Pattern: Spinning Tops

The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime.

Neither buyers nor sellers could gain the upper hand, and the result was a standoff.

  • If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.
  • If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

Marubozu


Sounds like some kind of voodoo magic, huh? “I will cast the evil spell of the Marubozu on you!”

Fortunately, that’s not what it means. Marubozu means there are no shadows from the bodies.

Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as its open or close.

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Check out the two types of Marubozus in the picture below.

Forex Candlestick Pattern: Marubozu

A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price. This is a very bullish candle as it shows that buyers were in control the entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.

A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low.

This is a very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal.

Doji

Doji candlesticks have the same open and close price or at least their bodies are extremely short. A doji should have a very small body that appears as a thin line.

Doji candles suggest indecision or a struggle for turf positioning between buyers and sellers.

Prices move above and below the open price during the session, but close at or very near the open price.

Neither buyers nor sellers were able to gain control and the result was essentially a draw.

There are FOUR special types of Doji candlesticks.

The length of the upper and lower shadows can vary and the resulting forex candlestick looks like a cross, inverted cross or plus sign.

The word “Doji” refers to both the singular and plural form.

Forex Candlestick Pattern: Doji

When a Doji forms on your chart, pay special attention to the preceding candlesticks.

If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening.

In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down.

Forex Candlestick Pattern: Long White Candle and Doji

If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weak.

In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.

Forex Candlestick Pattern: Long Black Candle and Doji

While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal.

Look for a white candlestick to close above the long black candlestick’s open.

In the next following sections, we will take a look at specific Japanese candlestick pattern and what they are telling us.

Hopefully, by the end of this lesson on candlesticks, you will know how to recognize different types of forex candlestick patterns and make sound trading decisions based on them.

Single Candlestick Patterns

Learn how to use single candlestick patterns to identify potential market reversals.

Here are the four basic single Japanese candlestick patterns:

Hammer and Hanging Man

The hammer and hanging man look exactly alike but have totally different meanings depending on past price action.

Both have cute little bodies (black or white), long lower shadows, and short or absent upper shadows.

Single Candlestick Pattern: Hammer and Hanging Man
Hammer at the end of a downtrend and Hanging Man at the end of an uptrend

The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom. When price is falling, hammers signal that the bottom is near and price will start rising again.

The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open.

Just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger.

A typical example of confirmation would be to wait for a white candlestick to close above the open to the right side of the hammer.

Recognition Criteria for Hammer:

  • The long shadow is about two or three times of the real body.
  • Little or no upper shadow.
  • The real body is at the lower end of the trading range.
  • The color of the real body is not important.

The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level.

When price is rising, the formation of a hanging man indicates that sellers are beginning to outnumber buyers.

The long lower shadow shows that sellers pushed prices lower during the session.

Buyers were able to push the price back up some but only near the open.

This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price.

Recognition Criteria Hanging Man:

  • A long lower shadow which is about two or three times of the real body.
  • Little or no upper shadow.
  • The real body is at the upper end of the trading range.
  • The color of the body is not important, though a black body is more bearish than a white body.

Inverted Hammer and Shooting Star


The inverted hammer and shooting star also look identical. The only difference between them is whether you’re in a downtrend or uptrend.

An inverted hammer is a bullish reversal candlestick.

A shooting star is a bearish reversal candlestick.

Both candlesticks have petite little bodies (filled or hollow), long upper shadows, and small or absent lower shadows.

Single Candlestick Pattern: Inverted Hammer and Shooting Star
Single Candlestick Pattern: Inverted Hammer at the end of a downtrend and Shooting Star at the end of an uptrend

The inverted hammer occurs when price has been falling suggests the possibility of a reversal. Its long upper shadow shows that buyers tried to bid the price higher.

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However, sellers saw what the buyers were doing, said “Oh heck no!” and attempted to push the price back down.

Fortunately, the buyers had eaten enough of their Wheaties for breakfast and still managed to close the session near the open.

Since the sellers weren’t able to close the price any lower, this is a good indication that everybody who wants to sell has already sold.

And if there are no more sellers, who is left? Buyers.

The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising.

Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom.

This means that buyers attempted to push the price up, but sellers came in and overpowered them. This is a definite bearish sign since there are no more buyers left because they’ve all been murdered.

Dual Candlestick Patterns

What’s better than single candlestick patterns?

DUAL candlestick patterns!

Engulfing Candles

Candlestick Patterns: Bullish and Bearish Engulfing

The bullish engulfing pattern is a two candlestick pattern that signals a strong up move may be coming. It happens when a bearish candle is immediately followed by a larger bullish candle.

This second candle “engulfs” the bearish candle. This means buyers are flexing their muscles and that there could be a strong up move after a recent downtrend or a period of consolidation.

On the other hand, the bearish engulfing pattern is the opposite of the bullish pattern. This type of candlestick pattern occurs when the bullish candle is immediately followed by a bearish candle that completely “engulfs” it.

This means that sellers overpowered the buyers and that a strong move down could happen.

Tweezer Bottoms and Tops


The tweezers are dual candlestick reversal patterns.

This type of candlestick pattern are usually be spotted after an extended uptrend or downtrend, indicating that a reversal will soon occur.

Notice how the candlestick formation looks just like a pair of tweezers!

Amazing!

Candlestick Patterns: Tweezer Bottoms and Tweezer Tops

The most effective Tweezers have the following characteristics:

The first candlestick is the same as the overall trend. If price is moving up, then the first candle should be bullish.

The second candlestick is opposite the overall trend. If price is moving up, then the second candle should be bearish.

The shadows of the candlesticks should be of equal length.

Tweezer Tops should have the same highs, while Tweezer Bottoms should have the same lows.

Triple Candlestick Patterns

Evening and Morning Stars

The morning star and the evening star are triple candlestick patterns that you can usually find at the end of a trend.

They are reversal patterns that can be recognized through three characteristics.

Candlestick Patterns: Morning and Evening Star

We’ll use the Evening Star Pattern on the right as an example of what you may see:

  1. The first candlestick is a bullish candle, which is part of a recent uptrend.
  2. The second candle has a small body, indicating that there could be some indecision in the market. This candle can be either bullish or bearish.
  3. The third candlestick acts as a confirmation that a reversal is in place, as the candle closes beyond the midpoint of the first candle.

Three White Soldiers and Black Crows


The three white soldiers pattern is formed when three long bullish candles follow a DOWNTREND, signaling a reversal has occurred.

Candlestick Patterns: Three White Soldiers and Three Black Crows

This type of triple candlestick pattern is considered as one of the most potent in-yo-face bullish signals, especially when it occurs after an extended downtrend and a short period of consolidation. The first of the three soldiers is called the reversal candle. It either ends the downtrend or implies that the period of consolidation that followed the downtrend is over.

For the pattern to be considered valid, the second candlestick should be bigger than the previous candle’s body.

Also, the second candlestick should close near its high, leaving a small or non-existent upper wick.

For the three white soldiers pattern to be completed, the last candlestick should be at least the same size as the second candle and have a small or no shadow.

The three black crows candlestick pattern is just the opposite of the three white soldiers. It is formed when three bearish candles follow a strong UPTREND, indicating that a reversal is in the works.

The second candle’s body should be bigger than the first candle and should close at or very near its low.

Finally, the third candle should be the same size or larger than the second candle’s body with a very short or no lower shadow.

Three Inside Up and Down

Candlestick Patterns: Three Inside Up and Three Inside Down

The three inside up candlestick formation is a trend-reversal pattern that is found at the bottom of a DOWNTREND.

This triple candlestick pattern indicates that the downtrend is possibly over and that a new uptrend has started.

For a valid three inside up candlestick formation, look for these properties:

  1. The first candle should be found at the bottom of a downtrend and is characterized by a long bearish candlestick.
  2. The second candle should at least make it up all the way up to the midpoint of the first candle.
  3. The third candlestick needs to close above the first candle’s high to confirm that buyers have overpowered the strength of the downtrend.
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Conversely, the three inside down candlestick formation is found at the top of an UPTREND.

It means that the uptrend is possibly over and that a new downtrend has started. A three inside down candlestick formation needs to have the following characteristics:

  1. The first candle should be found at the top of an uptrend and is characterized by a long bullish candlestick.
  2. The second candle should make it up all the way down the midpoint of the first candle.
  3. The third candlestick needs to close below the first candle’s low to confirm that sellers have overpowered the strength of the uptrend.

Candlesticks with Support and Resistance

In this section, we will be looking at these basic candlestick patterns that we have learned in the previous sections to make sound trading decisions.

Remember, candlesticks are useless on their own, and you must always consider market environment and what price is telling you. But before we begin, just a few words of caution…

As with any technical indicator or tool, if candlesticks point to a reversal or continuation that does NOT mean it will happen.

This is the forex market and nothing is set in stone!

Using Candlesticks with Support and Resistance

The simplest ways to use candlesticks is with support and resistance levels.

Because support and resistance levels determine areas where buyers and sellers have set up their defenses, looking at how candlesticks react to them will help you greatly in predicting where price will head next. Here’s a real forex world example:

In this scenario, you can see that there is resistance around the 1.4900 level.

You badly want to enter but you decide to wait instead because the candle that touched this level looks very bullish.

Looks like it's going to break resistance

Two candles later you spot a nice three inside down candlestick pattern, which is considered as a very potent bearish signal.

Using the formation as your sell signal confirmation, you go ahead and short the pair.

Since you’re a smart trader, you also set a stop loss above the resistance.

Three inside down formation forms. Time to sell!

Because of your high level of patience and your knowledge of candlestick formations, you have greatly increased the odds in your favor.

Let’s see what happened after you shorted…

Ka-pow! The pair almost immediately goes in your favor and nets you hundreds of pips.

You go to the nearest car dealership and buy yourself an exotic sports car.

And a jet. With matching colors.

You might be thinking, “Why do I have to pair support and resistance levels with candlesticks? I could get a lot more signals with just candlesticks and make more money!”

To answer that, take another look at the same chart of your hypothetical trade…

We’ve taken the liberty of highlighting some potential trade signals based solely on candlestick formations.

Take a look!

If you had traded on those candlesticks formations alone, you would have lost every single time!

By simply pairing candlestick formations WITH support and resistance levels, you have increased your odds your winning.

Summary: Japanese Candlesticks

We’ve covered a lot about Japanese candlesticks. Hopefully, you’re not at wick’s end but are actually now fired up about candlestick charts. Maybe we’ve even ignited a flame that becomes a lifelong passion for Japanese candlesticks.

Japanese Candlestick Says Goodbye!

Let’s summarize what you’ve learned about Japanese candlesticks:

  • If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
  • If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
  • The hollow or filled section of the candlestick is called the “real body” or body.
  • The thin lines poking above and below the body display the high/low range and are called shadows.
  • The top of the upper shadow is the “high”.
  • The bottom of the lower shadow is the “low”.
Summary of Japanese Candlesticks

Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean buyers and bears mean sellers.

Upper shadows signify the session high.

Lower shadows signify the session low.

There are many types of Japanese candlestick patterns, but they can be categorized into how many bars make up the candlestick pattern.

There are single, dual, and triple candlestick formations.

The most common types of Japanese candlestick patterns are the following:

Number of BarsJapanese Candlestick Pattern
SingleSpinning Tops, Dojis, Marubozu, Inverted Hammer, Hanging Man, Shooting Star
DoubleBullish and Bearish Engulfing, Tweezer Tops and Bottoms
TripleMorning and Evening Stars, Three Black Crows and Three White Soldiers, Three Inside Up and Down

Just refer to the Japanese Candlesticks Cheat Sheet for a quick reference on what these candlestick patterns mean.

Combine candlestick analysis with support and resistance levels for best results.

And finally, here are some words of wisdom:

Just because Japanese candlesticks hint at a reversal or continuation, it doesn’t mean it will happen for sure! You must always consider market conditions and what price action is telling you.

This is the forex market and nothing is set in stone!

And if you’re looking for a more in-depth look at Japanese Candlesticks, you can’t go wrong with the book, Japanese Candlestick Charting: A Contemporary Guide to the Ancient Techniques of the Far East. It’s written by the man himself, Steve Nison.

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