Learn to interpret single Japanese candlestick patterns

Learning to read charts is an essential skill for any trader who wants to go beyond the basics. There are three popular chart types in trading: Line charts connect closing price points and this makes them easy to read, but they don’t provide a lot of detail. Bar charts track the opening and closing price of an asset for the selected timeframe, as well as the highest and lowest price point. Japanese candlesticks, also known as just candlesticks, contain the same information but in a visually pleasant way.

For the specified timeframe, a candlestick is formed by a body, which tracks the opening and closing price of the instrument and two shadows, one at the top which tracks the highest price point and one at the bottom which tracks the lowest price point. When the candlestick’s body is green, the instrument’s price trend is bullish so the closing price is higher than the opening price, whereas a red candlestick body suggests a bearish movement, where the closing price is lower than the opening one. In case you’re wondering why we call them “Japanese” candlesticks, it’s because they were first used by Japanese rice merchants long before online trading was a thing.

How can candlesticks help me succeed?

Knowing when to enter and exit a trade is the holy grail of trading. Effectively, most traders chase swing points, so they try to identify when a bullish (upward) trend will stall because turning downwards or when a bearish (downward) trend will reverse and move upwards.

Formation patterns in single candlesticks can give you an idea of where the market is going and help you identify imminent trend reversals. Here are some basic hints to look out for:

  • A candlestick with a short body: A red or green candlestick with a short body suggests that the volume of traders is low or that buyers and sellers cancel each other out.
  • A candlestick with a long body: A green candlestick with a long body suggests that the closing price is significantly higher than the opening price. Therefore, it’s safe to say buyers control the market. A red candlestick with a long body tells us that the closing price is significantly lower than the opening price and sellers control the market.
  • A candlestick with no shadows (Marubozu): A green candlestick with no top or tail shadow, indicates that the lowest price point is the opening price and the highest price point is the closing price. A red candlestick with no top or tail shadow, indicates that the highest price point is the opening price and the lowest price point is the closing price. Both suggest a strong trade in one direction throughout the session.
  • A candlestick with long shadows and short body (Spinning tops): A green or red candlestick with a short body and long top and tail shadows. This indicates that there was little movement throughout the session or buyers and sellers were cancelling each other out. In either case, you’re likely to see a reversal of the trend, e.g. a bullish spinning top may suggest that the market is running out of buyers and sellers are about to take over.
  • A candlestick with no or very short body and long shadows (Doji): This tells us that the opening and closing price were identical or very close and it’s another strong indication that the market is consolidating and a reversal may happen.
  • Candlestick with short body, no upper shadow and a long tail: These candlesticks can be red or green. We call them hammers when they appear during bearish (downward) trend and hanging men when they appear during a bullish (upward) trend. In both cases, they suggest we may see a reversal.

So how safe is it to base your decision on a single candlestick? You should definitely keep your eyes on the chart for these patterns because they’re good warning signs. But you will need to take a look at the surrounding candlesticks to make safer predictions. We will cover double and triple candlestick formations in the next lesson.

Bitesize basics
  • Japanese candlesticks are the most trustworthy trading charts because they provide opening and closing prices as well as low and high points in a visually appealing way.
  • By observing the length of a candlestick’s body and shadows, you can infer upcoming price reversals which are excellent opportunities to enter and exit trades.
  • Popular patterns include Marubozu, dijo, spinning tops, hammer and hanging man.

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