Japanese candlestick charts originated in the 18th century Japanese rice futures market. A trader named Honma Munehisa from the city of Sakata is considered to be the pioneer of this charting method. Decades later, Steve Nison learned the technique from a Japanese broker and introduced it to the Western world in the 1990s. Since then, Japanese candlesticks have become one of the most popular charting formats used by traders around the world.
Japanese candlestick charts show the opening, closing, high, and low prices of an asset over a specified period of time. They are easy to understand because different colors are used to indicate whether the price has increased or decreased during that period.
Candlesticks are formed as follows:
When the closing price is higher than the opening price, the middle part of the candlestick is usually shown in green (or white).
When the closing price is lower than the opening price, the area is shown in red (or black). The area between the opening and closing prices is called the "real body".
The lines above and below the body of the candlestick are called "shadows", and they reflect the highest and lowest prices for that period.
Traders use candlestick patterns to interpret market psychology and predict potential price changes—such as up, down, or sideways.
Some patterns are considered bearish, as they indicate a potential price decline.
Others are bullish, indicating a potential upward movement.
There are also candlesticks that reflect indecision between buyers and sellers. Patterns can consist of a single candlestick or a specific combination of several. Candlestick analysis can be applied to any timeframe, from one-minute charts to monthly charts.
These patterns are the same for day trading, swing trading, or long-term investing. Similarly, they work for stocks, futures, currencies, or cryptocurrencies. The principles are universal and apply to all markets and timeframes. Some traders even build their entire strategies based on candlestick patterns alone, without resorting to complex technical indicators.
How to read a candlestick chart?
Understanding candlestick charts helps you identify whether buyers (bulls) or sellers (bears) are dominant at any given time. These charts provide a clear and quick picture of market sentiment.
Although it may seem complicated, candlesticks simply show price movement over a specific period of time. The relationship between the open, close, high, and low provides information about the relative confidence of buyers and sellers. Understanding this dynamic can give you an advantage over other market participants.
Some basic 📊 candlestick signals:
👉 Green candlestick with long body: Strong upward momentum and significant buying pressure.
If it is green and matches the open price low and the close price high, it indicates complete buyer dominance.
👉 Red candlestick with long body: Significant downward momentum and strong selling pressure.
If it is red and matches the open price high and the close price low, it indicates seller dominance.
👉 Marubozu: A long-bodied candlestick with no shadow.
Small-sized candlestick: Market stability or lack of clear direction.
⤷ Long upper shadow: Buyers dominated at the beginning, but sellers won in the end.
⤷ Long lower shadow: Sellers created pressure, but buyers were able to turn the situation around before the market closed.
⤷ Long upper and lower shadows: A fierce battle between buyers and sellers, with no clear winner.
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What is a Reversal Candlestick Pattern?
1. A reversal pattern indicates that the current trend may change.
2. In an uptrend, a reversal pattern indicates a possible decline ↯.
3. In a downtrend, it can predict upward ↗ momentum.
4. What is a Continuation Candlestick Pattern?
5. Unlike the previous ones, Continuation patterns indicate that the trend will continue in the same direction.
6. In a downtrend, they indicate a further decline.
7. In an uptrend, they indicate that the price will continue to rise.
🔹 Hammer
A single-candlestick pattern that appears in a downtrend. It is characterized by a small body and a long lower shadow (at least twice the size of the body). This indicates that sellers drove the price down to a new low, but buyers reacted and managed to close near the opening level.
🔹 Bullish Engulfing Pattern
Formed by two candles in a downtrend. The first is short and bearish. The second is bullish, and its body completely covers the body of the first.
🔹 Morning Star Pattern
A pattern of three candles:
a. Bearish candle with a long body.
b. Short candle with a gap down.
c. Bullish candle with a long body with a gap up.
🔹 Shooting Star Pattern
A single candle seen in an uptrend. It has a short body and a long upper shadow (at least twice the length of the body). It indicates that buyers pushed the price up, but sellers regained control.
🔹 Bearish Engulfing Pattern
Two candles in an uptrend. The first is short and bullish. The second is bearish and completely covers the body of the first.
🔹 Dark Cloud Cover Pattern
A bearish two-candle pattern. The first is bullish with a long body. The second opens at the highest price but closes below the midpoint of the previous body, signaling a psychological victory for sellers.
🔹 Indecision Pattern
A Doji is formed when the opening and closing prices match. It represents a balance between buyers and sellers. It is neutral on its own, but it can be part of a more complex pattern, such as a tri-star.
Japanese Candlestick Chart vs. Heikin-Ashi
Heikin-Ashi means "average bar" in Japanese. It uses a different formula to represent price and reduce market noise.
Heikin-Ashi 💡 Formula
🟢 Open: The midpoint of the previous candle.
🔒 Close: The average of the open, close, high, and low.
🚀High: The current high.
🢃 Low: The current low.
✅ Benefits
Reduces market noise.
Makes trends more visible.
In an uptrend, consecutive green candles predominate.
In a downtrend, consecutive red candles predominate.
Explanation
Continuous green candles: Uptrend.
Continuous red candles: Downtrend.
Green candles without lower shadow: Strong upward momentum.
Red candles without upper shadow: Strong downward momentum.
Color 🎨 Change: Possible change in trend
Short body with long shadow: Pause or possible change.
Disadvantages: They do not show the actual opening and closing prices.
They can cause delays in detecting trend changes.
They do not reflect market gaps.
Example Charts
Provides candlestick charts for stocks, commodities, and currencies. You can view them by going to the corresponding page for the asset you want to analyze. For example, you can follow the link below, which shows a candlestick chart for Apple.
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