What is a Japanese Candlestick?

Do you know how to speak Japanese?

If your response is a no (like me)—no worries!

Understanding Japanese candlestick charts requires no linguistic capabilities in particular. Yet the benefits that come with such an understanding are seriously underrated. ✅

While everyone loses in the stock market sometimes, there are ways to make smarter investment decisions, and using Japanese candlestick charts to your advantage is one of them. 

Reading stock charts and staying on top of financial news are two great ways to make informed investment decisions. You’ll want to know if the stock market is in a bubble after vaccine rollouts, for example. But just reading the news isn’t enough to tell you when to buy and when to sell—to do that, you’ll need to know some basic financial analysis. 

The most popular type of stock chart is the Japanese candlestick – and by learning how to use this to your advantage, you can make better investment decisions that pay off more frequently. If you don’t know what all those little bars mean – don’t worry! Read on to learn all about the Japanese candlestick and how to identify specific patterns and use them to your advantage. 

Japanese Candlestick Explained 🕯

Even if you’re brand new to how the stock market functions, you’ve probably seen one of these before:

This is called a Japanese candlestick chart—it’s called this because it was invented in the 1700s by a Japanese rice trader called Munehisa Honma, a.k.a. “The God of the Markets” as he was called back in the day. He applied the principles of Yin and Yang (bearish and bullish) to the markets to predict prices, and that’s how the candlestick chart was born.

Some of the same skills from reading stock charts apply here, but a candlestick chart is also its own animal. Basically, this thing tracks the variation of a given stock over set time frames. It’s different from a regular stock chart because it groups the performance into discrete intervals (as represented by the candlesticks), rather than tracking the changes continuously.

Now don’t freak out because we said “discrete”! You don’t have to be a math genius to use a candlestick chart. These babies are so popular because they’re easy to understand, but also because they are very useful for finding turning points in the market. 

By analyzing the candlesticks, you can estimate whether the market will continue or reverse its current trend – which means you can make great decisions on whether to buy or sell! Impress your friends with knowledge of the dollar’s three-week lows, and then bring it home with an impromptu reading of a candlestick chart. (Disclaimer: We may not be up to date on how to impress people at parties.)

You can combine this kind of financial analysis with researching stocks to make better investment decisions. Read on to find out how!

How to Read Japanese Candlestick Charts 📖

Let’s say you’ve just gotten rich off one of those record jumps in the price of Bitcoin, and you’re ready to dive into the stock market. You should be able to see candlestick charts through all of the leading platforms for trading stocks, or by setting up your own charts online. Let’s go over all the basics of reading candlestick charts.

First, let’s go through the anatomy of these little candlesticks themselves. Each of the vertical bars you see is called a candlestick. The main thick part is called the body, while the lines on either side are called shadows.

The body shows you the difference between the open price and the close price for the stock in a given time frame. The shadows show you the highest price and the lowest price that the stock reached on that day. 

The above chart shows a stock that is going down. These are colored red, and you can see that the close price is lower than the open price – so the stock decreased in value. 

A green candlestick means that the stock is going up. In this case, the close price and open price are switched—the price started (opened) low and climbed up. 

The candlesticks represent the change in stock price over a given period of time. If you’re looking at a 10-minute chart, each candlestick represents 10 minutes. You can also look at them for each day, or whatever setting you choose.

Japanese Candlestick vs. Bar Chart ⚖️

At this point you might be asking yourself, “How is this different from a bar chart?” It’s a good question. A bar chart shows the same information as a Japanese candlestick chart, but in a different format. Candlestick charts are more visual, thanks to the color coding of the price bars. 

A bar chart also doesn’t have the distinction between the bodies and shadows on candlesticks. This means that a candlestick chart will show you the real differences between open and close, not just the price fluctuations. 

Ultimately, it is a matter of preference. It’s up to you which chart makes more sense in your brain. Especially if you actively trade options contracts or some other strategy that has you making quick decisions from small fluctuations, the important thing is to find a chart that you can understand quickly and reliably. 

Japanese Candlestick Reversal Patterns 📊

See how the candlestick chart goes up and down with the stock price? 

Every time that happens, it’s called a reversal pattern. A bearish reversal pattern refers to when the stock changes from going up to going down – that’s a signal to sell the stock, because it’s at its highest point. A bullish reversal pattern is when the stock changes from going down to going up – that means you should buy the stock, because it’s at its lowest point. 

These are called patterns because there are some consistent changes that indicate that a price trend might reverse. Once you know them, you can figure out the best time to buy and sell. 

It’s like a Jedi mind trick… but you make money off it. We’re not saying that knowing these patterns single-handedly keeps you from losing billions on bad trades like Archegos Capital, but it can’t hurt, right? Read on for specific examples of bullish and bearish patterns!

Japanese Candlestick Bullish Patterns 🐂

In case you need a refresher, a bullish pattern is when a stock that has been trending downward changes to trending upward. Bullish reversal patterns indicate that you should buy the stock – it has reached its lowest price point, and now it’s heading back up. This could happen because of something like market volatility due to vaccine news and inflation, or it could be unique to a specific security.

It can also happen just because the last reversal was at the exact same price point, so traders are assuming that the price will go down, which will lead to a massive sell-off and a drop in price. Regardless of the cause, let’s dive in and figure out how to use these patterns!

Bullish Engulfing ✔️

Bullish engulfing refers to a smaller red candle that is followed by a green candle that fully engulfs it. This means that the green candle’s high point is higher than the red candle’s, and its low point is lower. When you see this, it’s pretty likely that the market will start to go up from here. 

Now, you might see the green candlestick engulf just one red candle – or you might see it engulf two, three, or even more. This is an even stronger indication that the price is about to start trending upward, and it’s a good time to buy. 

Hammer 🔨

Picture a hammer. Have you got it in your brain? Now picture a hammer if it were on a Japanese candlestick chart. 

That’s right, it’s this little guy in the pic below! The hammer has a long lower shadow, a short body, and a short or nonexistent upper shadow.

This pattern indicates that a declining price is about to reverse its direction. You can see that there is a huge gap between the lowest the price went during the interval (the bottom of the bottom shadow) and the price it closed at (the bottom of the body).

This means it’s a good time to buy! If you want to be even more confident, you can wait to make sure a green candlestick comes after the hammer. 

Morning Doji Star ⭐️

No, it’s not a yoga pose – put away that mat! Doji is a Japanese word for “blunder” or “bungle,” and this pattern indicates that there is an indecisiveness in the market—one that could spark a trend reversal.

This pattern is made up of three candlesticks. First you have a red candlestick; then a doji, which looks like a little plus sign in the middle; then a green candlestick that closes at least in the middle of the first red candlestick.

A doji occurs when the open and close prices are essentially equal. It’s an even stronger indicator if the green candle is longer than the red candle. 

Bullish Harami 🐃

Another Japanese word here—this one means conception or pregnancy. As this is not meant in a literal sense (don’t worry), it indicates that a price jump is about to be “born” and grow up.

A bullish harami refers to a green candlestick that is completely inside of the red candlestick that came before it. Its high point is lower than the red candlestick’s high point, and its low is higher than the red candlestick’s low. 

This usually indicates indecision in the marketplace. It’s a signal that the price trend might change – but it’s not 100%. Like when your friend says they’re still deciding whether to come out with you tonight – we’re not sure how it’s going to go.

But if another green candlestick follows, that’s like your friend sending you pics of different outfit options – it’s safe to assume where we’re headed! 

Bullish Harami Cross ✔️

A bullish harami cross is a special type of bullish harami. It happens when you have a string of red candlesticks, followed by a doji cross. A doji cross happens when the open and close prices are essentially equal. 

So, you can see that a doji cross is basically a special type of candlestick. In this case, it’s a very tiny candlestick that’s completely engulfed by the previous candlestick. That makes it a special case of the bullish harami, and it similarly indicates some indecision in the market. 

Bullish Rising Three 📈

The first part of this pattern is a long green candlestick. This indicates that the stock had a day (if each candle represents a day) where it had quite a bit of growth, making its closing price significantly higher than its opening price.

After this long candlestick, there are three trading sessions that are on a downtrend, but all stay within the range of the initial long green candlestick. The fifth day gives another long green candlestick. 

Now, we’ve seen three days in a row with price decreases. However, no new low is set. This means that bull traders should be ready for another move up, shown on the fifth day. 

Three White Soldiers 3️⃣

Three white soldiers give a clear sign that a bearish trend is ending. After an extended downtrend, three white soldiers represents a small consolidation. 

First, you’ll see a green candle after a downward move. Then, you’ll have another green candle, which has a larger body than the first and a small upper shadow – this means that it closed close to the highest point it reached that day.

Then, you’ll see another green candle with a body that is as large or larger than the second candle, and again has little to no upper shadow. This is a good sign that the price is about to start trending upward.

Green Marubozu ✅

Marubozu means “bald” in Japanese. No, we’re not talking about your uncle – in this context, it means a candlestick with no shadows at all. 

A green marubozu must have opened at its lowest point, and closed at its highest point. This means it just went upward all day. This means that the price is likely to continue trending upward, as bullish sentiment completely won the day. 

Homing Pigeon 🐦

A bullish homing pigeon has two red candlesticks in a row. The second candlestick’s body is situated entirely within the first. This shows that an uptrend may be on the horizon, since the downward momentum is slowing. 

When you look for a homing pigeon, you are searching for downtrends that are weakening. They are more useful in stable market conditions, when changes in the speed of a downtrend might indicate a price reversal. In highly volatile markets, this might not be as significant.

Evening Star 🌙

An evening star is a pattern of three candlesticks. At the end of an uptrend, you’ll see a long green candlestick. Then, you’ll see a short green candlestick – this means that bullish sentiment is starting, but not enough to cause the reversal yet.

Finally, you’ll see a long red candlestick. This shows that bullish sentiment has taken over, and the price trend is now reversing.

Japanese Candlestick Bearish Patterns 🐻

Now we’ve gone through the bullish patterns that signal it’s a good time to buy. But what happens when you’re ready to sell? Maybe you’re not excited about the dollar’s downward swoop after the inflation report, and you’re ready to close a position. These patterns can help you find the best time to sell to get the most bang for your buck.

If you’re new to investing, you might be used to a bullish pattern since the market’s been trending upward. But, that upward trend probably won’t last, so you need to know how to spot when a downturn looks likely.

Bearish Engulfing 🔥

If you read the above description of bullish engulfing, you’ve already got a head start on this one. This pattern happens when a green candlestick is completely engulfed by a red candlestick. That means the red candlestick’s high point is higher than the green one’s, and the low point is lower.

If you see one red candlestick engulf the green candlestick, that might mean the price is going to start trending downward. If the red candlestick engulfs the previous two or three green candlestick, that gives an even stronger indication. 

Dark Cloud Cover ☁️

Say you have several green candles in a row – an upward price trend. Then, you have a red candle that opens at a new high, but closes below the middle of the previous green candle. This is called dark cloud cover.

This is more rare when you are trading currencies in the forex market. Usually, a red candle will open at the close price of the previous green candle, rather than setting a new high. You can sell when you see this pattern, or you can wait for confirmation when you see an additional red candlestick. 

Shooting Star 💫

Picture a shooting star, falling straight to earth. No, not a spooky meteor – like in a pretty way! Now picture it as though it were a candlestick on a stock chart. Just as beautiful, right? 

What you get is a red candlestick with a long upper shadow, a short body, and a short or nonexistent lower shadow. This means that there is a significant gap between the highest price the asset reached, and its closing price. That’s a good indicator that the price is now trending downward instead of upward, so it’s a good time to sell. 

Bearish Harami ✔️

A bearish harami might sound like a backcountry delicacy, but it’s another “birthing” pattern. It’s when you see a small red candlestick that is fully inside the previous green candlestick. This indicates that buyers are being indecisive – the price is wavering. 

This doesn’t necessarily mean that the price is going to change direction – indecision can go many ways, as all of us who have wavered between Netflix titles for fifteen minutes can attest. But if it’s followed by another red candlestick, that’s a good indication that the price is about to start trending downward. 

Bearish Harami Cross ✔️

This is like a bearish harami, plus a cross. There, you get it! 

No, we can go into a bit more detail than that. This is basically a special case of the bearish harami we just described. Instead of a small red candlestick that’s completely engulfed by the previous green candlestick, now we have a doji cross. Remember, a doji cross occurs when the close and open prices are essentially equal.

You can see that a doji cross is basically a special type of candlestick, and it’s completely within the previous candlestick. This pattern is therefore the same as the bearish harami: it’s an indicator that there is some indecision in the market, and you should keep watching to see if the price trend changes.

Bearish Falling Three 📉

This is a five-day pattern. (It could be five units of whatever time frame you choose for your chart, but we’re going to use days for simplicity.) On the first day, you have a long red candlestick, indicating a large decrease in price on a single day.

On the second, third, and fourth days, you have small green candlesticks. These represent a consistent uptrend in the price – but they stay entirely within the first red candlestick. This means that while the price trend is increasing, it is not setting a new high. Bearish traders should therefore be prepared for another long red day on the fifth day. 

Three Black Crows 🦅🦅🦅

It’s not an Edgar Allen Poe story – it’s a sign that an upwardly trending asset is about to start trending downward. Almost as spooky if you don’t sell in time!

First, you’ll see a red candlestick after a consistent uptrend. Each candle should be as long or longer than the previous candle. They should also have little to no lower shadow – this means that the closing price was close to the lowest price the asset reached that day. This indicates that the stock is about to enter a downtrend.

Red Marubozu 🚨

Marubozu comes from the Japanese word for “bald,” and in this case it refers to a candlestick with no shadows at all. For a red candle, that means it must have opened at its highest point of the day, and closed at its lowest point.

A red marubozu is a good indicator that the price is about to start trending downward, because bearish sentiment completely dominated the price pattern for the day. If there was no wiggle room from bearish sentiment today, it’s likely to be strong again tomorrow. 

Hanging Man ⚠️

Remember the “hammer”? This was a red candlestick with a short body and a long lower shadow, indicating that the closing price was significantly higher than the lowest point of the day. The hanging man uses the hammer, but it comes up at a different point in the pattern.

If you see a hammer after an uptrend, that’s a hanging man. This means that there is growing selling sentiment, and it can indicate a reversal. Both a red or green hanging man is an indicator of a reversal in this position, though a red hanging man is usually a stronger signal.

Evening Star 🌒

An evening star shows a point of indecision in the market. There are three candlesticks that make up this pattern. First, you’ll have a large green candlestick that’s part of a previous uptrend. Then, you’ll get a green candlestick with a short body – this means that there is some bearish sentiment appearing, but not enough to reverse yet.

Finally, you’ll see a red candlestick with a long body. This shows that the reversal has begun, and may turn into a longer downtrend.

How to Practice Using Japanese Candlestick Patterns 💡

It takes some practice to become an expert at reading these charts, and especially recognizing these patterns. But they’ll work for all types of stocks – helping you with everything from blue chip stocks to trends among penny stocks. And of course, nothing in the stock market is set in stone: even top analysts predict different things, with some sharing how the US economic boom is benefiting Asian countries, and others worrying that the US economy is opening too fast.

If you’re feeling overwhelmed, just follow these easy steps: 

1. Study the pattern you want to use. Just pick one at a time – you don’t have to memorize every pattern immediately. 

2. Pick the asset you want to trade. Stocks? Forex? Up to you! 

3. Open an account with a broker that offers good tools. Make sure your broker offers the charts that you want to read. The top stock brokers for day trading, as well as the top forex brokerages will offer these resources.

4. Use charts as a guide – not a crystal ball. Keep in mind that these charts can’t tell you the future – they can just help you make informed decisions! 

Remember, sometimes the stock market is out of control. Right now we’re even seeing parallels between today’s economy and the 1929 stock market crash. You can’t control the market – but you can try to predict the trends and protect your investment as much as possible. 

Conclusion

You’ve made it through a whole lot of information – great job! Japanese candlestick charts can be a great tool for many traders, and we hope they will be for you as well. These patterns will help you find the best time to buy or sell in moments of doubt—after all, you want to make informed decisions.

No one can trade in the stock and forex markets without ever losing – but we can all try our best, can’t we? By learning how to read these charts, you are now one step closer to wielding powerful trading strategies. Go get ‘em!

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