Learn to Read Japanese Candles: The Foundation of Technical Analysis in Trading

Japanese candlesticks are the fundamental tool that every trader must master. Their origin dates back to rice trading in Japan during the Edo period, but today they are indispensable for analyzing any financial market, from currencies like EUR/USD to cryptocurrencies like Bitcoin.

Understanding the Basic Structure of Candlesticks

Each Japanese candlestick condenses four key data points into its graphical representation: opening price (O), high (H), low (L), and closing © — known as OHLC. The body of the candlestick shows the open and close, while the wicks (or shadows) reveal the highs and lows reached during that period.

Color is your first visual indicator: generally green for bullish candles (price closed higher) and red for bearish (price closed lower). Although you can customize these colors on your trading platform, this convention helps you quickly interpret market direction.

The crucial point is that candlesticks work on any timeframe: from 1-minute charts to monthly. A 1-hour candle is composed of four 15-minute candles, which in turn contain three 5-minute candles each. This fractal structure is why long wicks on higher timeframes are so significant for your analysis.

Key Patterns You Must Recognize

The Engulfing Candle: This pattern of two different candles reveals potential trend reversals. The second candle “engulfs” the first, suggesting that market control has shifted from one side to the other. If you see an engulfing after a prolonged move, pay attention: it could mark an important support or resistance level.

Doji and Spinning Tops: Both indicate market indecision. They are candles with very small bodies and long wicks, showing that buyers and sellers are in balance. The price moves up and down without establishing a clear direction. When you see these patterns, wait for additional confirmation before acting.

The Hammer: A candle with a small body and a long wick upward (or downward) indicating an upcoming trend reversal. In an uptrend, a hammer with a upper wick suggests buyers lost strength. Sellers took control, pushing the price down. The opposite occurs in downtrends.

Hanging Man: Although it resembles the hammer, the difference lies in the context. Look at previous candles: if there is a prior downtrend and this formation appears, the market is likely to turn bullish. This pattern requires understanding the preceding behavior.

Marubozu: “Bald” in Japanese, due to the absence of wicks. A marubozu candle shows clear trend strength. A large body without shadows means one side of the market (buyers or sellers) had total control. After breaking support or resistance levels, these candles confirm the strength of the move.

How to Use Candlesticks to Identify Support and Resistance

Japanese candlesticks allow you to detect levels that a line chart would never reveal. While line charts only consider closes, candlesticks show everything: where it opened, where it closed, and the extremes. Long wicks touch important price points that buyers or sellers vigorously defended.

Imagine analyzing EUR/USD and noticing that multiple times, lower wicks bounce at the same price level. That is support. When you combine this information with other indicators like Fibonacci or moving averages, you get more reliable confluences to place your trades.

The Importance of Training Your Vision

Theoretical knowledge is only 50% of the journey. To truly master reading Japanese candlesticks, you must practice regularly with historical charts. Spend time looking for these patterns across different assets and timeframes.

An effective strategy is to use demo accounts. Experiment risk-free, visualize past patterns in Bitcoin, gold, currencies, and other CFDs. You will notice that certain assets repeat predictable behaviors according to these patterns. With enough training, you will soon be able to analyze a chart in seconds and know exactly what is happening.

Improving Your Technical Analysis

Japanese candlestick patterns work in all markets: Forex, cryptocurrencies, commodities, and stocks. However, remember two golden rules:

First: Signals on higher timeframes are more reliable. A hammer on a daily chart carries much more weight than one on a 15-minute chart.

Second: Never trade based on a single pattern. Look for confluences: candlestick pattern + support/resistance levels + Fibonacci + moving averages. The more confirmations you have, the greater your confidence in the entry.

Professional traders combine technical analysis with fundamental analysis. By mastering candlestick reading, you will have covered an essential aspect of technical analysis. The next step is to apply it consistently and continue learning about each pattern in depth.

Remember: analyzing the market does not require constant trading. A professional studies for hours to execute a few high-probability trades. It’s like a football player who trains nearly 3 hours daily to play 90 minutes. Your goal is to develop patience, precision, and discipline in how to read Japanese candlesticks before risking real capital.