Master Japanese candlestick reading: keys to your technical analysis strategy

The Origin and Functioning of Japanese Candlesticks

Japanese candlesticks have a fascinating history dating back to rice trading in Dojima, ancient Japanese cities, where merchants needed a visual way to track price movements. Centuries later, this methodology crossed oceans and became the fundamental pillar of modern technical analysis in global financial markets.

At its core, a Japanese candlestick is a compressed graphical representation of price action over a specific period. Its simple yet powerful structure contains four critical pieces of information: the opening price (O), the highest reached (H), the lowest recorded (L), and the closing price ©. This is the OHLC notation you will see on any trading platform.

Visually, each candlestick consists of two elements: the body, which shows the range between open and close, and the wicks (shadows), which reveal the extremes reached during that session. The color coding varies depending on the platform, but conventionally, green indicates bullish sessions (close above open) and red bearish sessions (close below open). This dual-color coding allows traders to instantly grasp the direction of movement.

Deep Interpretation: What Each Candle Tells About the Market

Mastering candlestick reading goes beyond simply recognizing colors. Each component narrates a story of the conflict between buyers and sellers.

A long upper wick, accompanied by a small red body, suggests that although sellers tried to push the market down, buyers managed to regain ground during the session. Conversely, a long lower wick with a bullish body indicates that buyers could not sustain gains when selling pressure increased.

A large body without significant wicks (known pattern as Marubozu, literally “bald” in Japanese) communicates something different: absolute dominance of one side over the other. There was no retreat, no internal struggle. Sellers or buyers maintained control from the first minute until close.

Comparing this to analysis based solely on line charts reveals why professional traders embrace candlesticks. A line chart only connects closing prices, ignoring intraday volatility, tested highs and lows. This means you could miss crucial support or resistance signals that are evident in the wicks of candlesticks.

Key Candlestick Patterns

Reversal Patterns

Engulfing Candle: This pattern appears when confidence shifts sides. A small candle is followed by another of opposite color and larger size that completely engulfs the range of the first candle. It’s not just a color change; it’s a power shift. Market participants controlling the previous session lost authority, and the emerging group established dominance. It’s a clear warning that the trend may be exhausted.

Hammer: Imagine a candle with a tiny body but a huge wick pointing upward. What happened? It was a rejection. Sellers pressed aggressively, but buyers intervened strongly enough to recover almost all the ground. This pattern, especially on higher timeframes, suggests a possible trend reversal. The rejection is an act of defense that often precedes a counterattack.

Hanged Man: Structurally identical to the Hammer, but its context is opposite. While the Hammer appears after bullish trends suggesting buyer exhaustion, the Hanged Man emerges during declines, indicating sellers are losing momentum. The preceding context is what differentiates these two patterns.

Indecision Patterns

Doji: This pattern represents market paralysis. Opening and closing prices are practically identical, but long wicks reveal intense volatility. What does it mean? Buyers and sellers battled fiercely without either side gaining the session. It’s a sign of precarious balance. The next move depends on who attacks first in the upcoming session.

Spinning Top: Similar to the Doji but with a slightly more pronounced body, the Spinning Top also reflects indecision, though with a slight predominance of one side. Both patterns are neutral in terms of direction but significant because they often precede explosive movements.

Continuation Patterns

Marubozu: The bullish pattern shows a massive green body without upper wicks, indicating buyers controlled the entire session without resistance. The bearish Marubozu is the opposite: absolute seller control. These patterns reinforce the existing trend, not reverse it. Their appearance near validated support or resistance levels usually indicates those levels will be respected or decisively penetrated.

Practical Application: Building Confluences

Reading candlesticks is only effective when combined with other tools. Many beginner traders seek entries based on a single candlestick pattern, but this is speculation, not structured analysis. Experienced operators build confluences.

Imagine you identify support in EUR/USD at 1.036 through the rejected wicks of several candles. Now add the 61.8% Fibonacci retracement level at the same point. Then, a long-term moving average converges precisely there. Now you have confluence. When a Hammer forms at that point, you have a high-probability entry.

In a real gold analysis, for example, a daily engulfing candle warned of a potential trend change. But disciplined traders didn’t enter just because of that. They waited for a second confirming candle, looked for a nearby Fibonacci level, and then executed a buy order near 1700 USD. That’s the difference between serious technical trading and guessing.

Timeframes and How to Broaden Your Reading

Candlesticks work on any timeframe: from 1-minute charts to monthly charts. Each provides the same OHLC structure, but the information they encode varies in significance.

A long wick on a 1-minute chart could be noise; the same wick on a daily chart is a powerful rejection signal. This occurs because a daily candle contains 24 hours of price battles compressed into a single candle, while a 1-minute candle captures only 60 seconds.

This is where fractalization becomes important. A 1-hour candle is composed of 4 fifteen-minute candles, each of which is further composed of 3 five-minute candles. Breaking down a higher timeframe candle allows you to see exactly how the conflict evolved. If you see a 1-hour candle that opens bullish but closes bearish with a long upper wick, decomposing it into 15-minute candles will show that buyers gained ground in the first two candles but lost all their advantage in the last two. This reinforces the narrative: buyers exhausted, sellers counterattacked successfully.

Advanced Candlestick Reading Techniques

As you train your eye in candlestick reading, you will develop intuition about what specific combinations mean. A small red candle followed by a large green candle after touching support conveys a different story than an isolated small red candle in the middle of an uptrend without context.

Advanced traders don’t need confirmation indicators for every trade; they have read so much that they can predict micro-movements just by observing the shape a candle takes as it forms. But reaching that level requires deliberate practice, hours in front of historical charts, identifying patterns, and taking notes on what happened afterward.

Get Into Action: Learning Strategy

If you’ve decided to adopt technical analysis as your approach, start recognizing that candlesticks are your alphabet. Without mastering them, the rest of technical analysis will be ineffective. But once you grasp what each formation means, you will have covered more than 50% of the path toward market reading proficiency.

Use demo accounts to experiment risk-free. You don’t have to trade; in fact, when learning, you should analyze much more than you trade. Dedicate daily hours to examining historical charts of multiple assets: forex currencies, cryptocurrencies like Bitcoin, commodities. Observe how candlestick patterns unfold in different contexts and markets.

Remember that patterns on higher timeframes are significantly more reliable. A Hammer on a daily chart represents a more serious market decision than one on a 15-minute chart. Your analytical approach should prioritize larger timeframes for more robust signals.

The approach of professional traders is instructive: constant preparation for hours, selective action at specific moments. Like a professional athlete training 3 hours daily for a 90-minute game, analyze the market continuously but open positions only when you find multiple confluences. You won’t need 10 trades per day; you’ll need 10 well-constructed trades per month.

Finally, integrate candlestick reading with fundamental analysis. While candlesticks tell you what is happening now and what happened in the past, fundamental analysis explains why. Together, they provide a complete market view that is almost impossible to beat.