What is a Japanese Candlestick?

While we briefly covered Japanese candlestick charting analysis in the previous forex lesson,
we’ll now dig in a little and discuss them more in detail. Let’s do a quick review first.

Japanese Candlestick Trading

Back in the day when Godzilla was still a cute little lizard, the Japanese created their own
old school version of technical analysis to trade rice. That’s right, rice.

A Westerner by the name of Steve Nison “discovered” this secret technique called “Japanese
candlesticks,” learning it from a fellow Japanese broker. Steve researched, studied, lived,
breathed, ate candlesticks, and began to write about it. Slowly, this secret technique grew
in popularity in the 90’s. To make a long story short, without Steve Nison, candlestick charts
might have remained a buried secret. Steve Nison is Mr. Candlestick.
Okay, so what the heck are Japanese candlesticks?
The best way to explain is by using a picture:

Japanese candlesticks can be used for any forex time frame, whether it be one day, one
hour, 30-minutes – whatever you want! They are used to describe the price action during
the given time frame.
 Japanese candlesticks are formed using the open, high, low, and close of the chosen time
period.

 If the close is above the open, then a hollow candlestick (usually displayed as white) is
drawn.
 If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
 The hollow or filled section of the candlestick is called the “real body” or body.
 The thin lines poking above and below the body display the high/low range and are called
shadows.
 The top of the upper shadow is the “high”.
 The bottom of the lower shadow is the “low”.

Japanese Candlestick Anatomy

Sexy Bodies
Just like humans, candlesticks have different body sizes. And when it comes to forex
trading, there’s nothing naughtier than checking out the bodies of candlesticks!

Long bodies indicate strong buying or selling. The longer the body is, the more intense the
buying or selling pressure. This means that either buyers or sellers were stronger and took
control.
Short bodies imply very little buying or-selling activity. In street forex lingo, bulls mean
buyers and bears mean sellers.

Long white Japanese candlesticks show strong buying pressure. The longer the white
candlestick, the further the close is above the open. This indicates that prices increased
considerably from open to close and buyers were aggressive. In other words, the bulls are
kicking the bears’ butts big time!
Long black (filled) candlesticks show strong selling pressure. The longer the black Japanese
candlestick, the further the close is below the open. This indicates that prices fell a great
deal from the open and sellers were aggressive. In other words, the bears were grabbing
the bulls by their horns and body-slamming them.

Mysterious Shadows
The upper and lower shadows on Japanese candlesticks provide important clues about the
trading session.

Upper shadows signify the session high. Lower shadows signify the session low.

Candlesticks with long shadows show that trading action occurred well past the open and
close.

Japanese candlesticks with short shadows indicate that most of the trading action was
confined near the open and close.

Basic Japanese Candlestick Patterns

Spinning Tops
Japanese candlesticks with a long upper shadow, long lower shadow and small real bodies
are called spinning tops. The color of the real body is not very important.

The pattern indicates the indecision between the buyers and sellers.

The small real body (whether hollow or filled) shows little movement from open to close,
and the shadows indicate that both buyers and sellers were fighting but nobody could gain
the upper hand.
Even though the session opened and closed with little change, prices moved significantly
higher and lower in the meantime. Neither buyers nor sellers could gain the upper hand,
and the result was a standoff.

If a spinning top forms during an uptrend, this usually means there aren’t many buyers left
and a possible reversal in direction could occur.

If a spinning top forms during a downtrend, this usually means there aren’t many sellers left
and a possible reversal in direction could occur.

Marubozu
Sounds like some kind of voodoo magic, huh? “I will cast the evil spell of the Marubozu on
you!” Fortunately, that’s not what it means. Marubozu means there are no shadows from
the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low
are the same as its open or close. Check out the two types of Marubozus in the picture
below.
A White Marubozu contains a long white body with no shadows. The open price equals
the low price and the close price equals the high price. This is a very bullish candle as
it shows that buyers were in control the entire session. It usually becomes the first part of a
bullish continuation or a bullish reversal pattern.
A Black Marubozu contains a long black body with no shadows. The open equals the
high and the close equals the low. This is a very bearish candle as it shows that sellers
controlled the price action the entire session. It usually implies bearish continuation or
bearish reversal.
Doji
Doji candlesticks have the same open and close price or at least their bodies are
extremely short. A doji should have a very small body that appears as a thin line.
Doji candles suggest indecision or a struggle for turf positioning between buyers and sellers.
Prices move above and below the open price during the session, but close at or very near
the open price.

Neither buyers nor sellers were able to gain control and the result was essentially a draw.

There are four special types of Doji candlesticks. The length of the upper and lower shadows
can vary and the resulting forex candlestick looks like a cross, inverted cross or plus sign.
The word “Doji” refers to both the singular and plural form.
When a Doji forms on your chart, pay special attention to the preceding candlesticks.
If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus),
the Doji signals that the buyers are becoming exhausted and weakening. In order for price
to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking
their chops and are looking to come in and drive the price back down.

If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus),
the Doji signals that sellers are becoming exhausted and weak. In order for price to
continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming
in the mouth for a chance to get in cheap.

While the decline is sputtering due to lack of new sellers, further buying strength is required
to confirm any reversal. Look for a white candlestick to close above the long black
candlestick’s open.
In the next following sections, we will take a look at specific Japanese candlestick
pattern and what they are telling us. Hopefully, by the end of this lesson on candlesticks,
you will know how to recognize different types of forex candlestick patterns and make sound
trading decisions based on them.
If a Japanese candlestick has a long upper shadow and short lower shadow, this means that
buyers flexed their muscles and bid prices higher, but for one reason or another, sellers
came in and drove prices back down to end the session back near its open price.
If a Japanese candlestick has a long lower shadow and short upper shadow, this means that
sellers flashed their washboard abs and forced price lower, but for one reason or another,
buyers came in and drove prices back up to end the session back near its open price

Single Candlestick Patterns

Learn how to use single candlestick patterns to identify potential market reversals.

Here are the four basic single Japanese candlestick patterns:

Hammer and Hanging Man

The hammer and hanging man look exactly alike but have totally different meanings
depending on past price action. Both have cute little bodies (black or white), long lower
shadows, and short or absent upper shadows.
 The hammer is a bullish reversal pattern that forms during a downtrend. It is named
because the market is hammering out a bottom.
When price is falling, hammers signal that the bottom is near and price will start rising
again. The long lower shadow indicates that sellers pushed prices lower, but buyers were
able to overcome this selling pressure and closed near the open.

Just because you see a hammer form in a downtrend doesn’t mean you automatically place
a buy order! More bullish confirmation is needed before it’s safe to pull the trigger.

A typical example of confirmation would be to wait for a white candlestick to close above the
open to the right side of the hammer.

Recognition Criteria:
 The long shadow is about two or three times of the real body.
 Little or no upper shadow.
 The real body is at the upper end of the trading range.
 The color of the real body is not important.
The hanging man is a bearish reversal pattern that can also mark a top or strong
resistance level. When price is rising, the formation of a hanging man indicates that sellers
are beginning to outnumber buyers.
The long lower shadow shows that sellers pushed prices lower during the session. Buyers
were able to push the price back up some but only near the open.

This should set off alarms since this tells us that there are no buyers left to provide the
necessary momentum to keep raising the price.

Recognition Criteria:

 A long lower shadow which is about two or three times of the real body.
 Little or no upper shadow.
 The real body is at the upper end of the trading range.
 The color of the body is not important, though a black body is more bearish than a white
body.
Inverted Hammer and Shooting Star
The inverted hammer and shooting star also look identical. The only difference between
them is whether you’re in a downtrend or uptrend. Both candlesticks have petite little
bodies (filled or hollow), long upper shadows, and small or absent lower shadows.

The inverted hammer occurs when price has been falling suggests the possibility of a
reversal. Its long upper shadow shows that buyers tried to bid the price higher.
However, sellers saw what the buyers were doing, said “Oh heck no!” and attempted to
push the price back down.

Fortunately, the buyers had eaten enough of their Wheaties for breakfast and still managed
to close the session near the open.
Since the sellers weren’t able to close the price any lower, this is a good indication that
everybody who wants to sell has already sold. And if there are no more sellers, who is left?
Buyers.

The shooting star is a bearish reversal pattern that looks identical to the inverted hammer
but occurs when price has been rising. Its shape indicates that the price opened at its low,
rallied, but pulled back to the bottom.
This means that buyers attempted to push the price up, but sellers came in and
overpowered them. This is a definite bearish sign since there are no more buyers left
because they’ve all been murdered.

Dual Candlestick Patterns

Engulfing Candles

The bullish engulfing pattern is a two candlestick pattern that signals a strong up move
may be coming. It happens when a bearish candle is immediately followed by a larger
bullish candle.
This second candle “engulfs” the bearish candle. This means buyers are flexing their
muscles and that there could be a strong up move after a recent downtrend or a period of
consolidation.

On the other hand, the bearish engulfing pattern is the opposite of the bullish pattern.
This type of candlestick pattern occurs when the bullish candle is immediately followed by a
bearish candle that completely “engulfs” it. This means that sellers overpowered the buyers
and that a strong move down could happen.
Tweezer Bottoms and Tops
 The tweezers are dual candlestick reversal patterns. This type of candlestick pattern
are usually be spotted after an extended uptrend or downtrend, indicating that a reversal
will soon occur.

Notice how the candlestick formation looks just like a pair of tweezers!

Amazing!

The most effective Tweezers have the following characteristics:

 The first candlestick is the same as the overall trend. If price is moving up, then the first
candle should be bullish.
 The second candlestick is opposite the overall trend. If price is moving up, then the second
candle should be bearish.
 The shadows of the candlesticks should be of equal length. Tweezer Tops should have the
same highs, while Tweezer Bottoms should have the same lows.

Triple Candlestick Patterns

Evening and Morning Stars
 The morning star and the evening star are triple candlestick patterns that you can usually
find at the end of a trend. They are reversal patterns that can be recognized through three
characteristics. We’ll use the Evening Star Pattern on the right as an example of what you
may see:
1. The first candlestick is a bullish candle, which is part of a recent uptrend.
2. The second candle has a small body, indicating that there could be some indecision in the
market. This candle can be either bullish or bearish.
3. The third candlestick acts as a confirmation that a reversal is in place, as the candle closes
beyond the midpoint of the first candle.
Three White Soldiers and Black Crows
 The three white soldiers pattern is formed when three long bullish candles follow a
downtrend, signaling a reversal has occurred. This type of triple candlestick pattern is
considered as one of the most potent in-yo-face bullish signals, especially when it occurs
after an extended downtrend and a short period of consolidation.
The first of the three soldiers is called the reversal candle. It either ends the downtrend or
implies that the period of consolidation that followed the downtrend is over.

For the pattern to be considered valid, the second candlestick should be bigger than the
previous candle’s body. Also, the second candlestick should close near its high, leaving a
small or non-existent upper wick.

For the three white soldiers pattern to be completed, the last candlestick should be at least
the same size as the second candle and have a small or no shadow.

The three black crows candlestick pattern is just the opposite of the three white soldiers.
It is formed when three bearish candles follow a strong uptrend, indicating that a reversal is
in the works.

The second candle’s body should be bigger than the first candle and should close at or very
near its low. Finally, the third candle should be the same size or larger than the second
candle’s body with a very short or no lower shadow.

Three Inside Up and Down

The three inside up candlestick formation is a trend-reversal pattern that is found at the
bottom of a downtrend. This triple candlestick pattern indicates that the downtrend is
possibly over and that a new uptrend has started. For a valid three inside up candlestick
formation, look for these properties:
1. The first candle should be found at the bottom of a downtrend and is characterized by a
long bearish candlestick.
2. The second candle should at least make it up all the way up to the midpoint of the first
candle.
3. The third candlestick needs to close above the first candle’s high to confirm that buyers
have overpowered the strength of the downtrend.
Conversely, the three inside down candlestick formation is found at the top of an uptrend.
It means that the uptrend is possibly over and that a new downtrend has started. A three
inside down candlestick formation needs to have the following characteristics:
1. The first candle should be found at the top of an uptrend and is characterized by a long
bullish candlestick.
2. The second candle should make it up all the way down the midpoint of the first candle.
3. The third candlestick needs to close below the first candle’s low to confirm that sellers have
overpowered the strength of the uptrend.

Summary: Japanese Candlesticks

 If the close is above the open, then a hollow candlestick (usually displayed as white) is
drawn.
 If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
 The hollow or filled section of the candlestick is called the “real body” or body.
 The thin lines poking above and below the body display the high/low range and are called
shadows.
 The top of the upper shadow is the “high”.
 The bottom XE of the lower shadow is the “low”.
Long bodies indicate strong buying or selling. The longer the body is, the more intense the
buying or selling pressure.

Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean
buyers and bears mean sellers.
Upper shadows signify the session high.

Lower shadows signify the session low.

There are many types of Japanese candlestick patterns, but they can be categorized into
how many bars make up the candlestick pattern. There are single, dual, and triple
candlestick formations. The most common types of Japanese candlestick patterns are the
following:

Number of
Bars Japanese Candlestick Pattern
Spinning Tops, Dojis, Marubozu, Inverted Hammer,
Single Hanging Man, Shooting Star
Bullish and Bearish Engulfing, Tweezer Tops and
Double Bottoms
Morning and Evening Stars, Three Black Crows and
Triple Three White Soldiers, Three Inside Up and Down
Just refer to the Japanese Candlesticks Cheat Sheet for a quick reference on what these
candlestick patterns mean.

Combine candlestick analysis with support and resistance levels for best results.

And finally, here are some words of wisdom.

Just because candlesticks hint at a reversal or continuation, it doesn’t mean it will happen
for sure! You must always consider market conditions and what price action is telling you.

This is the forex market and nothing is set in stone!

And if you’re looking for a more in-depth look at Japanese Candlesticks, you can’t
go wrong with Japanese Candlestick Charting: A Contemporary Guide to the
Ancient Techniques of the Far East(Amazon Affiliate Link) by the man himself,
Steve Nison, if you want to further your study and add another skill to your trading
too