Introduction: The language of candlesticks
Japanese candlesticks are a classic and powerful form of price representation that shows the battle between buyers and sellers within a given period.
Each candle displays open, high, low, and close prices:
- If the close is higher than the open → bullish candle (often green/white).
- If the close is lower → bearish candle (red/black).
The body shows the strength of the move, while the wicks (shadows) reveal rejection or indecision. Learning to read them helps anticipate reversals, continuations, and false breakouts.
Reversal patterns
Reversal patterns indicate a possible change in market direction after a strong trend:
- Hammer: after a downtrend; long lower wick, small upper body → rejection of lower prices, possible bullish reversal.
- Hanging Man: after an uptrend; same shape as hammer but signals weakness in buyers.
- Shooting Star: small body with long upper wick, showing rejection of highs.
- Inverted Hammer: similar to a shooting star but found at the end of a downtrend, suggesting bullish reversal.
Continuation patterns
These patterns indicate a pause before continuation in the main trend:
- Three White Soldiers: three consecutive bullish candles closing higher each time.
- Three Black Crows: three consecutive bearish candles closing lower each time.
- Doji within trend: temporary pause before continuation.
- Spinning Tops: indecision candles before momentum resumes.
Indecision patterns
These include Doji candles and other small-bodied patterns:
- Standard Doji: open and close nearly equal.
- Dragonfly Doji: long lower wick, bullish potential.
- Gravestone Doji: long upper wick, bearish potential.
- Spinning Top: small body, long wicks, showing indecision.
Context, confirmation and common mistakes
Japanese candlestick patterns gain power within context:
- Appearing at support or resistance.
- Confirmed by the next candle.
- Accompanied by volume expansion or structure break.
Common mistakes:
- Ignoring overall trend context.
- Acting on unconfirmed signals.
- Misinterpreting continuation as reversal.
