Japanese candlesticks are a popular charting technique used in technical analysis to analyze price action and predict future price movements. To help you better understand candlestick patterns, this post will cover:

• Candlestick Pattern Components: Explains the definition of session, open, close, body, wick, high and low.

• Top candlestick patterns: Explores some of the top candlestick patterns, offering insights into their appearance and meanings. To make things easier, a candlestick pattern cheat sheet is included. 

• Common mistakes: Helps you avoid mistakes of over-reliance on candlestick patterns, ignoring the trend context, playing down confirmation, or failing to consider time frames.

Hopefully, by the end of this post, you will be able to understand what the candlesticks tell you and make sound trading decisions based on them.

Candlestick Pattern Components

Japanese candlesticks summarize price action over a specific time frame in a visual format. Each candlestick represents a single session, displaying the open, close, high, and low prices with that session. Let’s break down the key components using candlestick diagrams.

Session

In a candlestick chart, a session refers to the specific time frame represented by a single candlestick. The session can range from one minute, one hour, one day, or any interval, depending on your chart’s settings. You can switch between larger sessions and smaller ones. For example, if you switch to a one-minute session chart, each candle represents price action within one minute.

Open

The open is the price at which the first trade occurred during the session.

Close

The close is the price at which the last trade occurred during the session.

Body

The body of a candlestick is the wider part, representing the price range between the open and close.

• Body Color

• Green/White: If the close is above the open, the body is green or white, indicating upward price movement or a bullish pattern.

• Red/Black: If the close is below the open, the body is red or black, indicating downward price movement or a bearish pattern.

• Body Size

• Small body: Indicates very little price movement between the open and close, suggesting indecision or a balance between buyers and sellers.

• Long Body: Indicates significant price movement, reflecting strong market pressure.

• Long Green Body: Signals strong buying pressure, where demand exceeds supply, driving the price up. The longer the green body, the higher the close relative to the open, reflecting more intense buying pressure.

• Long Red Body: Indicates strong selling pressure. This occurs when more sellers are eager to sell than buyers are willing to buy, causing the price to drop. The longer the red body, the lower the close relative to the open, showing more intense selling pressure.

Wick

Wicks (or shadows) are thin lines extending above and below the body and displaying the high and low for the session. 

• Short Wick: Suggests that most trading occurred near the open and close, indicating a relatively stable session.

• Long Wick: Suggests that prices moved significantly from the open, but eventually returned near the open or close.

• Long Upper Wick: Suggests that buyers were initially strong, pushing the price up, but they were eventually overpowered by sellers, causing the price to fall back before the session ended. 

• Long Lower Wick: Suggests that sellers initially drove the price down, but buyers stepped in to push the price back up.

High

The highest price traded during the session, marked by the top of the upper wick.

Low

The lowest price traded during the session, marked by the bottom of the lower wick.

Summary

As discussed earlier, each candlestick provides insights into the battle between buyers and sellers. Long wicks highlight the aggressive moves made by either buyers or sellers to drive the price up or down. A green candle indicates that buyers dominated during the session, while a red candle shows that sellers took control. When one side dominates or takes control, they are driving the price movement. When buyers take control, demand increases, leading to higher prices. When sellers take control, supply increases, leading to lower prices.

Understanding the components of a candlestick and the information it conveys is crucial for interpreting candlestick patterns. In the next section, we'll explore some top candlestick patterns and see how they can help you anticipate market movements.

Top Candlestick Patterns

Some patterns are taken as indication of potential market movement, since these patterns reveal price action that has often led to specific movement in the past. While past performance is no guarantee of future price movement, patterns can be useful for understanding market sentiment and spotting opportunities.

There are three types of candlestick pattern: single, double and triple. This is based on the number of candles that made up the pattern. Let’s first explore single-candle patterns, which are essential before delving into more complex candlestick patterns.

1. Spinning Tops

Spinning tops are candlestick patterns characterized by a small body with long upper and lower wicks. They signal indecision between the buyers and sellers. The small body implies little price movement from open to close, and the wicks indicate that both buyers and sellers were aggressive and pushed the prices higher and lower within the session. However, neither side could take control, resulting in a standoff. 

Trend Context and Potential Signals

In an Uptrend: A spinning top may signal that buying momentum is fading and there aren’t many buyers left, suggesting a possible reversal.

In a Downtrend: It can indicate that selling pressure is weakening and there aren’t many sellers left, hinting at a potential reversal upward.

2. Marubozu

The term “marubozu” means “bald head” in Japanese. So, a Marubozu candlestick is a bald candle with no wick. The high and low prices match the open and close, depending on whether the body is green or red.

Green Marubozu contains a long green body with no wicks, meaning the open equals the low, and the close equals the high. This pattern is very bullish, indicating buyers controlled the session entirely.

Conversely, Red Marubozu contains a long red body with no wicks, meaning the open price equals the low, and the close equals the high. This pattern is very bearish, showing that sellers dominated the session.

Trend Context and Potential Signals

Green Marubozu:

• In an Uptrend: Signals likely continuation of the uptrend.

• In a Downtrend: Suggests a possible reversal to the upside.

Red Marubozu:

• In an Uptrend: Signals likely continuation of the downtrend.

• In a Downtrend: Suggests a possible reversal to the downside.

3. Doji

A Doji candlestick has a very small body that appears as a thin horizontal line, indicating that the open and close are nearly identical. It suggests indecision between buyers and sellers. Although price may move above and below the open during the session, it ultimately closes at or near the open. This reflects a balance between buyers and sellers, with neither side gaining control, resulting in a draw.

Trend Context and Potential Signals

• In an Uptrend: Signals possible reversal to the downside.

• In a Downtrend: Suggests a possible reversal to the upside.

4. Hammer and Hanging Man

Both Hammer and Hanging Man have small bodies (either green or red), long lower wicks, and short or absent upper wicks.

4.1 Hammer

The Hammer is a bullish reversal pattern that appears during a downtrend. It suggests “hammering out of a bottom”, indicating that the market has found a bottom and is ready to rise. The long lower wick indicates that sellers initially drove the price lower, but the buyers stepped in and managed to close the session near the open. This can be a warning sign of a potential reversal to the upside.

4.2 Hanging Man

The Hanging Man is a bearish reversal pattern that forms during an uptrend. It visually and metaphorically suggests a market that is “hanging” at a high level and might “fall” as if it were a person being hanged. The long lower wick shows that sellers were able to push the price down during the session. Although buyers managed to bring the price back near the open, this struggle can be a warning of a potential reversal to the downside.

5. Inverted Hammer and Shooting Star

Both Inverted Hammer and Shooting have small bodies (either green or red), long upper wicks, and small or absent lower wicks.

5.1 Inverted Hammer

The Inverted Hammer is a bullish reversal candlestick that appears in a downtrend. Its long upper wick shows that buyers tried to drive the price higher. Although sellers attempted to push the price back down, the session closed near the open. Since sellers weren’t able to close the session any lower. This inability of sellers to maintain control suggests a potential reversal to the upside.

5.2 Shooting Star

The Shooting Star is a bearish reversal candlestick that forms during an uptrend. The long upper wick shows that buyers initially drove the price higher, but sellers took over and pushed the price back down, closing near the open.This pattern indicates a potential reversal to the downside.

6. Engulfing

The Engulfing pattern involves two candles: the first one has a smaller body, while the second one completely “engulfs” the body of the first candle.The second’s body is larger and fully covers the previous candle’s body from open to close.

6.1 Bullish Engulfing

The Bullish Engulfing pattern is a bullish reversal signal that appears in a downtrend. It consists of a smaller bearish (red) candle followed by a bullish (green) candle that completely engulfs the body of the previous candle. This pattern suggests a potential reversal to the upside, as it indicates that buyers have taken control from the sellers and are pushing the price higher.

For added confidence in a potential trend reversal, traders often look for the next candlestick to close higher than the Bullish Engulfing pattern.

6.2 Bearish Engulfing

The Bearish Engulfing pattern is a bearish reversal signal that occurs during an uptrend. It consists of a smaller bullish (green) candle followed by a bearish (red) candle that completely engulfs the body of the previous candle. This pattern suggests a potential reversal to the downside, as it indicates the sellers have empowered the buyers and are driving the price lower.

To confirm a potential downtrend, traders typically look for the next candlestick to close lower than the Bearish Engulfing pattern.

7. Tweezer

The Tweezer pattern is identified by two candles with similar highs or lows.

7.1 Tweezer Top

The Tweezer Top is a bearish reversal pattern that forms after an uptrend. The first candle is usually bullish, followed by a bearish candle with a similar high. The matching highs suggest that the market has hit a resistance level, and sellers are starting to gain control, potentially leading to a reversal to the downside.

7.2 Tweezer Bottom

The Tweezer Bottom is a bullish reversal pattern that occurs after a downtrend. The first candle is usually bearish, followed by a bullish candle with a similar low. The matching lows indicate that the market has found support, with buyers stepping in to halt the downtrend. This can be a sign of a potential reversal to the upside.

8. Evening Star and Morning Star

Both Evening Star and Morning Star consist of three candles, signaling a trend reversal.

8.1 Morning Star

The Morning Star is a bullish reversal pattern that appears at the end of a downtrend, suggesting that the downward momentum is weakening and that a potential reversal to the upside could follow.

• First Candle: A bearish (red) candle continues the existing downtrend.

• Second Candle: A small-bodied candle shows indecision or a pause in selling pressure.

• Third Candle: A bullish (green) candle that closes above the midpoint of the first bearish candle’s body, signaling that buyers are taking control and a reversal to the upside may occur.

8.2 Evening Star

The Evening Star is a bearish reversal pattern that appears at the end of an uptrend, suggesting that the upward momentum is weakening and that a potential reversal to the downside could be imminent.

• First Candle: A bullish candle continues the existing uptrend.

• Second Candle: A small-bodied candle, typically gapping up, which indicates indecision or a pause in buying pressure.

• Third Candle: A bearish candle that closes below the midpoint of the first bullish candle’s body, indicating that sellers are taking control and a reversal to the downside may follow.

9. Three White Soldiers and Three Black Crows

The Three White Soldiers and Three Black Crows consist of three consecutive candles, signaling strong trend reversals.

9.1 Three White Soldiers

The Three White Soldiers pattern is a bullish reversal pattern that typically appears after a downtrend. It consists of three consecutive long-bodied bullish  (or white)  candles, each closing higher than the previous one. Each candle in the pattern opens within the previous candle's body and closes near its high, showing sustained buying pressure.

The lack of significant wicks on these candles suggests that bulls are in control, driving the price consistently higher. This pattern indicates a strong shift in market sentiment from bearish to bullish and is seen as a reliable signal that a new uptrend may be beginning.

9.2 Three Black Crows

The Three Black Crows pattern is a bearish reversal pattern that typically appears after an uptrend. It consists of three consecutive long-bodied bearish (or black) candles, each closing lower than the previous one. Each candle in the pattern opens within the previous candle's body and closes near its low, reflecting sustained selling pressure.

The absence of significant lower wicks suggests that bears are firmly in control, pushing prices steadily downward. This pattern signals a strong reversal from bullish to bearish sentiment, often indicating that a downtrend is likely to follow.

10. Three Inside Up and Inside Down

Both Three Inside Up and Three Inside Down consist of three candles and can be used to predict a shift in market momentum.

10.1 Three Inside Up

The Three Inside Up is a bullish reversal pattern that appears during a downtrend, suggesting that the selling pressure is weakening, and buyers are beginning to take control, potentially leading to a trend reversal.

• First Candle: A large bearish candle that continues the downtrend.

• Second Candle: A smaller bullish candle that closes within the body of the first candle, signaling a potential shift in momentum.

• Third Candle: A bullish candle that closes above the high of the first candle, confirming the reversal to the upside.

10.2 Three Inside Down

The Three Inside Down is a bearish reversal pattern that occurs during an uptrend, indicating that the buying momentum is waning, and sellers are starting to take over, potentially leading to a downtrend.

• First Candle: A large bullish candle that continues the uptrend.

• Second Candle: A smaller bearish candle that closes within the body of the first candle, indicating a possible slowdown in buying pressure.

• Third Candle: A bearish candle that closes below the low of the first candle, confirming the reversal to the downside.

Candlestick Patterns Cheat Sheet

Mistakes in Using Candlestick Patterns

Over-Reliance on Candlestick Patterns Alone

Traders sometimes place too much emphasis on candlestick patterns without considering other technical indicators, market context, or fundamental analysis. This can lead to false signals and poor trade decisions because candlestick patterns are more effective when used in conjunction with other forms of analysis.

Ignoring the Trend Context

Candlestick patterns are often trend-dependent, meaning they have different implications based on the existing market trend (uptrend, downtrend, or sideways).

Lack of Confirmation

Entering a trade based on a candlestick pattern without waiting for confirmation from subsequent price action. This can result in entering trades prematurely before the pattern is fully validated, leading to increased risk and potential losses.

Failing to Consider Time frames

Traders often make the error of analyzing candlestick patterns on a single time frame without considering how the pattern might appear or behave on other time frames. For example, a candlestick pattern that looks like a strong reversal signal on a 5-minute chart might appear insignificant or even contradictory on a daily chart. This mismatch can lead to conflicting signals and poor trade decisions. Analyze candlestick patterns across different timeframes (e.g., a 15-minute, 1-hour, and daily chart) to get a fuller picture of market conditions.This helps you identify the dominant trend and ensures that any pattern you trade is supported by the overall market direction.

Conclusion

By now, you should have a clearer understanding of Japanese candlestick patterns and their role in technical analysis. Whether it’s grasping the basic components, recognizing top patterns, or avoiding common pitfalls, this knowledge will help you navigate the complexities of price action with greater confidence. Equipped with these insights, you're now better positioned to interpret market signals accurately and make sound trading decisions that align with your overall strategy. MC Prime provides advanced chart tools, allowing you personalize your candlestick charts by setting up sessions, changing candle colors, adding trend lines, and more. Sign up on MC Prime today and start exploring candlestick patterns.