The 16 Japanese candlestick patterns that every trader should know

Derivative financial products are complex instruments. Trading these products carries a high risk of rapid capital losses.

Candlestick patterns are used to anticipate the future direction of price movements. Discover the 16 most common candlestick patterns and how you can use them to identify trading opportunities.

Carlos Ruiz | Financial Analyst, Spain.

What are Japanese candlesticks?

Japanese candlesticks are a graphical representation of price movements in financial markets. They are one of the most popular elements of technical analysis, as they allow traders to quickly obtain information about the price by observing just a few bars.

This article focuses on daily charts, where each candle represents the trading activity of a full day. Each candle has three main components:

1. The body, which shows the range between opening and closing.

2. The wicks, which indicate the intraday highs and lows.

3. The color, which indicates the direction of movement. A green ( or white ) body indicates that the price went up, while a red ( or black ) one shows a drop.

Over time, individual candles form patterns that traders can use to identify key levels of support and resistance. There are numerous candle patterns that suggest opportunities in the market. Some provide insight into the balance between buying and selling pressure, while others identify continuation or indecision patterns.

Before trading, it is essential to familiarize yourself with the fundamentals of candlestick patterns and how they can assist in trading decision-making.

Six bullish candlestick patterns

Bullish patterns typically form after a bearish market trend and indicate a possible reversal in price movement. They are a signal for traders to consider opening long positions to capitalize on a potential upward movement.

Hammer

This pattern consists of a small body with a long lower wick and is formed at the end of a downtrend.

A hammer shows that, although there was selling pressure during the session, ultimately strong buying pressure caused the price to recover. The color of the body may vary, but green hammers indicate a stronger bullish market than red ones.

Inverted Hammer

A similar bullish pattern is the inverted hammer. The only difference is that it has a long upper wick and a short lower wick.

This indicates strong buying pressure followed by selling pressure that failed to significantly lower prices. The inverted hammer suggests that buyers may soon take control of the market.

Bullish Envelope

The engulfing pattern is formed by two candles. It consists of a small red body completely engulfed by a larger green candle that follows.

Although the second day opens below the first, the bullish momentum causes prices to rise and traders end the session with profits.

Piercing Pattern

This is also a two-candle pattern, consisting of a long red candle followed by a long green candle.

There is usually a significant bearish gap between the close of the first day and the green open of the second. This indicates strong buying pressure, as the price rises to the midpoint or above the previous day's level.

Morning Star

The morning star pattern is considered a signal of hope in a downtrend. It is a three-candle pattern: a small one between two large ones, one red and one green. Traditionally, the "star" does not overlap the large bodies, with gaps both at the open and at the close.

It is a sign that the selling pressure from the first day is beginning to decrease and a bullish market is anticipated.

Three white soldiers

The pattern of three white soldiers unfolds over three days. It consists of a series of three consecutive long green or white candles with short wicks, which progressively open and close higher than the previous day.

It is a very significant bullish signal after a bearish trend and shows a steady increase in buying pressure.

Six bearish candlestick patterns

Bearish patterns usually form after an uptrend and indicate a resistance point. Strong pessimism about the market price often leads traders to close long positions and open short ones to take advantage of the price decline.

( Hanged Man

The hanging man is the bearish version of the hammer: it has the same shape but forms at the end of an uptrend.

It indicates that there was significant selling pressure during the session, but buyers managed to push the price higher. Strong selling pressure is often seen as a sign that the bullish trend is losing strength.

) Shooting star

The shooting star has the same shape as the inverted hammer, but it forms in a bullish trend: small body and long upper wick.

Typically, the market will experience a small bullish gap at the open and an intraday rally before closing near the opening price, like a shooting star falling to the ground.

Bearish envelope

A bearish engulfing pattern occurs at the end of an uptrend. The first candle has a small green body that is completely engulfed by a subsequent large red candle.

It implies the peak or deceleration of price movement and signals an imminent market drop. The lower the second candle goes, the greater the likelihood that the trend will be significant.

Evening Star

The evening star is a three-candle pattern equivalent to the bullish morning star. It consists of a small candle interspersed between a large green candle and a large red one.

It indicates a reversal of the bullish trend and is especially relevant when the third candle erases the gains generated by the first.

Three black crows

The three black crows pattern consists of three long red candles with short or nonexistent wicks. Each session opens near the close of the previous day, but selling pressure pushes the price lower at each close.

Traders interpret this pattern as the beginning of a bearish trend, as sellers outnumber buyers for three consecutive days.

Dark Cloud

The dark cloud pattern signals a bearish reversal, like a dark cloud over the optimism of the previous day. It consists of two candles: a red one that opens above the green body of the previous day and closes below its midpoint.

It is a sign that bearish sentiment has dominated the session, causing a significant drop in prices. Short wicks on the candles suggest that the bearish trend was decisive.

Four continuation candlestick patterns

When a candlestick pattern does not indicate a change in market direction, it is known as a continuation pattern. This can help traders identify a period of pause in the market, indecision, or a neutral price movement.

Doji

When a market opens and closes at nearly the same price, the candle resembles a cross or plus sign. Traders should look for a very short or nonexistent body with variable length wicks.

The doji pattern represents a struggle between buyers and sellers that ends without either side gaining a net advantage. By itself, a doji is a neutral signal, but it can be found in reversal patterns such as the bullish morning star and the bearish evening star.

Spinners

These patterns have a short body centered between similarly long wicks. The pattern indicates indecision in the market, resulting in little net change in price: the bulls have pushed the price up, but the bears have brought it back down. Spinning tops are often interpreted as a period of consolidation or pause, which may be followed by either a bullish or bearish trend.

By itself, a spinning top is a relatively neutral signal, but it can be seen as an indication that something is about to happen, as it implies that the current market pressure is losing control.

Formation of three bearish methods

This pattern is used to predict the continuation of the current trend, whether it is bullish or bearish.

The bearish variant is known as "bearish three methods formation". It consists of a long red body, followed by three small green bodies, and another red body. The green candles remain within the range of the bearish body. This shows traders that the bulls do not have enough strength to reverse the trend.

Formation of three bullish methods

It is the opposite of the previous pattern, being bullish, and is known as the "bullish three methods formation". It consists of three short red candles between two long green ones. The pattern shows traders that, despite some selling pressure, buyers maintain control of the market.

Practice Reading Japanese Candles

The best way to learn to interpret candlesticks is by practicing trading based on the signals you observe. If you don't feel ready to trade in real markets, you can develop your skills risk-free with the demo account from Gate.

When using any candlestick pattern, it is crucial to remember that while they are useful for quickly predicting trends, they should be used alongside other forms of technical analysis to confirm the trend.

In addition to the legal notice presented at the beginning, the content of this page does not constitute a record of our trading prices, nor an offer or solicitation of transaction in any financial instrument. Gate assumes no responsibility for the use that may be made of these comments or for any consequences that may arise. No representation or warranty is offered regarding the accuracy or completeness of this information, so any person who uses it does so at their own risk. No analysis presented takes into account the specific objectives, financial situation, or needs of any particular person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment analysis and as such is considered a marketing communication.