How to Read Japanese Candlesticks, Charting & Techniques

Is Reading Candlestick Stock Charts Difficult? You Can Easily Learn The Patterns & Techniques Or Use Pattern Recognition Chart Software

Japanese Candlesticks Techniques

The theories behind candlestick charts are so abundant that one could write a book about it, and in fact, many have.

Learning Japanese Candlestick Patterns
Learning Japanese Candlestick Patterns

At first, candlesticks look very difficult to understand, and there are at least 60 different main patterns.  Who has the time to learn the name of every pattern and its meaning?  Not you, I can imagine.

What Are Japanese Candlestick Patterns

Japanese Candlestick charts are designed to represent the supply and demand of any given market. The patterns developed in the 1700s to track rice prices can be used on stocks, commodities, and foreign exchange.  There are over 120 different candlestick patterns to learn and recognize, making the whole process of analysis very time-consuming.

Used widely in Japan and gaining a strong foothold in the rest of the world, the Japanese Candlestick chart gives an excellent insight into current and future price movements. Named Candlesticks because they look like candlesticks with a wick and the main body.

I use Candlestick charts exclusively when doing my analysis when you get used to how they work; they provide an unparalleled inside into the short-term market dynamics on a given stock.

Candlestick Pattern Recognition Algorithms & Indicators

Before you jump into a headlong three months of studying and analyzing Japanese Candlesticks manually, I would highly recommend you use the power of modern stock charting algorithm software to do the job for you.

Three of our review winning stock market chart analysis software vendors have functionality that can do a better job of identifying and analyzing candlesticks that humans can.  Give them a try.

CandleStick SoftwareTrendSpiderTradingViewMetaStock
Rating★★★★★★★★★★★★
Patterns Recognized1232752
PricingIncludedIncluded$349 add-on
Full ReviewRead the ReviewRead the ReviewRead the Review
Get the SoftwareVisit TrendSpiderVisit TradingViewVisit MetaStock

 

Read more about the best Candlestick Pattern Analysis & Recognition Software

Learning Japanese Candlestick Analysis

This section will show you how they work and focus on what they are trying to tell us.  There are a few psychological principles involved with Candlesticks, and when you know them, you can understand the meaning of all the patterns without having to learn them all.

Two Types of Japanese Candlesticks

The first candle has a black or filled body indicating the day was a price down day.  A white or hollow candlestick indicates an up day.  The lines above and below the main body are referred to as the “Shadows” or “Wicks.”

japanese-candlesticks-ohlc
Two Types of Candle – Filled & Hollow Candles

It is also worthy of note that candlesticks show the days price pictorially quite nicely as the extent of the surge or “Trading Range” from Opening Price to Closing Price can be seen very clearly.

Once you get used to Candlesticks, I am sure you will never go back to OHLC Bars again.

Candlesticks are used to allow us to try to predict the movement of the price of the course of the next few days.  Candlesticks are of two types, “Reversal Patters” and Continuation Patterns.”

How to Read Candlestick Charts [7 Steps]

How to Read Japanese Candlesticks In 7 Steps
How to Read Japanese Candlesticks In 7 Steps

1. Filled Candlestick – Price Down

A filled Candlestick is a dark color, depicting the night, referring to the sun setting, which means the price has, like the sun, has gone down for the day.

2. Hollow Candlestick – Price Up

The Hollow Candlestick represents the rising of the sun, white and full of light. Like the sun, it rises, and so does the stock price for the day.

3. Candle Open – Bottom of Hollow Candle, Top of Filled Candle

A hollow Candlestick has the opening price at the base of the candle; of course, this is easy to remember because the hollow candle rises like the sun, so the bottom of the candle is the opening price.

For the filled “dark” candle, we know that the sun has set on this stock for the day, and the price went down.  This means the top of the candle body is the opening price, and the top of the filled candle is the closing price.

4. The Candlestick High – Top of the Wick or Candle

Surging through every candle is a wick, and it is this wick that makes the Candlestick so impressive. The top of the Candlestick wick is always the price high for the day.  The longer the upper Candlestick wick, the higher the stock price was, but also, the more the price was beaten down for the day.

5. The Candlestick Low – Bottom of the Wick or Candle

The Candlestick wick also runs through the bottom of the candle. The presence of a long lower wick indicates that the stock price went very low for the day, but the market traders decided that this price low represented bargains and demand fo the stock drove the price higher. Ultimately this created a long lower wick and is a bullish signal.

6. The Candlestick Close – Bottom of the Filled Candle or Top of Hollow Candle

For a filled Candlestick, the closing price is always the lower part of the candle’s base. The sun has set on the candle and this where the price closed.

A hollow Candlestick means the rising of the sun; therefore, the top of the body is the closing price.

7. The Candlestick Wick – Shows the High and Low for the Chart Time Period

The final key lesson here is the length of the Candlestick wick.  A very long wick that extends through the body, both above and below, suggests that a strong equilibration between buyers and sellers has been found.  Both a higher high and a lower low were tested, and the market participants agreed on a balance in the middle.

This long wick in a Candlestick leads us on to the best reversal sign in Candlestick charting, the DOJI.

The Doji Reversal Candlestick Pattern

In this graphic, you can see one of the most popular uses of a candlestick chart to spot a “reversal.”

The Doji Candlestick Pattern
The Doji Candlestick Pattern

The “Doji” is when the opening price and the closing price are very close together.

You can see the price pattern here; the price was going down, then the Doji appeared, and then the price reversed and proceeded upwards.

This is one of the most common reversal patterns, and when you understand it, you will see it everywhere.

 

5 Best Candlestick Reversal Patterns

As we are concerned with spotting changes in price moves, we will focus on the Reversal Patterns.  This section is the Bullish Reversal Pattern, meaning when a price is moving down, and you see this sign, the price may change direction and start moving up in the short term.  These are the most common patterns, not an exhaustive list, but it will give you an idea of what is common in all patterns.

The Hammer

The Top 5 Japanese Candlestock Reversal Patterns

The hammer can be either filled or hollow; the Japanese say the price is hammering out a bottom.  What is important here is that at the end of a down move, the buyers and sellers test out an extreme low (the long shadow); however, the price has returned higher by the closing bell.

The lows were tested, but the price found no comfort there; there were enough buyers at this level to move the price back up.

Inverted Hammer

This hammer shows that at the end of a downward move, the stock gaps significantly down; there is much movement throughout the day moving back to fill the gap, but the price settles lower for the day.  This shows significant price action and that buyers are showing a strong interest in the stock at these levels.

Bullish Engulfing

Here we have a negative spinning top or a short day during a downtrend, then followed by a long day of real power; the long white body tells you something significant has changed, and so has the sentiment, a clear trend reversal.

Bullish Harami

During a downtrend, we experience a very negative “Long Day,” followed by a short positive day.  This indicates the market participants have found a level they are happy with.  Candlesticks are most useful when predicting a change in trend; this might be from an “up” to a “down” trend or from a “down” trend to a “sideways” trend.  In the case of this Harami, the change in trend may be from downwards to sideways.

Piercing Line

This shows a day of real strength following a very negative day.  The White candle gaps down on open, but the buyers show real demand throughout the day to retrace more than 50% of the previous day’s losses.

Japanese Candlesticks Positives

Candlesticks give an excellent view of the Open, High, Low, and close of price.  Pictorially illuminating and easy to see trends.  There is a full reference of 1 bar to 4 bar patterns, which help us to make judgments on the future direction of price.  They connect psychology with the price pattern.  An easy to learn system for understanding candlesticks are available in the Liberated Stock Trader PRO Training Course – which includes a video to help you master these charts.

Japanese Candlesticks Negatives

Although Candlesticks have many advantages, they can seem like information overload to the beginner.  There are also many Candlestick patterns to learn.

Candlestick Analysis During the 2008 Financial Crisis

Let’s take a look at a great example of how Candlesticks work, casting an eye back to June 2010.

It was a flat day on the market.  One thing that certainly stood out to me was the chart pattern for the day.  The day was extremely uneventful, with the market participants backing away from the higher prices.  Volume was lower than the previous day suggesting traders pausing for breath.

What is interesting is to look at the price pattern using Candlestick analysis.

Using Japanese Candlestick Analysis to evaluate market direction
Using Japanese Candlestick Analysis to evaluate market direction during a crash

The Doji is a Candlestick pattern that suggests indecision in the marketplace.

The Open and Close prices are very close, yet there is a longer distinguishable wick.

Above is a 3-month chart of the DJ-30.

13 Point Candlestick Crash Analysis

I have picked out some of the more notable signs of indecision, Dojis, Hammers, Spinning Tops and Long Legged Dojis (also known as a Rickshaw Man):

  1. The first arrow shows the price trending up during April 2010.
  2. Next, we see a Doji occur.
  3. Price then proceeds to move downwards.
  4. Price moves aggressively downwards and halts at 9875,
  5. Price begins to recover.
  6. Then we see a Spinning Top.
  7. Two days later, the trend changed and move down again.
  8. Then a Hammer occurs, and the trend changes to short-term positive.
  9. Then at the start of June, we see a Doji.
  10. The following day the price moves down again.
  11. We then see an Inverted Hammer.
  12. The price moves up again.
  13. Then yesterday – June 16th, 2010, we see a Long-Legged Doji.

Candlestick Summary

Each Candlestick pattern has a specific story to tell.  If you can understand the story being told, you do not need to memorize each pattern’s name and the textbook meaning.  Re-read this article and try to imagine the story.  Combining the action of multiple days will allow you to understand the market participants’ current psychology, therefore giving you an insight into tomorrow’s price action.

Automated Candlestick Stock Charts

Is this already too much information?  There are only 150 more Candlesticks to memorize and recognize.  Or simply let software int eh could do it for you.

CandleStick SoftwareTrendSpiderTradingViewMetaStock
Rating★★★★★★★★★★★★
Patterns Recognized1232752
PricingIncludedIncluded$349 add-on
Full ReviewRead the ReviewRead the ReviewRead the Review
Get the SoftwareVisit TrendSpiderVisit TradingViewVisit MetaStock

Learn Stock Market Trading and Investing with FREE Education and Training on Stock Screening, Stock Charts, Candlesticks, Technical Analysis & Fundamental Analysis. Get Started Now.

Top 3 Candlestick Pattern Analysis & Recognition Software

For an in-depth guide to Japanese Candlestick charts, take a look at our Pro Stock Market Training.

PRO Stock Market Training – From Beginner To Professional

11 COMMENTS

  1. Hi there, I found your blog via Google while searching for first aid for a heart attack and your post looks very interesting for me.

  2. I dont use candlestick much,but i read in books and seen, when Doji with low volume is sign downtrend- doji with high volume is sign of uptrend. Doji when compared with volume, makes powerful. I am not sure how far this is valid and true. Any thoughts on this.

    • A Doji is a sign of indecision, perhaps change of trend, from up to down, up to sideways etc. Volume is also good to know. A gravestone doji at the top of an uptrend is considered the end of the trend.

  3. Just want to say your article is striking. The clarity in your post is simply striking and i can take for granted you are an expert on this subject. Well with your permission allow me to grab your rss feed to keep up to date with forthcoming post. Thanks a million and please keep up the accomplished work. Excuse my poor English. English is not my mother tongue.

  4. hello Barry–i’m assuming that a gravestone doji has the body(what there is of it) at the bottom of the shadow–just to be sure—praises again for this site!–S.

    • Hi Steve, thanks for the positive comments, yes you are exactly right. That reminds me I have a post on Bullish reversal candlestick patterns here https://www.liberatedstocktrader.com/2-japanese-candlesticks-bullish-reversal-patterns/
      I have not as yet added a post about Bearish reversal patterns. A Gravestone Doji is one of the easiest Bearish reversal patterns to spot and usually occurs during an uptrend.

  5. You you could make changes to the page title Chapter 6 – Introduction to Japanese Candlesticks :: Stock Market Training Course,Technical Analysis Course,Share Market Education to something more suited for your content you create. I enjoyed the post nevertheless.

Leave a Reply to anonymous Cancel reply

Please enter your comment!
Please enter your name here