16 Essential Japanese Candle Patterns for Investors

Candlestick patterns are essential tools for anticipating price movements in financial markets. Let’s explore the 16 most relevant patterns and how to leverage them to identify trading opportunities.

Understanding Japanese Candlesticks

Japanese candlesticks provide a visual representation of price activity in markets. They are a fundamental element of technical analysis, allowing traders to extract valuable information quickly and efficiently.

On a daily chart, each candlestick represents the trading activity of a full day. Candlesticks consist of three key elements:

1. The body, which shows the range between open and close.
2. The wicks or shadows, indicating the extremes reached during the session.
3. The color, which signals the direction of movement. Green (or white) for gains, and red (or black) for declines.

Over time, individual candlesticks form patterns that traders use to identify significant support and resistance levels. There are numerous patterns suggesting market opportunities, some revealing the balance between buying and selling pressure, while others indicate continuation or indecision.

Before trading, it is crucial to familiarize yourself with the fundamentals of these patterns and their application in decision-making.

Six Bullish Candlestick Patterns

Bullish patterns typically appear after a downtrend, signaling a possible reversal. They serve as indicators for traders to consider opening long positions to benefit from a potential upward movement.

The Hammer

This pattern is characterized by a small body and a long lower wick, forming at the end of a downtrend.

The hammer indicates that, despite initial selling pressure, strong buying demand managed to push the price higher. Although the body color may vary, green hammers suggest a more robust bullish sentiment than red ones.

The Inverted Hammer

Similar to the hammer, but with a long upper wick and a short lower wick.

This pattern suggests strong buying pressure followed by sales that did not significantly push the price down. The inverted hammer indicates that buyers might take control of the market soon.

Bullish Engulfing

Formed by two candlesticks, consisting of a small red body completely engulfed by a larger green candle.

Although the second day opens below the first, bullish strength drives prices up, resulting in gains for investors.

Piercing Pattern

Another two-candlestick pattern, composed of a long red candle followed by a long green candle.

Typically, a significant bearish gap occurs between the close of the first day and the open of the second. This signals strong buying pressure, pushing the price up to or above the midpoint of the previous candle.

Morning Star

Considered a sign of hope in a downtrend, this three-candle pattern includes a small body between two large candles, one red and one green. Traditionally, the “star” does not overlap with the large bodies, with gaps at both open and close.

It indicates that initial selling pressure is waning, anticipating a possible bullish reversal.

Three White Soldiers

This pattern develops over three days, showing a sequence of large green (or white) candles with short wicks, each opening and closing progressively higher than the previous one.

It represents a strong bullish signal after a downtrend, demonstrating a steady increase in buying pressure.

Six Bearish Candlestick Patterns

Bearish patterns usually form after an uptrend, indicating a possible resistance point. Pessimistic market sentiment generally leads traders to close long positions and open shorts to capitalize on the expected decline.

The Hanging Man

The bearish version of the hammer, with the same shape but appearing at the end of an uptrend.

It suggests significant selling pressure during the session, although buyers managed to recover some ground. A strong selling pressure is often interpreted as a sign of trend exhaustion.

Shooting Star

Similar in shape to the inverted hammer but forming in an uptrend, featuring a small body and a long upper wick.

Typically, the market experiences a small bullish gap at open, followed by an intraday rally before closing near the opening price, reminiscent of a shooting star falling to earth.

Bearish Engulfing

Appears at the end of an uptrend. The first candle has a small green body engulfed by a subsequent large red candle.

Implies the peak or slowdown of the upward movement, signaling a potential imminent decline. The lower the close of the second candle, the higher the likelihood of a significant bearish trend.

Evening Star

A three-candle pattern, the bearish counterpart of the morning star. It consists of a small candle between a large green and a large red candle.

Indicates a reversal of the bullish trend, especially when the third candle erases the gains of the first.

Three Black Crows

Composed of three large red candles with short or nonexistent wicks. Each session opens near the previous close, but selling pressure pushes the price progressively lower at each close.

Traders interpret this pattern as the start of a bearish trend, indicating sellers outnumber buyers over three consecutive days.

Dark Cloud Cover

Indicates a bearish reversal, like a dark cloud over previous optimism. Consists of two candles: a red one opening above the previous green candle’s body and closing below its midpoint.

Signals that selling pressure dominated the session, resulting in a significant price drop. Short wicks suggest a decisive bearish trend.

Four Continuation Candlestick Patterns

Continuation patterns do not indicate a change in market direction. They help traders identify periods of consolidation, indecision, or neutral price movements.

Doji

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

The Doji represents a standoff between buyers and sellers, with no party gaining an advantage. Alone, it is a neutral signal but can form part of reversal patterns such as the bullish morning star or the bearish evening star.

Spinning Tops

These patterns show a short body centered between wicks of similar length. They indicate market indecision, resulting in little price change: bulls have sold at highs, while bears have bought at lows. Spinning tops are often interpreted as consolidation or pause periods, potentially followed by a continuation of the previous trend.

Although neutral on its own, a spinning top can suggest an imminent change, implying that current market pressure is weakening.

Three Methods Bearish Formation

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

The bearish variant, known as the “Three Methods Bearish Formation,” consists of a long red body followed by three small green bodies and another red body. The green candles stay within the range of the initial bearish body. This shows traders that bulls lack the strength to reverse the trend.

Three Methods Bullish Formation

Opposite the previous pattern, the “Three Methods Bullish Formation” comprises three short red candles interspersed between two long green candles. The pattern indicates that, despite some selling pressure, buyers maintain control of the market.

Hone your Japanese candlestick reading skills

The best way to master candlestick interpretation is to practice trading based on their signals. If you’re not ready to trade in real markets, you can develop your skills risk-free using a demo account on Gate.

When employing any candlestick pattern, it is essential to remember that, although they are useful for quickly identifying trends, they should be used together with other forms of technical analysis to confirm the trend.