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Japanese Candlesticks in Trading - Overview and Analysis

By Stelian Olar, Updated on: Nov 02 2023.

Learning how to read Japanese candlestick charts is an important skill for any Forex trader.

But you may be wondering - how do Japanese candlesticks work in the first place? Each candlestick has a specific meaning that reveals the emotion and psychology behind price movements.

Japanese candlestick charts originated centuries ago when a Japanese rice trader named Homma discovered that prices were not just affected by supply and demand - the emotions of traders themselves moved markets. So he developed the Japanese candlestick chart to capture that sentiment.

Understanding the Japanese candlestick patterns is crucial to reading the back-and-forth emotions of the Forex market

By the end of this article, you'll understand the:

• Japanese candlestick meanings
• Bullish and bearish candlestick patterns
• We'll cover the pros and cons of using candlestick charts
• As well as tips for successfully trading with Japanese candlestick charting techniques
• And a handy cheat sheet code with Japanese candlestick patterns PDF 

What is a Japanese Candlestick

In technical analysis, a Japanese candlestick visually depicts the market's prices during a set period of time highlighting the market's open, high, low, and closing prices for that time frame (from 1 minute TF to the monthly TF).

Japanese Candlestick Pattern

One of the best book on Japanese candlestick is "The Candlestick Course" by Steve Nison. This trading guide clearly explains what each candlestick represents and how to interpret them. Thanks to his work, the Japanese candlestick explained what each candlestick represents and how to interpret them.

We recommend practicing reading candlestick charts with a free demo account from Pepperstone to gain experience before trading live markets.

How Do Japanese Candlesticks Work

Learning the proper method for how to read Japanese candlestick patterns is key for technical analysis. Here are the core components to understand:

The Body

The thick rectangular part of a Japanese candlestick depicts the range between the open and close price. If the close is higher, the body is white/green showing buying pressure. If lower, the body is black/red indicating selling.

The Wicks

The thin "shadows" above and below the body represent the high and low prices beyond the open and close. Long upper wicks signal rejection of higher prices while long lower wicks suggest support.

The Color

As mentioned before, color conveys meaning. White/green bodies indicate bullish sentiment, while black/red shows bearish sentiment.

The Size

Bigger candlestick bodies represent stronger conviction versus small, skinny bodies.

Japanese Candlesticks

Japanese Candlestick Analysis - Trade Successfully!

Let's break down Japanese candlestick analysis with an example:

The EUR/USD pair opens the day at 1.0765. Optimism about Europe's economy sends the euro surging to 1.0912 (the high). But dollar bulls step in and the pair drops back down to 1.0758 (the low). More euro buying comes in near the close and EUR/USD finishes at 1.0854.

Japanese Candlestick Charting

This price action forms a long green candlestick with a tall upper wick:

• The green color shows bullishness with a higher close than open.
• The upper wick signals the pair hit resistance at 1.0912.
• The finish near the highs reflects euro strength.

This long green candle after positive European data implies upside momentum may persist. Traders would look for a bullish entry on a pullback, like 1.1550, to benefit from additional gains in EUR/USD.

Analyzing the candlestick's components - its shape, color, and size - reveals the psychology driving prices. Analyzing the candlestick components provides an edge for traders using Japanese candlestick technical analysis to capitalize on short-term trends.

How To Read Japanese Candlestick Patterns

When you look Japanese candlesticks there is a lot to digest.

For example, the wide part shows the price range between the open and close:

• If the close is higher than the open, the candlestick is white or green.
• If the close is lower, the candlestick is black or red.
• The lines above and below are called “wicks” and show the highest price and lowest price.

So if there's a long upper wick, you know buyers pushed the price up but got rejected back down before the candlestick closed. Long lower wicks indicate strong buying pressure brought the price up from its lows.

Basic Japanese Candlestick Patterns

See how reading candlesticks give you a clearer feel for who's in control and where potential support or resistance levels might be?

That's why so many traders use Japanese candlestick techniques rather than just looking at standard bar chart.

You can even spot classic candlestick patterns that tend to lead to certain next moves like the hanging man. For example, a long green candle suggests bullish momentum ahead, while a Doji pattern with equal opening price and close prices hints at indecision in the Forex market.

So if you really want to step up your technical analysis, give Japanese candlestick trading a try. Those candles reveal so much more about price action and the tug-of-war between buyers and sellers!

Basic Japanese Candlestick Patterns

When you start reading candlestick charting, you'll want to familiarize yourself with some of the most basic Japanese candlestick patterns as they can give you clues into where the market might be headed next.

Being able to identify them will give you a leg up with all Japanese candlestick patterns as a beginner Forex trader.

Bullish/Bearish Engulfing

The body completely covers the previous candle's body, signaling a potential trend reversal.

Doji

 The price opened and closed near the same level, indicating indecision.

Hammer

Long lower wick shows buyers driving the price up.

Shooting Star

Long upper wick and the small body signals a potential bearish reversal.

Morning/Evening Star

Signals a potential trend reversal with a doji sandwiched between one bearish candle and one bullish candle.

Spinning Top

Long wicks on both sides with a small real body showing indecision.

Three Black Crows

Three long red candles in a row indicate downtrend.

There are many candlestick patterns to learn - you can find them all in an all Japanese candlestick patterns PDF online.

Japanese Candlestick Explained 

Pros and Cons of Japanese Candlesticks

Here's a concise overview of the pros and cons of Japanese candlestick charting for beginner traders:

Pros of Japanese candlestick pattern

• Visual representation makes trends easy to spot
• Reveals support/resistance levels
• Popular technique used by many traders

Cons of Japanese candlestick pattern

• Doesn't factor in volume or economic data
• Interpretation can be subjective
• Not a standalone tool, must be combined with other indicators
• Requires practice to master

How To Trade Using Japanese Candlesticks

Candlestick patterns and indicators together provide a powerful 1-2 punch for traders. Here is the candlestick patterns cheat sheet to use when trading Forex:

1. Confirm signals - If a moving average crossover suggests a trend reversal, a bullish or bearish candlestick pattern can validate the signal and offer an entry point.
2. Identify entries/exits - Oversold RSI readings could set up for longs on bullish candlestick reversals. Oversold RSI could spur exits on bearish candles.
3. Add insight - A doji candle shows indecision which may hint at a reversal, even if indicators aren't clear yet.
4. Verify trend strength - If moving averages show a bullish trend, a series of solid bullish candlesticks confirm upside momentum is robust.

Japanese Candlestick Charting Techniques

Candlesticks tell the emotional story behind the math of indicators. Together they provide a complete picture of market psychology and potential trades. Use candlesticks to confirm, get entries, gain insights, and assess trend strength.

Download Cheat Sheet on Japanese Candlestick Patterns in PDF 

Below, you can find our Japanese candlestick patterns cheat sheet that you can use when trading Forex.