Mastering the Meaning of Japanese Candles: The Foundation of Technical Analysis in Trading

Why Understanding Japanese Candlesticks Is Critical to Your Success

When you start trading, you’ll probably encounter three different approaches: fundamental analysis, technical analysis, and speculative analysis. Speculative analysis is risky because it relies on intuition without foundation; fundamental analysis requires monitoring macroeconomic events, reports, and political situations; but technical analysis has a clear advantage: it is entirely built on charts and historical patterns that can be replicated. At the heart of this technical analysis are Japanese candlesticks, tools that every serious trader must master completely.

Japanese candlesticks originated from rice trading in Dojima, Japanese cities, centuries ago. Later, the West adopted this methodology to analyze financial markets. Today, they are the standard graphical representation of prices across any timeframe: from 1 minute to 1 month. Each candlestick provides you with 4 crucial data points simultaneously: open, high, low, and close, known in English as OHLC.

The Anatomy of a Candlestick: Understanding Its Components

Each Japanese candlestick has only two physical elements: the body and the wicks. However, these communicate a lot of information. The body represents the difference between opening and closing prices; the wicks show the extremes reached during that period.

Colors vary depending on the platform, but generally green indicates bullish movement (close above open) and red indicates bearish movement (close below open). On most platforms, you can customize these colors and view OHLC values by hovering over any candlestick.

Let’s consider a practical example: a 1-hour candlestick in EUR/USD shows an open at 1.02704, high at 1.02839, low at 1.02680, and close at 1.02801, representing a gain of 0.10%. This set of data allows you to precisely identify where buyers and sellers fought during that specific hour.

Pattern Catalog: Recognizing Market Signals

There are numerous Japanese candlestick patterns. Below are the most relevant in real trading:

Engulfing Pattern: The Shift of Control

This pattern consists of two candles of different colors. The second candle literally engulfs the first, completely surpassing its price range. It is a powerful trend reversal signal. A bullish engulfing after a downtrend suggests that control has shifted to buyers; a bearish engulfing indicates the opposite.

In a real example with gold, traders identified a daily engulfing candle around 1700 USD that correctly anticipated a change in direction, allowing a favorable buy entry.

Doji: The Perfect Balance

The doji candle is particularly interesting because it represents pure indecision. It has long wicks (showing considerable volatility) but a tiny body because open and close were virtually identical. This pattern indicates that neither (buyers nor sellers) managed to dominate the market. Two daily doji occurred in Bitcoin on May 11 and August 12, revealing moments of uncertainty before significant moves.

Spinning Tops: Siblings of the doji

Similar to the doji but with a slightly more prominent body, the spinning top also signals balance. However, the size of the wicks reveals the volume traded during that period. Large wicks indicate many investors were active but without reaching a clear consensus on direction.

Hammer: The Reversal in Action

This candle has a small body and an extraordinarily long wick on one end. Its meaning reveals trend changes. In an uptrend, a hammer with an upward wick suggests buyers pushed the price to new highs, but sellers regained ground with such strength that the close was well below the high. This often anticipates bearish reversals. The hammer in a downtrend (with a lower wick) indicates the opposite: exhausted sellers, buyers regaining control.

Hanging Man: Context Changes Everything

Visually identical to the hammer, but the hanging man appears after a downtrend and precedes an bullish reversal. The crucial distinction is that the context of previous candles determines the interpretation. In side-by-side comparative charts, we can see how the same shape has completely opposite meanings depending on the prior trend.

Marubozu: Unquestionable Strength

“Marubozu” literally means “bald” in Japanese, referring to the absence of wicks or minimal wicks. The body is massive, indicating that buyers (or sellers) maintained absolute control from open to close. A bullish marubozu suggests trend continuation upward; a bearish one indicates persistent downward pressure. These patterns often appear after breaking important support or resistance levels.

Practical Application: Translating Candles in Trading

The true value of understanding Japanese candlesticks emerges in identifying critical levels. In EUR/USD, a support at 1.036 was evident on candlestick charts because the wicks repeatedly rejected it, a situation that a line chart (which only considers closing prices) would have completely ignored.

This difference is fundamental: line charts discard valuable information from open, high, and low prices. With Japanese candlesticks, your technical indicators become more precise. Fibonacci retracements are placed more accurately, moving averages contact precise points, and you identify supports and resistances with greater confidence.

Real Confluence Trading

Let’s take EUR/USD with Fibonacci retracements. Advanced traders identified confluence between the 61.8% retracement level and the previously validated support at 1.036. They placed a sell order at that exact point, resulting in an almost perfect entry. This is professional methodology: not trading based on a single signal, but waiting for multiple confirmations before executing.

Multi-Timeframe Depth: Expanding Your Perspective

A critical concept that differentiates beginner traders from professionals is understanding how timeframes relate. A 1-hour candle is composed of 4 fifteen-minute candles, each of which is further made up of 3 five-minute candles.

In a practical example, a 1-hour EUR/USD candle showed an extremely long wick upward but a red (bearish) close. Breaking it down into 15-minute segments, the story is clear: buyers dominated from 8:00 to 8:15, continued upward until 8:30, but from there, sellers fully regained control, pushing the price below the hourly open. The result: buyers lost strength after gaining ground, allowing a subsequent 5-hour decline.

Wicks on higher timeframes are of utmost importance because they contain all the information from smaller subdivisions. A hammer on a daily chart is infinitely more reliable than one on a 15-minute chart.

Development Strategy: Training to Master

If you have decided to focus on technical analysis, the first step is training your eye to recognize patterns instantly. This requires systematic practice:

Start with analysis without trading. Dedicate daily hours to reviewing historical charts across multiple assets, identifying past patterns. With enough practice, you will eventually read a single candle and know exactly what is happening in the market.

Use demo accounts to experiment without real capital. Find favorite CFD assets where behavior is consistent and faithfully respects the studied patterns.

When you finally trade, apply the principle of confluence: wait for at least three different signals before executing. Combine candles with Fibonacci, moving averages, and complementary indicators.

Adopt a professional mindset: a professional footballer trains 3 hours daily to play 90 minutes weekly. You should analyze markets extensively and place trades rarely, only when all confluences align. Professional traders do not need new positions until they confirm how the previous one ended.

Conclusion: Your Technical Edge

Japanese candlesticks represent the foundation of modern technical analysis. Understanding what each candlestick pattern means, how they interact across different timeframes, and when to seek confluences automatically puts you ahead of traders who ignore these fundamentals.

Combined with fundamental analysis, this technical mastery makes you a balanced trader, capable of identifying not only opportunities but also risks. The difference between winners and losers in financial markets often boils down to who understands these tools more deeply.