Master the Art of Interpreting Japanese Candles: A Practical Guide for Traders

Why Are Japanese Candlesticks the Foundation of Technical Analysis?

Trading requires different approaches to study the market. There are three main methods: speculative analysis (where traders anticipate movements without technical support), fundamental (based on economic, political, and social factors), and technical (completely supported by charts and historical patterns).

If you decide to specialize in technical analysis, you must master a fundamental element: Japanese candlesticks. While other traders use line charts that only consider closing prices, those who understand Japanese candlesticks access four data points simultaneously: open, close, high, and low (OHLC). This additional information completely transforms your ability to identify support and resistance levels, recognize trend changes, and execute trades with greater precision.

Origins and Fundamental Structure of Japanese Candlesticks

Japanese candlesticks originated in the rice trading in Dojima, Japanese cities, and were later adapted to the technical analysis of Western financial markets. Today, they are the most important graphical tool for any trader who wants to understand price behavior.

Each Japanese candlestick consists of two main visual elements: the body and the wicks. The body represents the difference between the opening and closing prices, while the wicks (also called shadows) indicate the highs and lows reached during that period.

In most trading platforms, green candles indicate bullish periods (rising prices) and red candles indicate bearish periods (falling prices), although these colors can be customized. The OHLC information appears at the top of the screen when hovering over any candle, along with the percentage change and the corresponding timeframe.

For example, in a 1-hour EUR/USD candle, we might observe: open at 1.02704, high at 1.02839, low at 1.02680, and close at 1.02801, representing a gain of 0.10%. The body specifies where the quote opened and closed, the wicks reveal the extremes reached, and the color communicates the direction of the movement.

Main Japanese Candlestick Patterns and Their Meanings

There are numerous Japanese candlestick patterns, although certain types predominate in professional technical analysis. It is crucial to understand that no pattern guarantees results: they represent potential opportunities, not market certainties.

Engulfing Candle: Reversal Signal

The engulfing candle consists of two candles of different colors, where the second completely engulfs the first. This means the second candle surpassed both the open and close of the previous one, suggesting an imminent trend change.

Although trading can be based on a single pattern, experienced traders look for confluences (multiple converging signals). Consider gold: if a daily engulfing candle coincides with other technical indicators, placing a buy order at $1,700 USD would have stronger fundamentals.

Doji: Market Indecision

The doji candle has long wicks and a minimal body, resembling a cross. The opening and closing prices are practically identical, indicating a balance between buyers and sellers. In Bitcoin, we have observed doji candles on significant dates that revealed moments of uncertainty before strong movements.

This pattern requires contextual analysis: examining previous candles helps predict whether the balance will break upward or downward.

Spinning Tops: Balance Without Strong Decision

Similar to the doji, the spinning top shows a small body but less extreme wicks. It represents the same concept: buyers and sellers in parity, with no clear market control. The length of the wicks reflects transaction volume and investor participation.

Hammer: Potential Trend Reversal

The hammer is a candle with a small body and a very long wick on one end. In an uptrend, when a hammer with an upper wick appears, it suggests that buyers lost strength. The price rose, but then sellers regained control, indicating a possible bearish reversal.

Hanging Man: Context Determines Everything

This candle looks visually identical to the hammer, but its meaning changes radically depending on preceding candles. A hammer within an uptrend suggests a bearish reversal, while the same pattern after bearish candles (called “hanging man”) indicates a trend reversal to the upside.

Marubozu: Trend Strength

The marubozu (meaning “bald” in Japanese) has virtually no wicks or very short ones. A bullish marubozu indicates dominant control by buyers, with few retracements and continuation of the upward move. A bearish marubozu, conversely, shows seller control and continuation of the decline.

How Japanese Candlesticks Surpass Other Chart Methods

The comparison between Japanese candlesticks and line charts reveals crucial differences. Line charts only connect closing prices, ignoring critical information. Consider the EUR/USD currency pair: a support at 1.036 can be clearly identified through the wicks of Japanese candles when the quote attempts to break that barrier three times. With a line chart, that level would never be visible.

This advantage allows for more effective identification of support and resistance levels, more precise Fibonacci retracements, and more accurate contact with moving averages. Technical indicators applied to Japanese candlesticks produce signals that are significantly more reliable than those based solely on closing lines.

Deep Reading: Breaking Down Candles in Lower Timeframes

An advanced concept is temporal fracturing. A 1-hour candle is composed of 4 fifteen-minute candles, which in turn contain 3 five-minute candles each. The wicks in higher timeframes are especially revealing because they summarize the volatility of smaller periods.

Let’s observe a 1-hour EUR/USD candle with a very long upper wick but closing below the open. Breaking it down into 15-minute segments, we find that: at 8:15, the upward move continued (peak hour); at 8:30, the decline began; and at 8:45, it closed below the open of 8:00. This explains the red candle with an upper wick: buyers temporarily took control, but sellers gained momentum so strongly that they caused a further 5-hour decline.

Practical Application: Identifying Confluences

Suppose you are trading EUR/USD, identifying support at 1.036 (through wick analysis on daily candles), applying Fibonacci retracements with the 61.8% level, and verifying that both tools converge at the same price. Placing a sell order at this confluence creates an almost perfect entry: multiple independent technical signals point to the same decision.

Learning Strategy for Technical Analysts

Mastering Japanese candlesticks accounts for approximately 50% of the journey in professional technical analysis. Once you understand what each pattern communicates, you will access the fundamental tools.

Key reminders:

Signals from higher timeframes are more effective than those from shorter periods. A hammer on a daily chart is significantly more reliable than one on a 15-minute chart.

Candles work across all assets: Forex, cryptocurrencies, commodities, stocks. The OHLC structure remains identical regardless of the market.

Before trading, look for confluences: Fibonacci, moving averages, candlestick patterns, and other indicators aligned in the same direction substantially increase the probability of success.

Recommended training method:

Use demo accounts to practice without risk. It’s not necessary to trade while learning; dedicate daily hours to reviewing charts, identifying historical patterns across multiple assets. With consistent training, your eye will sharpen until you can recognize patterns in seconds.

Professional traders can draw conclusions by observing a single candle because they have invested hundreds of hours analyzing markets. Eventually, you will develop favorite CFDs where you recognize repetitive behaviors that respond exactly to the studied patterns.

Long-term trading philosophy:

Think like a professional athlete who trains 3 hours daily for a 90-minute game. Analyze markets as much as possible, execute trades only when you find solid confluences, and wait for the patterns to fully develop. You won’t need another trade until you see how the previous one ended. Quality over quantity.

Traders who master Japanese candlesticks combine technical analysis with fundamentals, creating a comprehensive arsenal of analytical skills. This knowledge represents a giant step toward mastery of professional trading.