Master Japanese candlestick analysis: practical strategy for traders in the financial markets

How to Read Japanese Candlesticks: The Foundation of Technical Analysis

When we start trading, we discover that there are three main approaches to studying the markets: fundamental, which examines the economic and political context; speculative, based purely on emotional intuition; and technical, which relies entirely on chart patterns and indicators. The latter requires the trader to master an essential element: Japanese candlesticks. These visual charts represent the price behavior over a specific period, showing four fundamental data points known as OHLC (Open, High, Low, and Close). Although many platforms use green for bullish movements and red for bearish ones, these are customizable according to the operator’s preference.

The structure of each candlestick consists of two key parts: the body, which marks the difference between open and close, and the wicks, which indicate the extreme price levels reached. When you observe a chart of EUR/USD or any other pair on a 1-hour timeframe, for example, the information is clearly presented: if it opened at 1.02704, reached a high of 1.02839, touched a low of 1.02680, and closed at 1.02801, that results in a 0.10% gain visible in the same representation.

The Origin and Importance of Japanese Candlesticks in Modern Trading

Western markets adopted this tool from the historic rice trading in Dojima, Japan, revolutionizing financial technical analysis. What makes Japanese candlesticks so valuable is that they provide more comprehensive information than other types of charts. A line chart only considers the closing price, ignoring the open, highs, and lows, which significantly limits the identification of support and resistance levels.

Let’s take a practical example: in EUR/USD, we can draw a support at 1.036 where the price has bounced three different times. This level is clearly identified thanks to the wicks of the involved candles. In contrast, a line chart would have completely overlooked this critical support. This difference is transformative for any trader seeking to improve their accuracy in operations.

Fundamental Patterns: How to Read Japanese Candlesticks and Their Signals

Engulfing Pattern: the revealing trend reversal

This pattern involves two candles of opposite colors, where the second completely engulfs the first. The second candle penetrates beyond the previous candle’s open price, signaling a potential change in direction. In a real example with gold, when the daily engulfing candle appeared near 1700 USD, multiple analysts placed buy orders after identifying this confluence. If the pattern executes correctly, it establishes effective support or resistance levels.

Doji Candle: the balance of forces

The doji represents one of the most complex patterns to interpret. It is characterized by an almost nonexistent body with long wicks in both directions, symbolizing a cross. The open and close prices are practically identical, indicating perfect balance between buyers and sellers. In Bitcoin, we observe examples of daily doji candles on specific dates such as May 11 and August 12, revealing moments when the market was completely indecisive. These patterns require deep analysis of previous candles to determine what will happen next.

Spinning Top: similar but different from the doji

Although visually similar to the doji, the spinning top has a slightly larger body. Both signals indicate that no one has taken control of the market. The length of their wicks reflects the volume of transactions and the level of investor participation, showing that although there was movement, no clear direction was established.

Hammer: bullish trend reversal

This candle shows a small body with an exceptionally long wick upward. It indicates that buyers gained ground, pushing the price higher, but subsequently sellers regained control with such force that the close remained significantly below. This pattern suggests looking for sell positions, especially in previous bullish trends. The long upper wick represents rejection of higher prices.

Hanging Man: similar context, opposite meaning

Structurally identical to the hammer but with bearish antecedents. Where the hammer would appear in a bullish market followed by a bearish one, the hanging man appears in bearish contexts to anticipate a reversal upward. In real charts, both patterns show almost identical proportions in their individual candles, but the prior context completely determines their interpretation.

Marubozu: the unwavering trend

Marubozu means “bald” in Japanese, referring to candles without wicks or with almost imperceptible wicks. When the body is longer, the trend is stronger. A bearish marubozu candle reflects absolute control by sellers, often after touching resistance. It suggests that buyers took their profits and exited the market, or that they directly started selling.

How to Read Japanese Candlesticks in Practice: Real Application Cases

The importance of larger timeframes

Experienced traders agree that long wicks anticipate reversals when the trend exhausts, while short wicks confirm strength. A hammer on a daily candle is significantly more effective than one on a 15-minute chart. Larger timeframes produce more reliable and precise signals.

Consider a 1-hour candle that closes red with a long wick upward. To truly understand what happened, we must break it down into its 4 components of 15 minutes each. We would observe how it opened, rose in the first 15 minutes, continued upward in the next candle, but then from 8:30 started to fall, closing below the opening of the hour. This breakdown reveals that buyers had initial control but sellers regained enough momentum to cause declines over the next 5 hours.

Confluences: the key to winning trades

You should never operate solely based on a single candlestick pattern. Professional traders look for at least three signals confirming the same direction. In EUR/USD, if you identify a support, then a daily engulfing candle, and additionally the Fibonacci retracement level at 61.8% coincides at the same price, you have a strong confluence to place a sell order, which would have resulted in an almost perfect entry.

The candlestick chart allows for more effective use of Fibonacci than simple lines. Drawing from left to right, identifying a minimum and maximum, and the retracement levels align better with the wicks than with simple closing prices.

Development Strategy: From Analyst to Professional Trader

Continuous training without pressure to operate

If you are just starting, dedicate daily hours to reviewing historical charts of multiple assets without the need to make trades. Visualize patterns in Bitcoin, gold, currency pairs, stocks. Your goal is to train your eye to recognize patterns almost instantly. Professional operators analyze constantly for 3 hours but only trade for 90 minutes, like a football player who trains daily for the weekend match.

Application across all markets and assets

Japanese candlesticks work in Forex, cryptocurrencies, commodities, stocks, and derivatives. The OHLC structure remains constant regardless of the asset or timeframe. A 1-minute candle has the same elements as a 1-month candle.

Integration with fundamental analysis

Many advanced traders combine Japanese candlesticks with fundamental analysis, evaluating economic reports, earnings results, and geopolitical situations. This provides a more complete view than relying solely on technical patterns.

Conclusion: Mastering How to Read Japanese Candlesticks

Learning to read Japanese candlesticks is the first transformative step in your trading career. Once you master their interpretation, you have completed more than 50% of the path toward competent technical analysis. Remember that no pattern is 100% effective; they are opportunities that require additional confluences. Practice regularly, seek multiple confirmations, and over time you will be able to draw powerful conclusions by simply observing a single candle. The key lies in patience, continuous education, and the discipline to wait for the right trade with the right confluences, not in trading frequently without foundation.