Traders rely on Japanese candlestick charts to observe price action of financial assets. Candlestick graphs give twice more data than a standard line chart and interpret price data in a more advanced way and offer very distinct, comprehensive patterns.
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What are Japanese Candlesticks?
Japanese candlesticks are chart units that display price action.
Each candlestick represents a specific time frame and gives data about the price’s open, high, low, and close during the period.
Standard candlesticks consist of a candle body, upper and lower candlewick.
The candle body shows the opening and the closing price of the period. The tip of the upper candlewick shows the highest price during the period. Contrary to this, the lower candlewick shows the lowest price during the period.
Bullish vs. Bearish Candles
There are two types of candles depending on the price direction — bearish and bullish.
A bullish candlestick forms when the price opens at a certain level and closes at a higher price. This candlestick represents a price increase. The default color of the bullish Japanese candlestick is green.
A bearish candlestick forms when the price opens at a certain level and closes at a lower price. This candlestick shows a price drop. The default color of the bearish Japanese candle is red.
When chart periods start and end, different candlesticks line up next to each other. This is what forms the Japanese candlestick chart.
As you see, a chart involves many candlesticks. The graph you see above is a 4-hour chart where each of the candlesticks represents a four-hour period. In this relation, there are many chart time frames.
The most common are:
- 1-minute (M1)
- 5-minute (M5)
- 15-minute (M15)
- 30-minute (M30)
- 1-hour (H1)
- 4-hour (H4)
- Daily (D1)
- Weekly (W1)
- Monthly (M1)
The smaller chart time frame you switch to, the closer you look into price action. It is like you are zooming in the chart. Let’s say you are looking at an H4 chart like the one above. When you switch to the H1 chart, you will have four times more candles. Each H4 period crushes into four H1 candles.
Now, let’s get back to the H4 chart. Let’s say you switch to a D1 chart, where each candle equals to 24 hours. Every six H4 candles groups into a single D1 candle. You will feel like you are zooming out the chart.
Types of Candlestick Patterns & What They Mean
Since candles consist of four elements (open, high, low, and close) they form into different shapes, or Japanese candlestick patterns. Each pattern has a specific meaning — it shows the attitude of market participants, who are human beings and tend to act similarly in the same situations.
Candle patterns consist of one or more candles.
Single Candle Pattern
A single candle pattern involves only one candlestick. The more famous single candle patterns are:
- The whole Hammer family, which includes the hammer, Inverted hammer, hanging man, and shooting star
- Spinning top
- Spinning bottom
- Bullish marubozu
- Bearish marubozu
Double Candle Pattern
Double candle patterns consist of a couple of Japanese candlesticks. The more famous double candle patterns are:
- Bullish engulfing
- Bearish engulfing
- Bullish harami
- Bearish harami
- Tweezer top
- Tweezer bottom
Triple Candle Pattern
As you might guess, three candlesticks take place in triple candle patterns. Some of the famous ones are:
- Morning star
- Evening star
- Three white soldiers
- Three black crows
1. Doji Candlestick
The Doji is a single candle pattern. It is the only candlestick that is neither bearish nor bullish. This is so because the Doji represents a state where the price closes exactly where it has opened. For this reason, the Doji has no candle body and it looks like a dash.
Why is the price closing exactly where it opened? Because the bulls and the bears on the market have gained an equality. Since forces are equal, it is very likely that the previous trend stops. This could bring a reversal and a contrary price move.
The Doji candle will often hint about an upcoming price reversal.
2. Hammer Candlestick Family
The Hammer candle family is another single candlestick pattern. Hammers have a long upper or lower candlewick and a small candle body at the opposite side. Each hammer candle is a reminder that a price reversal might be on its way.
A Hammer candle will have a long lower candlewick and a small body in the upper part of the candle. Hammers come during bearish trends and suggest that the price might reverse.
The inverted hammer has a long upper candlewick and a small body in the lower part of the candle. Same as the hammer, an inverted hammer appears during bearish trends. It suggests a price reversal.
The hanging man looks the same as the hammer but it appears during bullish trends and it suggests that a new bearish trend might appear.
The shooting star has the same structure as the inverted hammer. Again, it appears during bullish trends and is a reminder that the increase could stop and that we’ll expect a price decrease.
This image will give you a better idea of the Hammer candle family. The green and the red arrows represent the price move. As you see, the candle is the same. But, the previous trend and its direction give different signals. Notice that every candle from the Hammer family could be bearish or bullish. This doesn’t matter as the meaning is the same – reversal.
3. Engulfing Candlestick Patterns
The Engulfing is a double candle pattern. It consists of a random candle, and another bigger candle, that engulfs the first one.
The bullish engulfing pattern appears during bearish trends. It consists of a bearish candle followed by a bullish candle that engulfs the first candle. A bullish trend is more likely to occur afterward.
The bearish engulfing appears during bullish trends. It consists of a bullish candle, followed by a bearish candle that engulfs the first candle. A bearish trend might occur afterward.
4. Morning and Evening Star Candlestick Patterns
The morning and the evening star are triple candle patterns. They also forecast reversals.
The morning star pattern occurs during bearish trends. It starts with a bearish candle and is followed by a small bearish or bullish candle that gaps down. Then the price gaps up and forms a bigger bullish candle. Notice that the third candle should cover at least half the body size of the first candle.
The evening star is the opposite of the morning star. It appears during bullish trends. The pattern starts with a bullish candle, followed by a small bearish or bullish candle that gaps up. Then, the price gaps down and forms a bigger bearish candle. Here, the third candle should cover at least half the body size of the first candle.
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Recognizing candle patterns is the first step toward understanding price action. If you know the meaning of the single price moves, it’ll help you build a more advanced trading strategy.
These are not all the candle patterns that exist. They are actually a lot more – from more complex to more simple. You’ll often meet new candle patterns over the course of your trading experiences. You might even discover your own candle pattern.
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