Complete Guide: Master the Main Types of Japanese Candlesticks for Technical Analysis

Candlesticks represent the most widely used tool for interpreting price dynamics on trading charts. Understanding their structure and the patterns they generate is essential for any trader. Let’s analyze in detail the components and the most relevant models you should know.

Anatomy of Candlesticks: Body and Shadows

The structure of a candlestick is divided into two main elements. The body is the wide section that represents the price range between the open and close of a session. When the closing price is lower than the opening price, the body is colored red. Conversely, if the close exceeds the open, the body is shown in green.

The shadows are the thin lines extending above and below the body, showing the extremes reached during the session. It is essential to remember that the larger the time frame you analyze, the more reliable the candlestick pattern you identify.

The Most Common Types of Japanese Candlesticks

Doji and Force Balance

Doji are candles characterized by small bodies that reflect the constant struggle between buyers and sellers. Generally, these candles suggest neutral behavior and typically appear within narrow trading ranges. They can be in green or red color interchangeably.

Doji: When Open and Close Converge

Doji are a type of candlestick with no apparent body, where almost the entire structure is shadow. These patterns arise when the opening and closing prices of a session are identical or extremely close to each other. The length of the shadows can vary considerably.

Hammer and Hanging Man: Reversal Signals

These patterns are among the most relevant for anticipating reversals. Depending on their market context, they can serve as bullish or bearish signals. When they appear after a sustained decline, they are called hammers, indicating weakening of the downtrend. If they emerge after prolonged upward movements, they are called Hanging Man, suggesting bullish exhaustion.

Three distinctive features identify these patterns: 1) The body located in the upper portion of the price range. 2) A lower shadow that doubles or exceeds the length of the body. 3) Absence or extreme brevity of the upper shadow. The longer the lower shadow and the more compact the body, the greater the reversal prospects.

Engulfing: Powerful Reversal Signal

This pattern, formed by two candles of contrasting colors, is one of the most reliable reversal indicators. It requires three conditions: 1) There must be a clear trend, bullish or bearish. 2) The second candle must completely engulf the first. 3) Both should have opposite colors.

Several factors increase the likelihood of trend change: if the first candle has a tiny body and the second is robust; if it occurs after prolonged or accelerated trends; if accompanied by high trading volume; if the second candle engulfs multiple bodies.

Dark Cloud Cover: Downward Signal

Appearing after an upward move, this two-candle pattern anticipates a bearish reversal. The first candle shows a vigorous green body; the second opens above the previous maximum but closes near the minimum, substantially covering the previous green. A deeper close implies a higher probability of forming a maximum.

Confirming factors: 1) The closer the red close is to the initial green open price, the more likely the peak. 2) After a strong green with an open at the minimum and close at the maximum, followed by a red opening at the maximum and closing at the minimum, the “Black Day” pattern is formed. 3) If it opens above a strong resistance and then falls, it indicates weakness in the bullish trend. 4) High volume at open can confirm the end of the trend.

Piercing Line: Bullish Reversal

This model represents the reversal of the dark cloud cover, emerging in bearish markets as a signal of upward change. It contains two candles: the first red and the second extended green. This structure is highly bullish and close to a bullish engulfing.

In this type of candlestick, the green body only partially covers the previous red. The greater the coverage, the more likely the reversal. Ideally, the green should penetrate more than half of the previous red. There are three variations based on penetration: 1) Close near the previous day’s minimum. 2) Close slightly above the red close. 3) Push: close without reaching half of the red.

Shooting Star: The Separation Pattern

The Shooting Star is a small-bodied candle that gaps from the previous candle’s price. Shadow intersections are allowed. This type of candlestick appears at tops and bottoms with four main variations.

Morning Star (Morning Star): formed by an extensive red candle, followed by a small body opening downward, ending with a green that covers a significant portion of the initial red. Indicates bullish initiative.

Evening Star (Evening Star): the bearish counterpart with a strong green, a star, and a subsequent red covering part of the green. Confirmation factors: gaps between bodies, significant overlap, low initial volume and high volume on confirmation.

Doji Star: Harbinger of Reversal

When a Doji forms an upward gap in an uptrend or a downward gap in a downtrend, it signals a potential change in direction. Confirmation requires the next candle to corroborate the reversal.

Evening Doji: Doji followed by a large red body overlapping the previous green. Morning Doji: in decline, Doji followed by green covering the red body.

The Abandoned Baby pattern represents one of the strongest reversals: a Doji with gaps before and after, without crossing shadows, in both directions.

Shooting Star: Warning of Exhaustion

This two-candle pattern indicates a possible end to the ascent. Characteristics: 1) Small body located at the lower end of the range. 2) Extended upper shadow. 3) Body color irrelevant. 4) Ideally forms a gap, although not mandatory.

Inverted Hammer: Bullish After a Drop

Similar in appearance to the Shooting Star, the inverted hammer indicates potential upward reversal after declines. Wait for confirmation from the next candle opening above the inverted hammer’s body, with a wide difference to strengthen the signal.

Harami: Pause in Movement

Harami, translated as “pregnant,” describes a small body contained within a larger previous candle. The large is the “mother” and the small is the “child.” The small body should be centrally located; the smaller it is, the more significance it gains.

Harami Cross: variant where Doji replaces the small body, becoming a powerful reversal signal, unlike the traditional Harami which simply pauses the movement.

Belt Grab: Impulse from Extremes

This pattern consists of an extended green candle opening at the previous candle’s minimum and rising vigorously. In a bearish context, it works inversely. Length determines importance for subsequent developments. If the next close surpasses the bullish grab, an upward trend is likely. If it falls below the bearish grab, selling pressure resumes.

Flying Crows: Bearish Formation

Formed by a small red candle with a reduced body and the previous candle’s body, followed by two additional reds. This formation presages a decline. Ideally, the second red’s open surpasses the first but the close is lower.

Tatami Hold: Continuation with Confirmation

The first three candles resemble the two-crows pattern followed by an additional red. If the next candle is green opening above the upper shadow, there is a possibility to buy. Occurs in bullish markets, as a continuation of the trend. Viable with two, three, or four reds.

Three Black Crows: Triple Decline

Consisting of three decreasing red candles, it presages a fall if it appears in high-price zones after extended trends. Closes should be at or near lows. Each open within the previous body. Ideally, the first red is below the previous green’s maximum.

Summary

Mastering these types of Japanese candlesticks and their patterns forms the foundation for effective technical analysis. Each pattern provides specific signals about trend changes or continuations. The key is to combine these patterns with volume analysis and key levels to maximize the accuracy of your trades.