Master Japanese Candlestick Reading: Practical Manual for Growing Traders

The Foundation of Technical Analysis: Understanding How to Read Japanese Candles

When you delve into the world of trading, you’ll discover that there are three main approaches to studying markets: technical, fundamental, and speculative. While many beginners experiment with pure speculation, professionals know that this approach lacks real foundation and relies too heavily on emotional intuition.

Fundamental analysis examines the macroeconomic context: financial reports, political decisions, social indicators. However, technical analysis operates in a completely different territory: it is based on charts, patterns, and indicators that allow observing the historical behavior of an asset to project its future. And the central element you must master to progress in technical analysis is the correct interpretation of Japanese candles.

Origin and Fundamentals: What Do Japanese Candles Represent?

Japanese candles originated centuries ago in the rice markets of Dojima in Japan, later adopted by the West to analyze financial markets. But what exactly is a candle in technical terms?

A candle is a graphical representation that compresses four price data points into a single visual element: the opening price, the closing price, the high, and the low reached during that period (OHLC: Open, High, Low, Close).

Structurally, each candle consists of two parts:

• The body: the thicker section showing the difference between open and close
• The wicks: the thin lines extending upward and downward, indicating the extremes of the period

In most trading platforms, green candles represent bullish movements (close above open) and red candles represent bearish movements (close below open). This color coding allows for quick reading of market sentiment in each candle.

Decoding the Components: How Does OHLC Work in Practice

To truly understand how to read Japanese candles, you need to familiarize yourself with the four OHLC values and their practical meaning.

Let’s consider an example in EUR/USD on a 1-hour timeframe: a candle might show an open at 1.02704, a high at 1.02839, a low at 1.02680, and a close at 1.02801, generating a profit of 0.10%. The body of this candle would be located between 1.02704 and 1.02801 (the open-close range), while the upper wick would extend up to 1.02839 and the lower wick down to 1.02680.

This level of detail is crucial: while a line chart only shows the closing price, candles reveal the entire struggle that occurred within the period. The long wick upward tells a story: buyers pushed the price to 1.02839, but then sellers regained control and the close occurred near the open level.

Pattern Catalog: Identifying Market Signals

Not all candle patterns are equally frequent or reliable. Next, we will explore the most relevant ones you will find in your daily analysis:

Engulfing Pattern: Confirmed Trend Reversal

The engulfing candle consists of two candles of opposite colors, where the second candle completely engulfs the range of the first. A bullish engulfing shows a small red candle followed by a large green candle that surpasses both its high and low. A bearish engulfing is the inverse.

This pattern is especially valuable because it signals a real turning point in market control. If you were in a downtrend and a bullish engulfing appears in the EUR/USD at 1.700 USD, it could indicate a potential support where buyers have taken the reins.

The importance of looking for confluences cannot be overstated: a daily engulfing in gold at 1,700 USD is much more powerful if it coincides with a Fibonacci retracement level or a moving average. Beginner traders who operate solely based on a single candle tend to suffer quick losses; professionals look for at least three converging signals before entering.

Doji: The Indecision Symbol

A doji candle has long wicks on both sides and an almost nonexistent body, making it look like a cross. The meaning is straightforward: during the period, the price moved significantly in both directions but closed very close to where it opened.

This represents pure balance between buyers and sellers, with no group able to maintain control. Bitcoin showed clear dojis on May 11 and August 12, moments of genuine market indecision.

A doji alone does not tell you whether the market will go up or down next. That’s why you need to analyze previous candles: if the doji appears after a strong downtrend, it could indicate exhaustion. If it appears in an uptrend, it could signal loss of momentum.

Spinning Top: The Little Brother of the Doji

Similar to the doji but with a slightly more pronounced body, the spinning top also indicates balance between opposing forces. The difference is that there was a bit more movement between open and close, but still insufficient to generate a clear signal.

The length of the wicks in these neutral patterns provides information about the intensity of the battle: long wicks suggest high volume and active transactions; short wicks indicate lower participation.

Hammer: Bullish Reversal

The hammer pattern consists of a candle with a small body and a long wick extending upward (in a potential bearish reversal) or downward (in a potential bullish reversal).

The narrative of the hammer is revealing: imagine you are in an uptrend. A hammer appears with a long wick upward: this indicates that buyers tried to push the price even higher, but sellers intervened strongly enough to close the candle near its open. That is exactly what you want to see before switching to sell positions.

In Bitcoin or EUR/USD, these patterns are extraordinarily common at turning points. However, an isolated hammer does not justify a trade. You need to verify where it is located: is it at a identified resistance zone? Is there a moving average confirming rejection? Does it coincide with a Fibonacci retracement level?

Hanging Man: The Deceptive Twin

This is where careful reading of Japanese candles becomes critical. A hanging man looks physically identical to a hammer: small body, long wick. The only difference is the context of previous candles.

On a chart, you can see the identical pattern in two places: on the right, the same candle appears after bullish candles (hammer pattern, suggesting a bearish reversal); on the left, the same candle appears after bearish candles (hanging man pattern, suggesting a bullish reversal).

This distinction is why beginner traders fail: they do not observe the context. The pattern alone is useless without understanding what trend preceded it.

Marubozu: Pure Trend

Marubozu, meaning “bald” in Japanese, describes a candle without wicks (or with extremely short wicks). The body occupies almost the entire range of the period.

This pattern indicates absolute control. A bullish green marubozu means buyers dominated completely: they opened low and closed high, without sellers managing to reject the move. A bearish red marubozu indicates the opposite: seller dominance without significant retracements.

You will frequently find marubozu after breaking critical support or resistance levels. The size of the body tells you the intensity: a huge body indicates an extremely strong trend.

The Real Advantage of Candles Over Other Charts

Many new traders question why not simply use line charts, which only show the closing price. The answer lies in the level of information you lose.

Consider EUR/USD where a support is identified at 1.036. On a line chart, the closing price might never touch this line. But on a candlestick chart, you can see how the wick extends downward exactly to that support level on three different occasions, rebounding consistently.

This means market participants truly respect that level, even if it doesn’t close exactly on it. A trader using lines would completely miss these critical dynamics.

Additionally, by using candles with technical indicators like Fibonacci retracements or moving averages, you get much more precise confluences. A moving average touching the body of a marubozu has a different weight than touching an abstract line.

Practical Application: Executing Trades with Confluences

Understanding how to read Japanese candles academically is one thing; using them for real profits is another. The difference lies in confluences.

Let’s consider a real trade in EUR/USD: you identify a support at 1.036 using the wicks of candles. Then you apply Fibonacci from a recent high to a recent low. The confluence occurs when the 61.8% retracement level aligns with your identified support at 1.036. That’s where, and only there, you place a sell order.

This approach is exactly how professional traders avoid market noise. They do not enter every pattern they see; they wait for multiple technical factors to converge. A trade executed from a clear confluence has a significantly higher probability of success than one based on an isolated pattern.

Timeframes: How Scale Changes Everything

A fundamental principle emphasized by experts: a 1-minute candle contains exactly the same components (OHLC) as a 1-month candle. But its reliability is not the same.

A 1-month candle represents thousands of 1-minute candles compressed. If you see a hammer pattern on a monthly timeframe, that carries massive weight. A hammer on 1-minute data could be random noise.

Now, there is an interesting synergy: a 1-hour candle is composed of four 15-minute candles. If you observe an hourly candle with a long wick upward but a red close, breaking it down into 15-minute candles reveals the full narrative.

For example, on a 1-hour candle at 8:00 AM: it opens at a certain price, rises (candles from 8:00-8:15), continues rising (candles from 8:15-8:30), then begins to fall (8:30-8:45) and closes below the open. The result is a red 1-hour candle with a long wick upward: initial buyers had control but sellers gained the battle toward the end, likely foreshadowing five more hours of declines.

Training Strategy: How to Develop a Professional’s Vision

If you just started trading, here’s the secret: you don’t need to trade immediately. In fact, traders who delay real trades while training their analysis tend to be more profitable.

The professional approach:

1. Analysis without trading: Spend hours daily reviewing historical charts. Visualize patterns in Bitcoin, stocks, commodities, currencies. Look for where patterns appeared in the past and how the market behaved afterward.

2. Training the eye: After hundreds of hours of pure analysis, your brain begins to recognize patterns instantly. Advanced traders can enter a trade by observing just one candle because their prior training was massive.

3. Trades with confluences: Once confident, execute trades on demo accounts with virtual money. Apply what you learned: look for at least three different confluences before entering. A support + an engulfing candle + a moving average = entry signal.

4. Professional selectivity: Unlike novice traders who trade constantly, professionals may make 2-3 trades per week or less. It’s like a professional footballer: trains 3 hours daily for 6 days, then plays 90 minutes on weekends.

Combining Japanese Candles with Comprehensive Analysis

The most successful traders practice both technical and fundamental analysis. With this guide on how to read Japanese candles, you have learned the first critical tool of technical analysis.

Remember: candles are superior to line charts in all markets (Forex, cryptocurrencies, commodities, stocks) and across all timeframes. Long wicks generally indicate potential reversals; short wicks indicate strengthened trends. Large bodies suggest volume and conviction; small bodies indicate indecision.

As you progress, you will combine candles with Fibonacci, moving averages, and additional indicators. You will start to identify assets where behaviors consistently respect the patterns you studied. Those will be your favorite markets to focus your trading on.

The time investment to master how to read Japanese candles pays off exponentially through more precise, less emotional, and substantially more profitable trades.