Master the Meaning of Japanese Candles: From Beginner to Competent Trader

The Fundamental Tool of Technical Analysis

When you decide to start trading, you will quickly discover that there are multiple ways to approach the market. Some traders are guided by emotions and intuition, speculating without any basis. Others choose fundamental analysis, researching earnings reports, economic context, and geopolitical variables. However, technical analysts work exclusively with historical charts, assuming that past patterns tend to repeat.

The core of technical analysis lies in understanding a specific visual element: Japanese candlesticks. Their meaning goes beyond simple graphical representation; they depict the battle between buyers and sellers within each analyzed time period. Those who master Japanese candlesticks and their interpretation will have completed approximately 50% of the path toward becoming effective technical analysts.

Origin and Structure: Beyond Aesthetics

For centuries, rice traders in the Dojima squares used a graphical system to record price fluctuations. This ancestral methodology was later adapted for Western financial markets, becoming the foundation of modern technical analysis.

Each Japanese candlestick has two main visual components: the rectangular body and the wicks (vertical lines). These elements working together provide us with four fundamental data points known as OHLC:

• Open (Opening): Starting price of the period
• High (Maximum): Highest point reached
• Low (Minimum): Lowest point recorded
• Close (Closing): Final price of the period

The trading platform you use will determine the colors, although conventionally green indicates bullish movements and red bearish. This color code allows for quick identification of the direction of movement without needing to read numbers.

Deep Reading: What Do Wicks and Bodies Reveal

The body of a specific candlestick shows exactly where the price opened and closed during that time interval. The wicks, on the other hand, tell a more complex story: they reveal failed attempts to move toward extremes that were eventually rejected.

Imagine a 1-hour candlestick in EUR/USD: opens at 1.02704, touches a high of 1.02839, a low of 1.02680, and closes at 1.02801 with a gain of 0.10%. The small body indicates that forces were relatively balanced, while a long upward wick suggests that buyers tried to keep the price elevated but ultimately failed to sustain it.

This detail is crucial: while line charts only consider closing prices, Japanese candlesticks show the full picture. This allows for the identification of support and resistance levels that would otherwise remain hidden, significantly improving accuracy when using additional tools like Fibonacci retracements or moving averages.

Pattern Catalog: Interpreting the Meaning of Each Formation

Engulfing Pattern: Imminent Reversal Signal

This pattern forms when a second candlestick completely engulfs the price range of the previous candle, but in the opposite direction. Bullish or bearish, it always communicates the same: market participants have changed their minds.

In a practical example with gold as a CFD, when a daily engulfing candle appeared around 1700 USD, it confluenced with other indicators. This did not guarantee success, but it provided greater statistical confidence to take a buy position.

Doji: When the Market Hesitates

The meaning of the doji candlestick reflects pure indecision. With long wicks in both directions and an almost nonexistent body, it shows a quote that went up and down without reaching a conclusion. The opening and closing prices are practically identical.

Bitcoin demonstrated this behavior on two different occasions: May 11 and August 12. In both cases, investors were conflicted, with no consensus on the future direction. An isolated doji predicts nothing; it needs context from previous and subsequent candles.

Spinning Top: Relative Balance

Quite similar to the doji, the spinning top has a slightly larger body but maintains the essence: no one has control. The length of the wicks reflects how much energy participants spent trying to move the price in both directions before reaching a tie.

Hammer: Reversal Signal

This pattern consists of a small body with an extraordinarily long wick on one end. Its meaning depends on the context: if it appears after an upward trend with a long wick downward, it suggests that sellers gained unexpected ground. The buyers who dominated the market lost strength, allowing a fall that was later partially recovered.

Hanging Man: The Deceptive Twin

Visually identical to the hammer, its meaning changes drastically depending on which candles precede it. A hammer requires previous bullish candles (trend reversing to bearish). The hanging man requires previous bearish candles (trend turning bullish). The same shape conveys opposite messages depending on the context.

Marubozu: Absolute Domination

When a candlestick lacks wicks or has extremely short ones, the meaning is unequivocal: someone is in total control. A bullish marubozu with a large body represents resolute buyers who never ceded ground. A bearish marubozu shows sellers who demolished resistances mercilessly.

Practical Application: From Theory to Profitable Trades

Understanding the meaning of each pattern is just the beginning. True mastery comes when you identify confluences: multiple signals pointing simultaneously to the same conclusion.

In EUR/USD, the wicks of several candles converged to identify a support at 1.036. On three different occasions, the quote tried to penetrate it without success. A line chart would never have detected this. Japanese candlesticks revealed that buyers considered that level as a buying opportunity, forming a demand floor.

Later, when the Fibonacci retracement of 61.8% aligned with that same support, the confluence reached three validation points. A sell order placed there was almost perfect.

The Importance of Timeframes: Zoom In, Zoom Out

A 1-minute candlestick contains the same four elements as a 1-month candle. But here lies a secret: a 1-hour candle is internally composed of four 15-minute candles, which in turn contain three 5-minute candles each.

Observing a 1-hour candle that closes bearish but with an extraordinarily long wick upward can be confusing without context. Expanding the chart to 15 minutes clarifies the story: in the first two 15-minute sessions, the trend was bullish reaching the period’s maximum. But in the last two intervals, sellers took control, generating a 5-hour decline.

This ability to “break down” candles explains why signals from higher timeframes are more reliable. A hammer on a daily chart carries more weight than one on a 15-minute chart simply because it represents more consolidated trading periods.

Comprehensive Strategy: From Student to Professional

Start practicing analysis without trading. Dedicate daily hours to examining historical charts across multiple assets: Forex, cryptocurrencies, commodities, stocks. Train your eye to recognize repetitive patterns. Professional traders spend nearly 3 hours analyzing to execute trades lasting 90 minutes.

Use demo accounts to experiment risk-free. Observe how different assets respect or break patterns. Identify your favorite CFDs where behavior is predictable because it follows the rules you have learned.

Once you have internalized the meaning of Japanese candlesticks, complement with Fibonacci, moving averages, and additional indicators. Always look for at least three confluences before opening a position. You don’t need to trade frequently; professionals place few but well-calculated trades.

Advanced traders can predict movements by observing just one candle after years of practice. But even they know that combining technical analysis with fundamental analysis provides the most complete market picture.

The journey begins here: understanding what Japanese candlesticks mean and how they work.