Mastering Japanese Candles: What Every Trader Must Know Before Trading

Why Japanese Candlesticks Are Your Best Ally in Technical Analysis

When you decide to venture into trading, you’ll quickly discover that there are three main approaches: fundamental analysis, which is based on economic events and reports; speculative analysis, which is more emotional and unpredictable; and technical analysis, which relies entirely on reading charts and historical patterns.

If you chose to follow the technical route, you need to master a fundamental element: Japanese candlesticks explanation. These charts originated centuries ago in rice trading in Japan, but today they are indispensable in any financial market, from Forex to cryptocurrencies.

The reason is simple: while a line chart only shows the closing price, Japanese candlesticks reveal four crucial data points in each period: open (open), close (close), high (high), and low (low), known as OHLC. This means you see more information and can make more informed decisions.

How a Japanese candlestick is structured and what it tells you

Each candlestick has two visual components: the body and the wicks. The body represents the difference between open and close, while the wicks show the extremes reached during that period.

Colors vary according to direction: generally green for bullish movements (close above open) and red for bearish movements (close below open). But this is customizable on most platforms.

Let’s take a real example of EUR/USD on an hourly candle: if it opened at 1.02704, reached a high of 1.02839, touched a low of 1.02680, and closed at 1.02801, we’re looking at a candle with a 0.10% gain. The body tells us there were more buyers than sellers, but the wicks reveal where resistances were encountered along the way.

This additional information that wicks provide is what allows you to identify support and resistance levels accurately, something a line chart simply cannot offer.

Key patterns you must recognize instantly

The engulfing candle: a sign of trend reversal

It forms when one candle “engulfs” the previous completely, indicating that market sentiment changed radically during that period. It’s a pattern of two candles of opposite colors, where the second surpasses both the open and close of the first.

When you see a bullish engulfing after a downtrend in gold, for example, it could indicate that sellers lost control and buyers are taking over. Experienced traders use this to anticipate significant reversals.

Doji: the market’s neutral referee

The doji candle has a distinctive feature: a very small body with long wicks, almost like a cross. This occurs when the opening and closing prices are practically the same, despite significant movements during the period.

What does it mean? Indecision. Buyers and sellers clashed, but neither gained the upper hand. It’s a sign of temporary market equilibrium. To interpret it correctly, always look at the candles surrounding it: what happened before? What happened afterward?

Spinning Top: balance with small fluctuations

Similar to the doji, but with a slightly larger body. The difference is subtle but important: while the doji is almost an exact indecision point, the spinning top suggests a small winner, but without conviction. The trading volume is reflected in the length of its wicks.

Hammer: when the trend weakens

Imagine a candle with a small body and a long wick upward (or downward, depending on the direction). The hammer generally appears after a sustained uptrend.

What happened? Buyers pushed the price aggressively, but sellers appeared with enough strength to reject higher levels. If you analyze in depth: the bulls lost control midway through the period. This suggests a bearish reversal could be near.

Hanging Man: context is everything

It looks identical to the hammer, but here’s where context saves you from costly mistakes. The hammer pattern appears in an uptrend, while the hanging man appears in a prior downtrend.

Although they have the same shape, they mean the opposite: the hammer signals a possible fall, the hanging man indicates a potential rebound. The lesson: never analyze a candle in isolation.

Marubozu: trend without doubts

The Japanese word literally means “bald” because this candle has no wicks (or minimal wicks). The body occupies the entire or almost entire candle, showing that buyers or sellers were in complete control throughout the period.

A bullish marubozu indicates strong upward trend without significant retracements. A bearish marubozu indicates the opposite. When you see these patterns after touching support or resistance levels, the signal becomes much more reliable.

Practice: looking for confluences before acting

A common mistake among beginner traders is operating based on a single candle. Professionals never do this. They look for confluences: multiple signals pointing in the same direction.

Let’s consider EUR/USD again. You identify a support level at 1.036 thanks to the wicks of several candles bouncing off that point. Then you apply Fibonacci retracements from a significant high and find that the 61.8% level also coincides with that support. If you also see a bullish engulfing candle at that level, you have three confluences. That’s where you place your order, not before.

From theory to action: how to train your eye

The academic explanation of Japanese candlesticks is one thing. Training your perception is a completely different matter.

The best technique is to analyze historical patterns across different assets and timeframes. If we divide a 1-hour candle into its 15-minute components, we can see exactly what happened within that hour. A long wick upward on the hourly candle might reveal a buying spike at 15 minutes, but afterward, sellers dominated the next 45 minutes.

This fractal understanding is crucial: the same patterns repeat across all time levels. A signal is more reliable the higher the timeframe. A hammer on a daily chart is significantly more powerful than one on a 15-minute chart.

Reasons why candles outperform other visualization methods

In a line chart, you only see the close of each period. This means you can miss critical information. That support level in EUR/USD we identified would never have appeared on a line graph because the price only touched the line via the wick (high or low), not at the close.

When you combine Japanese candlesticks with tools like moving averages, Fibonacci retracements, or Bollinger Bands, the contacts become exponentially more precise. The wicks help you better calibrate these indicators.

Tips to become a competent technical analyst

First, practice constantly with a demo account. Without financial pressure, you can focus entirely on pattern reading. Spend hours daily reviewing historical charts of multiple assets. Visualize past patterns, memorize how they looked before significant movements.

Second, never trade based on a single signal. Always seek the maximum number of confluences possible. This dramatically reduces your losses.

Third, respect higher timeframes. A trend change on the daily chart is infinitely more valuable than one on the 5-minute chart.

Fourth, develop discipline. Professional traders spend hours analyzing but make few trades. It’s like a football player who trains 3 hours daily but only plays 90 minutes on weekends. Analysis is training; trading is the game.

Finally, combine technical analysis with fundamental analysis. Japanese candlesticks tell you what is happening in the price, but understanding why it’s happening requires knowledge of the economic and news context.

Mastering the Japanese candlesticks explanation doesn’t automatically make you a successful trader, but it puts you on the right path. It’s the basic language you need to speak fluently. Once you master it, you have over 50% of the work done. The rest is experience, discipline, and patience.