Master Japanese candlestick reading: Essential strategy for your technical analysis in trading

When you delve into the financial markets, you will discover that there are three main approaches to decision-making: technical analysis, fundamental analysis, and speculation. While speculation is mainly based on intuition and anticipation without solid foundation, fundamental analysis studies the economic, political context, and earnings reports, and technical analysis relies entirely on charts and historical patterns. The cornerstone of any technical trader is mastering Japanese candlestick reading, as these graphical forms contain all the necessary information to predict future market movements.

The origin and structure of Japanese candlesticks

Japanese candlesticks originate from traditional rice trading in Dojima, Japanese cities, and later migrated to Western financial markets as a technical analysis tool. Today, they are the universal language for graphically representing prices over specific periods.

Each candlestick has two main visual components: the body and the wicks. However, their true power lies in condensing four critical data points into a single representation: opening price, closing price, high, and low (OHLC in English).

On most trading platforms, green candles indicate price increases, while red candles show declines. The body of the candle communicates where the price opened and closed, while the wicks reveal the extremes reached during that period. To illustrate: in a 1-hour EUR/USD candle with an opening at 1.02704, a high of 1.02839, a low of 1.02680, and a close of 1.02801, you would see a 0.10% gain, all this information visible in a single chart.

Classification and meanings of the main patterns

Reading Japanese candlesticks requires knowing the most recurrent patterns. These are not infallible 100%, but they offer valuable signals of market opportunities.

Engulfing Pattern: Consists of two candles of different colors where the second completely engulfs the first, often indicating a trend reversal. A bullish engulfing candle suggests a transition from bearish to bullish, while a bearish one indicates the opposite. This pattern can provide reliable support or resistance levels if executed correctly.

Doji Candle: Characterized by long wicks and an extremely small body, almost like a cross. The opening and closing prices are practically identical. This candle signals total indecision in the market, a perfect balance between buyers and sellers with no one able to dominate.

Spinning Top: Very similar to the doji but with slightly larger bodies. It also reflects equilibrium between opposing forces, though with marginal fluctuations in opening and closing prices.

Hammer: A candle with a small body and an extraordinarily long wick on one end. In prior bullish trends, a hammer anticipates a shift downward. In bearish contexts, it signals a reversal upward. It precisely represents what its name suggests: a reversal punch.

Hanging Man: Visually identical to the hammer but in an opposite prior context. A hammer after bullish candles predicts a fall, while a hanging man after bearish candles anticipates a rebound.

Marubozu: Name meaning “bald” in Japanese, referring to the absence of wicks. It shows a long, strong body, indicating a dominant trend without significant retracements. A bullish marubozu demonstrates buyer control, a bearish one shows seller dominance.

Practical application: from theory to real decisions

The true usefulness of reading Japanese candlesticks emerges when you use them to identify support and resistance levels more accurately than other chart methods. Consider that if you used line charts based solely on closing prices, you would miss valuable information contained in the wicks.

In EUR/USD, imagine a support identified at 1.036. The wicks of several candles repeatedly touch this level and bounce. A line chart would never reveal this pattern. This discovery demonstrates why technical indicators combined with Japanese candlesticks generate more precise signals: they capture the opening, high, low, and close prices simultaneously.

Long wicks communicate trend vulnerability, near-term reversal suggestions. Short wicks indicate persistent strength. Large bodies reveal substantial operational volume, offering confidence in established trends.

Temporal breakdown: deep understanding through fragmentation

A powerful concept in candlestick reading is that the same elements exist across all timeframes. A 1-minute candle contains the same components as a 1-month candle. But here comes the magic: by fracturing.

A 1-hour candle is composed of four 15-minute candles. Each of those contains three 5-minute candles. That’s why wicks in higher timeframes are so revealing: they compress the action of multiple smaller candles.

Suppose a 1-hour candle shows a long upper wick but closes below the open. In red, bearish. What really happened? By breaking it down into 15-minute segments, we discover: the first 30 minutes were bullish with strong momentum toward the high. Then, in the next 30 minutes, sellers took control with such force that they reversed all gains, closing well below.

This temporal fracturing reveals the true battle between buyers and sellers, explaining why the final result was bearish despite the initial bullish attempt.

Confluences: the secret of reliable trades

Although some advanced traders claim they can operate by observing a single candle, professionals know that confluences multiply the probability of success. A confluence means multiple signals point in the same direction.

A concrete example: identify support through candlestick reading. Then apply Fibonacci retracements from a clear low to a high. If the 61.8% Fibonacci level coincides exactly with your support identified by candles, you have confluence. This is the ideal moment to place orders, not when you see an isolated pattern.

In EUR/USD, when the 61.8% Fibonacci level aligned with the support at 1.036, that was the signal to sell with confidence. Look for at least three different signals converging before executing significant trades.

Competitive advantages of mastering this reading

Japanese candlestick reading works in all markets: Forex currencies, cryptocurrencies like Bitcoin, commodities, stocks, indices. In all timeframes, from intraday to long-term analysis.

A fundamental tip: signals in higher timeframes are exponentially more reliable. A hammer on a daily chart will be much more effective than one on a 15-minute chart. Small movements generate noise; large movements reveal real market intentions.

Japanese candlesticks offer a crucial advantage over line charts: they capture all intra-period action. You do not ignore opening, highs, or lows. This complete information is what differentiates superficial analysis from professional analysis.

Learning path for developing analysts

If you are just starting, dedicate systematic time. Open a demo account, analyze historical data without risking real money. Train your eye. Visualize patterns on past charts of multiple assets. The goal is to develop instinctive recognition.

A useful analogy: just as a professional footballer trains 3 hours daily to play 90 minutes, you should extensively analyze markets before placing each trade. You do not need to operate constantly. You need to wait for clear confluences, open considered positions, and let them develop fully.

When you truly master candlestick reading, you will draw conclusions by observing just one candle. You will recognize recurring patterns in your favorite assets. You will discover that behaviors almost perfectly respect what you have studied.

Combine this candlestick reading with fundamental analysis, and you will have covered the two pillars of professional trading. The third, emotional discipline, you will learn by trading consistently with clear rules and rigorous risk management.

Next steps in your development as a trader:

1. Register your account on a reliable platform
2. Access advanced charting tools
3. Start your immediate practice in simulated markets