Japanese candlestick patterns every trader should know

Japanese candlestick charts encode four pieces of information per period — open, high, low and close — into a single visual unit. The body shows the range between open and close (filled when down, hollow or coloured when up); the wicks above and below show the high and low. From these four points, traders read a vocabulary of patterns developed by Japanese rice traders in the 18th century.

Reversal patterns

A doji has a very small body — the open and close are nearly identical. It signals indecision. After a strong trend, a doji often precedes a reversal, especially if the wicks are long. Variations include the dragonfly doji (long lower wick, bullish reversal) and gravestone doji (long upper wick, bearish reversal).

The hammer (and its inverted cousin, the shooting star) is a single-candle reversal pattern. A hammer at the bottom of a downtrend — small body at the top, long wick below — suggests sellers tried to push lower but buyers reclaimed the close. Reverse for the shooting star at the top of an uptrend.

Engulfing patterns

The bullish engulfing pattern is a two-candle formation where a small red candle is followed by a larger green candle whose body completely engulfs the previous one. It signals that buyers have overwhelmed sellers and is one of the most reliable reversal signals — especially at the bottom of a pullback in an uptrend.

Continuation patterns

• Three white soldiers: three consecutive long green candles, each opening within the previous body — strong bullish continuation
• Three black crows: the bearish mirror image
• Rising / falling three methods: a small consolidation inside a strong trend, then continuation

Patterns work best as one input among several. Pair candlestick signals with support / resistance levels, volume confirmation, and trend context — not as standalone trade triggers. A bullish engulfing at random support in a sideways market is much weaker than the same pattern after a clean retest of a major moving average.