Japanese candlestick patterns – Hammer – Inverted hammer – Bullish engulfing – Morning star – Three white soldiers.
Japanese candlestick patterns are used to predict the direction of future price movements. These are the most popular candlestick patterns, learn how to use them to spot trading opportunities.
Japanese candlestick patterns
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Japanese candles meaning
What are candlesticks? Candlestick patterns are a visual representation of price movements in the market. They are one of the most famous parts of technical analysis because they allow traders to quickly obtain price information from a few price bars. This article focuses on a daily chart in which each candle represents intraday trading. Each candle has three main characteristics:
The body of the body represents the range from open to closed.
The wick or shadow represents the ups and downs of the day.
The color represents the direction of the market. A green (or white) body means the price is rising and a red (or black) body means the price is falling.
Over time, individual candlesticks create patterns that traders can use to identify key support and resistance levels. There are many candlestick patterns that indicate an opportunity in the market. Some of them provide information about the balance between buying and selling pressure, while others identify patterns of continuation or volatility in the market.
Before you start trading, it is important to understand the basics of candlestick patterns and how they can help you make decisions.
Rising candlestick patterns
Bullish patterns can follow a downtrend in the market and indicate a price reversal. They are an indicator that traders should watch over the long term to take advantage of any upward trajectory.
Hammer
This pattern consists of a small body with a long lower wick and is at the end of a downtrend.
This move shows that despite selling pressure throughout the day, in the end, strong buying pressure drove the price back down. The color of the body may vary, but the blue deck indicates a stronger bull market than the red deck.
Inverted hammer
A similar bullish pattern is an inverted hammer. The only difference is that the upper wick is long and the lower wick is short. This shows that the large buying pressure followed by selling pressure is not strong enough to drive the market price down. The inverted hammer shows that buyers will soon take control of the market.
Bullish envelope
The absorption candlestick pattern consists of two candles. It is a small red candlestick that is completely surrounded by a large green candlestick. Even though day two opens lower than day one, the bull market is pushing prices higher and traders continue to move higher.
Penetrating
It also consists of a two candlestick pattern consisting of a long red candlestick followed by a long green candlestick.
There is usually a significant downtrend between the first candlestick close and the green open. This indicates strong buying pressure when the price rises to or above the previous day’s average price.
Morning Star
The morning star pattern is considered a bullish sign of a bearish market trend. It is a three candlestick pattern: a small body, sandwiched between two large red and green candlesticks. Traditionally, the star will not beat the big players because the market gap will appear at both the open and close.
This is a sign that the first day’s selling pressure is beginning to ease and a bull market is expected.
Three white soldiers
The three white soldiers pattern occurs over the course of three days. It consists of a series of consecutive large green (or white) candlesticks with small wicks (shadows) that gradually close and open higher than the previous day. This is a fairly important bullish signal after a downtrend showing increasing buying pressure.
Descending candlestick patterns
Bearish candlestick patterns often follow an uptrend and signal a point of resistance. Strong pessimism about market prices often causes traders to close their positions and buy short positions to take advantage of falling prices.
Hanging man
The Hangman is a bearish version of the hammer: it has the same shape but forms at the end of an uptrend.
This shows a significant level of selling on the day, but buyers may be moving up in price. A significant level of selling is often taken as a sign that an uptrend in the market is fading.
Shooting Star
A shooting star is shaped like an inverted hammer, but it is in an uptrend: it has a small body and a large wick.
Typically, the market experiences a slight upward gap at the open and also rises during the day before closing just above the opening price like a shooting star.
Bearish engulfing
At the end of an uptrend, a bearish engulfing pattern emerges. The first candlestick has a small green body that is engulfed by another large red candlestick. It marks a peak or dip in the price movement and is a signal of an impending market decline. The lower the second candlestick falls, the more likely the trend.
Evening star
Evening Star is a three candlestick pattern, equivalent to Bull Morning Star. It consists of a small candlestick sandwiched between a large green candlestick and a large red candlestick. This indicates a reversal in an uptrend and is especially important when the third candlestick cancels the gain of the first candlestick.
Three black crows
The Three Black Crows pattern consists of three large red candlesticks with or without short strands. Each session opens at the previous day’s price, but selling pressure drives the price lower and lower each close. Investors interpret these patterns as the beginning of a downtrend in which sellers outnumber buyers for three consecutive days.
Dark cloud cover
The dark cloud pattern shows a bearish reversal, i.e. the dark cloud is above the previous day’s bullish level. It consists of two candlesticks: a red candlestick that opens above the previous day’s green body and a candlestick that closes below its center. This is an indication that a downtrend has occurred during the session, so the price is falling significantly. If the candlestick wick is short, the downtrend is decisive.
Continuation candlestick patterns
If the candlestick pattern does not show a change in market direction, it is called a continuation pattern. This can help traders identify resting periods in the market when the market is experiencing volatility or a neutral price movement.
Doji
When the market opens and closes at the same price, the candlestick looks like a cross or a plus sign. Traders should look for a short or non-existent one with bands of different lengths. The doji pattern is a battle between buyers and sellers that results in neither side receiving a net gain. The doji itself is a neutral signal, but can be found in reversal patterns such as the bull morning star and the bear evening star.
Trompos
These patterns have a short body centered on threads of the same size. The pattern shows indecision in the market, meaning that there is no significant price movement: the bulls have sold at the high price and the bearish have moved back down. The swings are often interpreted as a period of consolidation or rest, followed by an uptrend or downtrend.
The change itself is a relatively neutral signal, but it can be interpreted as a sign that something may be starting to happen, as it shows that current market pressures are getting out of control.
Triple bass formation
This pattern is used to predict the continuation of the current trend, either bullish or bearish.
The bearish pattern is known as the «bearish trio pattern». It consists of a long red stem, followed by three small green bodies and a red stem. Green candles appear between the bearish bodies. This shows traders that the bulls are not strong enough to reverse the trend.
Bullish triple formation
This pattern is the opposite of the previous one, as it has an uptrend and is known as a «bullish triad formation». It consists of three short red candlesticks placed between two long green candlesticks. The pattern shows investors that, despite selling pressure, buyers are still in control of the market.
How to read Japanese candlesticks
The best way to learn how to read Japanese candlesticks is to practice trading based on the signals you have. If you are not ready to trade in the real market, you can risk developing your skills on a demo account.
When using candlestick patterns, keep in mind that while they are useful for predicting trends quickly, they should be used in conjunction with other forms of technical analysis to confirm trends.
Other bullish Japanese candlestick patterns
Other Bearish Japanese Candlestick Patterns
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MANUAL DE VELAS JAPONESAS PDF
PARTS OF A JAPANESE CANDLE
TIPOS DE VELAS JAPONESAS
MARUBOZU BASSIST
The Marubozu candlestick has a long body but no wick. This means that the green Marubozu will have a low open and a high close, with the closing price being the high of the session. The green Marubozu shows that sellers have full control over that particular time period. On the other hand, a red Marubozu will have a similar opening and high, as well as similar proximity and dimples. The red Marubozu shows that the buyer has full control at that time.
MARUBOZU BULLISH
HAMMER OR HAMMER SAIL
HARAMI
Characteristics of Japanese candlesticks
Body length
The candlestick body length represents the distance between the closing price and the opening price for a specific period of time, which can be days, weeks, hours or minutes, among others.
Long bodies indicate a strong trend movement, while short bodies indicate a wavering market investor. This means that a large body gap will show a significant difference between the opening and closing prices. On the other hand, the open body will indicate the minimum volatility for the selected time period.
Length of wick or tail
Candlestick wicks, on the other hand, show the minimum and maximum prices reached in a certain period of time. So, when the wick or tail is long, it means that there has been a strong increase or decrease in price during this period. Conversely, when they are short, it will indicate stretches with slight price movements.
Essentially, they show how prices fluctuated during the period. The length of the zipper is analyzed in relation to the position of the body. For example, a candlestick with a long lower wick shows that sellers (bears) attempted to lower the price, but buyers (bulls) resisted the pressure and recovered. The above trend is also taken into account when interpreting Japanese candlestick patterns. It is important to consider the broader context, taking into account other oscillating or averaging indicators or systems, as candlestick patterns are not formed individually. In technical analysis, Japanese candlesticks are often the first indicator to be observed. It provides very visual information about the price change during the time period we want to analyze. However, in order to be able to find certain trends that may emerge in the coming sessions, it is important to combine the information that the candlesticks tell us in their historical record with other data from the market analysis itself.
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BACKWARD PATTERNS
DOUBLE CEILING PATTERN
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Japanese candlestick patterns : Hanging Man
The hanging man is the bearish version of the hammer: it has the same shape, but forms at the end of an uptrend.
This indicates that there has been a significant level of selling during the day, but buyers have been able to get the price to rise. A significant level of selling is usually considered a sign that the uptrend is fading in the market.
Japanese engulfing candlestick patterns
Bullish engulfing candlestick formations indicate that the buying interest in the particular asset exceeds the selling interest. This reversal pattern is formed by two candlesticks. The first is bearish, while the second is bullish. The bullish one (the white/green candlestick) completely covers the bearish one (the black/red candlestick). The pattern is so called when the second candlestick completely «wraps» the real body of the first candlestick.
Most common candlestick patterns
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Disadvantages of trading candlestick patterns
While candlestick patterns provide information about extreme price action, they also have their limitations. Candlestick patterns can generate false signals in volatile markets characterized by price gaps and spikes. In other words, while there are different patterns that initially indicate a bullish or bearish trend, they can also change suddenly in a volatile scenario, such as some cryptocurrencies.
Because they help analyze current or recent price action, they do not provide information about the big picture. This means that it is very easy to get stuck in a market situation that does not take into account broader, longer-term sentiment. Therefore, candlestick patterns are not the «Holy Grail» and should not be used as the sole guide in market analysis. To increase the effectiveness of candlestick patterns, it is important to look for breakout points with other methods of analysis. They are best combined with support and resistance levels, as candlestick patterns provide directional signals. Candlestick patterns can also be combined with technical analysis tools, such as oscillators that indicate overbought and oversold market conditions, as well as trend-following indicators, such as the PSAR indicator, to help identify trading opportunities in trending markets. In addition, candlestick patterns should be traded with strict risk management plans to help you manage your risks and thereby increase your profits. Risk management includes setting optimal stop loss levels and executing profitable orders.
Therefore, some indicators, such as the Moving Average Convergence and Divergence (MACD), the Relative Strength Indicator (RSI) or other moving averages, can help us identify certain market signals, such as the start of an uptrend or downtrend. Scenario. scenario.
HEIKEN ASHI CANDLES
At first glance, Heiken Ashi candlesticks look very similar to Japanese candlesticks. So much so that they overlap in their origins: Japan. Moreover, this similarity is enhanced if the analyst’s experience with the stock market is limited.