Table of contents
- Japanese Candlestick Chart Construction
- Candlestick Patterns
- Bearish Engulfing Candlestick Pattern
- Bullish Engulfing Candlestick Pattern
- Hanging Man Candlestick Pattern
- Hammer Candlestick Pattern
- Inverted Hammer Pattern
- Morning Star Pattern
- Evening Star Pattern
- Morning Doji Star Pattern
- Evening Doji Star Pattern
- Shooting Star Pattern
- Dark Cloud Cover Candlestick Pattern
- Piercing Candlestick Pattern
- Gravestone Doji Pattern
- Dragonfly Doji Pattern
- Three Black Crows Pattern
- Three White Soldiers Pattern
- Tweezers Top Pattern
- Tweezer Bottom
- Long Legged Doji Pattern
- Bullish Belt Hold Pattern
- Bearish Belt Hold Pattern
- Harami Pattern
- Bullish Harami Cross Pattern
- Bearish Harami Cross Pattern
- Abandoned Baby Top Pattern
- Abandoned Baby Bottom Pattern
- History of Japanese Candlestick Charts
- Further Reading
We have already introduced Japanese Candlestick charts on the types of trading charts page. That page gave you a brief introduction of this chart format but will have left you with many questions.
There are two main questions you are likely to have:
- How to read candlestick charts?
- What are the different candlestick patterns?
Before we can get to that we need to determine how the charts are constructed.
Japanese Candlestick Chart Construction
The following screenshot shows three candlestick charts for the S&P 500.
The top candlestick chart depicts a single candle as 1 hour of trading. Each candle in the lower left candlestick chart depicts 1 day of trading. Each candle in the lower right candlestick chart depicts 1 week of trading. The above example has candles shaded red when the close price is lower than the open. A candle is shaded green when the close price is higher than the open.
Lets see a close up of each type of candle.
Bearish Candle
When the closing price for a candle is lower than the open it is regarded as a bearish candle. These candles are nearly always shaded red but sometimes you may see them as black.
From this diagram you can see that the open price for bearish candles is the highest point of the candles body. The close price for bearish candles is the lowest point of the candles body. The highest price of the session is drawn as an upper wick and the lowest price of the session is drawn as a lower wick. Both wicks are coloured the same as the main candle body.
Bullish Candle
When the closing price for a candle is higher than the open it is regarded as a bullish candle. These candles can be shaded blue, green or sometimes white.
From this diagram you can see that the open price for bullish candles is the lowest point of the candles body. The close price for bullish candles is the highest point of the candles body. The highest price of the session is drawn as an upper wick and the lowest price of the session is drawn as a lower wick. Both wicks are coloured the same as the main candle body.
Candlestick Patterns
This section includes examples for the vast majority of Japanese candlestick patterns.
Bearish Engulfing Candlestick Pattern
The bearish engulfing pattern is comprised of two individual candles. For this reversal pattern to be significant the market has to be in a clear upward trend.
The second candle body must completely engulf the previous days candle body.
The second candle must:
- open higher than the close of candle 1
- close lower than the open of candle 1
Bullish Engulfing Candlestick Pattern
The bullish engulfing pattern is comprised of two individual candles. For this reversal pattern to be significant the market has to be in a clear downward trend.
The second candle body must completely engulf the previous days candle body.
The second candle must:
- open lower than the close of candle 1
- close higher than the open of candle 1
Hanging Man Candlestick Pattern
The hanging man pattern is comprised of two individual candles. For this bearish reversal pattern to be significant the market has to be in a clear upward trend.
The first example below shows the hanging man candle closing higher. A third bearish candle confirms the bearish reversal.
(Hanging Man candle closes higher)
The second example below shows the hanging man candle closing lower. A third bearish candle confirms the bearish reversal.
(Hanging Man candle closes lower)
The colour of the hanging man candle is not important. The fact that there is a long lower wick and no upper wick are the significant elements of the hanging man pattern.
Hammer Candlestick Pattern
The hammer pattern is comprised of two individual candles. For this bullish reversal pattern to be significant the market has to be in a clear downward trend.
The first example below shows the hammer candle closing higher. A third bullish candle confirms the bullish reversal.
(Hammer candle closes higher)
The second example below shows the hammer candle closing lower. A third bullish candle confirms the bullish reversal.
(Hammer candle closes lower)
The colour of the hammer candle is not important. The fact that there is a long lower wick and no upper wick are the significant elements of the hammer pattern.
Inverted Hammer Pattern
The inverted hammer pattern is comprised of two individual candles. For this bullish reversal pattern to be significant the market has to be in a clear downward trend.
The example below shows the hammer candle opening below the close of the first candle. The hammer candle then closes higher, although this is not mandatory. A third bullish candle confirms the bullish reversal.
The colour of the inverted hammer candle is not important. The fact that there is a long upper wick and no lower wick are the significant elements of the hammer pattern.
Morning Star Pattern
The morning star pattern is comprised of three candles. For this bullish reversal pattern to be significant the market has to be in a clear downward trend.
The first candle is a strong red candle.
The second candle:
- opens lower than the close of the first candle
- opens higher than the low of the first candle
- closes higher with a small candle body
The third candle is a strong blue candle and closes well within the body of the first candle.
Evening Star Pattern
The evening star pattern is comprised of three candles. For this bearish reversal pattern to be significant the market has to be in a clear upward trend.
The first candle is a strong blue candle.
The second candle:
- opens higher than the close of the first candle
- closes lower than the high of the first candle
- closes lower with a small candle body
The third candle is a strong red candle and closes well within the body of the first candle.
Morning Doji Star Pattern
The morning star pattern is very similar to the morning star pattern and is also comprised of three candles. For this bullish reversal pattern to be significant the market has to be in a clear downward trend.
The morning doji star pattern differs from the morning star pattern in three ways.
The second candle:
- opens lower than the low of the first candle
- closes lower than the low of the first candle
- must open and close at the same price, or very close.
Evening Doji Star Pattern
The evening star pattern is very similar to the evening star pattern and is also comprised of three candles. For this bearish reversal pattern to be significant the market has to be in a clear upward trend.
The evening doji star pattern differs from the evening star pattern in three ways.
The second candle:
- opens higher than the high of the first candle
- closes higher than the high of the first candle
- must open and close at the same price, or very close.
Shooting Star Pattern
The shooting star pattern is the bearish equivalent of an inverted hammer.
The shooting star pattern is comprised of two individual candles. For this bearish reversal pattern to be significant the market has to be in a clear upward trend.
The example below shows the shooting star candle opening above the close of the first candle. The shooting star candle then closes lower, although this is not mandatory. A third bearish candle confirms the bullish reversal.
The colour of the shooting star candle is not important. The fact that there is a long upper wick and no lower wick are the significant elements of the shooting star pattern.
Dark Cloud Cover Candlestick Pattern
The dark cloud cover pattern is comprised of two candles. For this bearish reversal pattern to be significant the market has to be in a clear upward trend.
The first candle is a strong blue candle.
The second candle:
- opens above the high of the first candle
- closes near its low and well within the body of the first candle
- must penetrate at least 50% into the body of the first candle.
Piercing Candlestick Pattern
The piercing pattern is comprised of two candles. For this bullish reversal pattern to be significant the market has to be in a clear downward trend.
The first candle is a strong red candle.
The second candle:
- opens below the low of the first candle
- closes near its high and well within the body of the first candle
- must penetrate at least 50% into the body of the first candle.
Gravestone Doji Pattern
The gravestone doji pattern is comprised of 2 candles. For this bearish reversal pattern to be significant the market has to be in a clear upward trend.
The first candle is likely to be a blue candle but should definitely not encroach too heavily into the second candle. The open, low and close prices for the second candle are identical. The second candle sets a new high before returning to its open price.
A small lower wick is allowed. If the lower wick increases too much then the pattern changes to either a long legged doji, or a standard doji.
Dragonfly Doji Pattern
The dragonfly doji pattern is the reverse of the gravestone doji. This is a very rare pattern. For this bullish reversal pattern to be significant the market has to be in a clear downward trend.
The first candle is likely to be a red candle but should definitely not encroach too heavily into the second candle. The open, high and close prices for the second candle are identical. The second candle sets a new low before returning to its open price.
A small upper wick is allowed. If the upper wick increases too much then the pattern changes to either a long legged doji, or a standard doji.
Three Black Crows Pattern
The three black crows pattern is comprised of three candles. This pattern is usually found as a bearish continuation pattern. To be significant the market should be in a gentle upward trend or consolidating.
The first candle will be a red candle and should close at or near its low. The second candle will also be red and should open at its high and drop to close at or near its low. The third candle will open near its high and should close at its low.
If the third candle does not close at its low it is a sign that the decline could be coming to an end, at least temporarily.
Three White Soldiers Pattern
The three white soldiers pattern is the bullish equivalent of the three black crows pattern. This pattern is usually found as a bullish continuation pattern. To be significant the market should be in a gentle downward trend or consolidating.
The first candle will be a blue candle and should close at or near its high. The second candle will also be blue and should open at its low and close at or near its high. The third candle will open near its low and should close at its high.
If the third candle does not close at its high it is a sign that the advance could be coming to an end, at least temporarily.
Tweezers Top Pattern
The tweezers top patterns are comprised of 2 candles. For this bearish reversal pattern to be significant the market has to be in a clear upward trend. All tweezers top formations share one attribute. The highs of both candles must be the same.
The first tweezers top example shows a strong blue candle followed by a weak hanging man candle. They both share the same high.
The second tweezers top example shows a strong blue candle followed by a harami cross candle. They both share the same high.
The third tweezers top example shows a strong blue candle followed by a shooting star. They both share the same high.
These three examples all have the two candles that create the pattern next to each other. It is possible for this pattern to occur with candles between them but their respective highs must not breach the highs of the two tweezers top candles.
Tweezer Bottom
The tweezers bottom patterns are comprised of 2 candles. For this bullish reversal pattern to be significant the market has to be in a clear downward trend. All tweezers bottom formations share one attribute. The lows of both candles must be the same.
The first tweezers bottom example shows a strong red candle followed by a strong hammer candle. They both share the same low.
The second tweezers bottom example shows a strong red candle followed by a harami cross candle. They both share the same low.
The third tweezers bottom example shows a strong red candle followed by an inverted hammer. They both share the same low.
These three examples all have the two candles that create the pattern next to each other. It is possible for this pattern to occur with candles between them but their respective lows must not breach the lows of the two tweezers bottom candles.
Long Legged Doji Pattern
The long legged doji pattern is a single candle formation. The long legged doji pattern is most significant at market tops and is therefore a bearish reversal formation. It shares similarities with the evening doji star and gravestone doji patterns.
As with all doji patterns the open and close prices must be the same. The difference with other doji patterns is the open and close must be very near to the center of the sessions trading range. The high and low must form a significant trading range that is not in keeping with the most recent trading activity.
Bullish Belt Hold Pattern
The bullish belt hold pattern is a single candle formation. For this bullish pattern to be significant the market has to be in a clear downward trend.
The bullish belt hold candle is a strong blue candle that opens on (or very near to) its low for the session. It then trades higher for the remainder of the session.
Bearish Belt Hold Pattern
The bearish belt hold pattern is a single candle formation. For this bearish pattern to be significant the market has to be in a clear upward trend.
The bearish belt hold candle is a strong red candle that opens on (or very near to) its high for the session. It then trades lower for the remainder of the session.
Harami Pattern
The harami pattern is comprised of 2 candles. These patterns are not overly significant and usually infer a stalling of a trend rather than a reversal. The colour of harami candles are not important. The length of the upper and lower wicks are not signifanct.
The example below starts with a strong red candle that has a long real body. The second candle is the harami candle that has its body completely contained within the body of the red candle.
The example below starts with a strong blue candle that has a long real body. The second candle is the harami candle that has its body completely contained within the body of the blue candle.
The harami patterns are the reverse of the engulfing patterns and are also referred to as inside days, or inside day candles.
Bullish Harami Cross Pattern
The bullish harami cross pattern is comprised of 2 candles. The harami cross pattern is much more significant than the standard harami pattern. For this bullish reversal pattern to be significant the market has to be in a clear downward trend.
The first candle is a strong red candle with a long real body. The second harami cross candle has a tiny real body and is completely contained with body of the first red candle. To be even more significant the open and close of the second candle should be identical. This is because the second candle becomes a highly important doji star pattern.
Bearish Harami Cross Pattern
The bearish harami cross pattern is comprised of 2 candles. The harami cross pattern is much more significant than the standard harami pattern. For this bearish reversal pattern to be significant the market has to be in a clear upward trend.
The first candle is a strong blue candle with a long real body. The second harami cross candle has a tiny real body and is completely contained with body of the first blue candle. To be even more significant the open and close of the second candle should be identical. This is because the second candle becomes a highly important doji star pattern.
Abandoned Baby Top Pattern
The abandoned baby top pattern is comprised of 3 candles and is a major bearish reversal pattern. It is very similar to the evening doji star pattern.
This pattern differs from the evening doji star because there is a visible gap, or window. The low of the doji star must be higher than the highs of both outer candles.
The abandoned baby top pattern is also known as the island top pattern, island top reversal pattern or the island reversal pattern.
Abandoned Baby Bottom Pattern
The abandoned baby bottom pattern is comprised of 3 candles and is a major bullish reversal pattern. It is very similar to the morning doji star pattern.
This pattern differs from the morning doji star because there is a visible gap, or window. The high of the doji star must be lower than the lows of both outer candles.
The abandoned baby bottom pattern is also known as the island bottom pattern, island bottom reversal pattern or the island reversal pattern.
History of Japanese Candlestick Charts
Japanese candlestick charts have been around for centuries and are older than bar charts and point and figure charts. For the majority of that time they have only been known to the Japanese.
This changed in the early 1990s when Steve Nison uncovered this amazing technique and brought it to the attention of the West. We haven’t looked back since and it is now impossible to find charting software without a candlestick option.
Further Reading
There are two amazing books on Japanese Candlestick charts which Trading AtoZ highly recommend. These are both available from our suggested reading section.
