Japanese Candlestick Anatomy

Let’s break down the different parts of a Japanese candlestick.

Sexy Bodies

Just like humans, candlesticks have different body sizes. And when it comes to forex trading,
there’s nothing naughtier than checking out the bodies of candlesticks!

Long bodies indicate strong buying or selling.

The longer the body is, the more intense the buying or selling pressure. This means
that either buyers or sellers were stronger and took control.

Short bodies imply very little buying or selling activity. In trading lingo, bulls mean buyers
and bears mean sellers.

Long white Japanese candlesticks show strong buying

pressure.
The longer the white candlestick, the further the close is above the open.

This indicates that prices increased considerably from open to close and buyers were
aggressive. In other words, the bulls were kicking the bears’ butts big time!

Long black (filled) candlesticks show strong selling pressure.

The longer the black Japanese candlestick, the further the close is below the open.

This indicates that prices fell a great deal from the open and sellers were aggressive. In
other words, the bears were grabbing the bulls by their horns and body-slamming them.

Mysterious Shadows

No, we’re not talking about wearing dark smokey eye shadow.

The upper and lower shadows on Japanese candlesticks provide important clues about the
trading session.

Upper shadows signify the session high.

Lower shadows signify the session low.

Candlesticks with long shadows show that trading action occurred well past the open and
close.

Japanese candlesticks with short shadows indicate that most of the trading action was
confined near the open and close.
If a Japanese candlestick has a long upper shadow and short lower shadow, this means that
buyers flexed their muscles and bid prices higher.

But for one reason or another, sellers came in and drove prices back DOWN to end the
session back near its open price.

If a Japanese candlestick has a long lower shadow and short upper shadow, this means that
sellers flashed their washboard abs and forced the price lower.

But for one reason or another, buyers came in and drove prices back UP to end the
session back near its open price.

Basic Japanese Candlestick Patterns

What do spinning tops, marubozus, and dojis have in common?

They’re all the basic types of Japanese candlesticks!

Let’s take a look at each type of candlestick and what they mean in terms of price action.

Spinning Tops

Japanese candlesticks with a long upper shadow, long lower shadow, and small real bodies
are called spinning tops. The color of the real body is not very important.

The Spinning Top pattern indicates the indecision between the buyers and sellers.
The small real body (whether hollow or filled) shows little movement from open to close, and
the shadows indicate that both buyers and sellers were fighting but nobody could gain the
upper hand.

Even though the session opened and closed with little change, prices moved significantly
higher and lower in the meantime.

Neither buyers nor sellers could gain the upper hand, and the result was a standoff.

​ If a spinning top forms during an uptrend, this usually means there aren’t many

buyers left and a possible reversal in direction could occur.

​ If a spinning top forms during a downtrend, this usually means there aren’t many

sellers left and a possible reversal in direction could occur.

Marubozu

Sounds like some kind of voodoo magic, huh? “I will cast the evil spell of the Marubozu on
you!”

Fortunately, that’s not what it means. Marubozu means there are no shadows from the
bodies.

The word “marubozu ” translates to “bald head” or “shaved head” in Japanese.

So a Marubozu candlestick is a bald candle or shaved candle means it has no shadow or

wick.

Depending on whether the candlestick’s body is filled or hollow, the high and low are the
same as its open or close.

Check out the two types of Marubozus in the picture below.

A White Marubozu contains a long white body with no shadows. The open price equals
the low price and the close price equals the high price.

This means that the candle opened at its lowest price and closed at its highest price.

This is a very bullish candle as it shows that buyers were in control of the entire session. It
usually becomes the first part of a bullish continuation or a bullish reversal pattern.

A Black Marubozu contains a long black body with no shadows. The open equals

A Black Marubozu contains a long black body with no shadows. The open equals the
high and the close equals the low.

This means that the candle opened at its highest price and closed at its lowest price.

This is a very bearish candle as it shows that sellers controlled the price action the
entire session. It usually implies bearish continuation or bearish reversal.

Depending on where a marubozu is located and what color it is, here are few
guidelines:

White Marubozu

​ If a White Marubozu forms at the end of an uptrend, a continuation is likely.

​ If a White Marubozu forms at the end of a downtrend, a reversal is likely.

Black Marubozu

​ If a Black Marubozu forms at the end of a downtrend, a continuation is likely.

​ If a Black Marubozu forms at the end of an uptrend, a reversal is likely.

Doji

Doji candlesticks have the same open and close price or at least their bodies are
extremely short. A Doji should have a very small body that appears as a thin line.

Doji candles suggest indecision or a struggle for turf positioning between buyers and
sellers.

Prices move above and below the open price during the session, but close at or very
near the open price.

Neither buyers nor sellers were able to gain control and the result was essentially a
draw.

There are FOUR special types of Doji candlesticks.

The length of the upper and lower shadows can vary and the resulting forex
candlestick looks like a cross, inverted cross, or plus sign.

The word “Doji” refers to both the singular and plural form.
When a Doji forms on your chart, pay special attention to the preceding candlesticks.

If a Doji forms after a series of candlesticks with long hollow bodies (like White
Marubozus), the Doji signals that the buyers are becoming exhausted and weakening.

In order for the price to continue rising, more buyers are needed but there aren’t any
more! Sellers are licking their chops and are looking to come in and drive the price
back down.

If a Doji forms after a series of candlesticks with long filled bodies (like Black
Marubozus), the Doji signals that sellers are becoming exhausted and weakening.

In order for the price to continue falling, more sellers are needed but sellers are all
tapped out! Buyers are foaming in the mouth for a chance to get in cheap.

While the decline is sputtering due to a lack of new sellers, further buying strength is
required to confirm any reversal.
Look for a white candlestick to close above the long black candlestick’s open.

In the next following lessons, we will take a look at specific Japanese candlestick
patterns and what they are telling us.

Hopefully, by the end of this lesson on Japanese candlesticks, you will know how to
recognize different types of candlestick patterns and make sound trading decisions
based on them.

Single Candlestick Patterns

Now that you’re familiar with basic candlestick patterns like spinning tops,
marubozus, and dojis, let’s learn how to recognize single candlestick patterns.

When these types of candlesticks appear on a chart, they can signal potential market
reversals.

Here are the four basic single Japanese candlestick patterns:

Hammer and Hanging Man

The Hammer and Hanging Man look exactly alike but have totally different meanings
depending on past price action.

Both have cute little bodies (black or white), long lower shadows, and short or absent
upper shadows.
The Hammer is a bullish reversal pattern that forms during a downtrend. It is named
because the market is hammering out a bottom.

When the price is falling, hammers signal that the bottom is near and the price will
start rising again.

The long lower shadow indicates that sellers pushed prices lower, but buyers were
able to overcome this selling pressure and closed near the open.

Just because you see a hammer form in a downtrend doesn’t mean you automatically
place a buy order! More bullish confirmation is needed before it’s safe to pull the
trigger.

A typical example of confirmation would be to wait for a white candlestick to close

above the open to the right side of the Hammer.

Recognition Criteria for a Hammer:

​ The long shadow is about two or three times of the real body.

​ Little or no upper shadow.

​ The real body is at the upper end of the trading range.

​ The color of the real body is not important.

The Hanging Man is a bearish reversal pattern that can also mark a top or strong
resistance level.

When the price is rising, the formation of a Hanging Man indicates that sellers are
beginning to outnumber buyers.

The long lower shadow shows that sellers pushed prices lower during the session.

Buyers were able to push the price back up some but only near the open.

This should set off alarms since this tells us that there are no buyers left to provide
the necessary momentum to keep raising the price.

Recognition Criteria for a Hanging Man:

​ A long lower shadow which is about two or three times of the real body.

​ Little or no upper shadow.

​ The real body is at the upper end of the trading range.

​ The color of the body is not important, though a black body is more bearish

than a white body.

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star also look identical. The only difference
between them is whether you’re in a downtrend or uptrend.

An Inverted Hammer is a bullish reversal candlestick.

A Shooting Star is a bearish reversal candlestick.

Both candlesticks have petite little bodies (filled or hollow), long upper shadows, and
small or absent lower shadows.

Inverted Hammer

The Inverted Hammer occurs when the price has been falling suggests the possibility
of a reversal. Its long upper shadow shows that buyers tried to bid the price higher.

However, sellers saw what the buyers were doing, said “Oh heck no!” and attempted
to push the price back down.

Fortunately, the buyers had eaten enough of their Wheaties for breakfast and still
managed to close the session near the open.

Since the sellers weren’t able to close the price any lower, this is a good indication
that everybody who wants to sell has already sold.

And if there are no more sellers, who are left? Buyers.

Shooting Star

The Shooting Star is a bearish reversal pattern that looks identical to the inverted
hammer but occurs when the price has been rising.

Its shape indicates that the price opened at its low, rallied, but pulled back to the
bottom.

This means that buyers attempted to push the price up, but sellers came in and
overpowered them. This is a definite bearish sign since there are no more buyers left
because they’ve all been overpowered.

Dual Candlestick Patterns

What’s better than single candlestick patterns?

DUAL candlestick patterns!

To identify dual Japanese candlestick patterns, you need to look for specific
formations that consist of TWO candlesticks in total.

Engulfing Candles

There are two types of Engulfing candles: Bullish Engulfing and Bearish Engulfing.
The Bullish Engulfing pattern is a two candlestick reversal pattern that signals a
strong up move may occur.

It happens when a bearish candle is immediately followed by a larger bullish candle.

This second candle “engulfs” the bearish candle. This means buyers are flexing their
muscles and that there could be a strong up move after a recent downtrend or a
period of consolidation.

On the other hand, the Bearish Engulfing pattern is the opposite of the bullish pattern.

This type of candlestick pattern occurs when the bullish candle is immediately
followed by a bearish candle that completely “engulfs” it.

This means that sellers overpowered the buyers and that a strong move down could
happen.

Tweezer Bottoms and Tops

Tweezer patterns are two candlestick reversal patterns.

This type of candlestick pattern is usually spotted after an extended uptrend or

downtrend, indicating that a reversal will soon occur.

There are two types of Tweezer patterns: the Tweezer Bottom and the Tweezer Top.
Notice how the candlestick formation looks just like a pair of tweezers!

Amazing!

The most effective Tweezers have the following characteristics:

The first candlestick is the same as the overall trend. If the price is moving up, then
the first candle should be bullish.

The second candlestick is opposite the overall trend. If the price is moving up, then
the second candle should be bearish.

The shadows of the candlesticks should be of equal (or near-equal) length.

Tweezer Tops should have the same highs, while Tweezer Bottoms should have the
same lows.

Triple Candlestick Patterns

What’s better than dual candlestick patterns?

TRIPLE candlestick patterns!

To identify triple Japanese candlestick patterns, you need to look for specific
formations that consist of three candlesticks in total.

These candlestick formations help traders determine how the price is likely to behave
next.

Some three candlestick patterns are reversal patterns, which signal the end of the
current trend and the start of a new trend in the opposite direction.

And other three candlestick patterns are continuation patterns, which signal a pause
and then the continuation of the current trend.

Let’s take a look at the popular triple Japanese candlestick patterns.

Evening and Morning Stars

The Morning Star and the Evening Star are triple candlestick patterns that you can
usually find at the end of a trend.

They are reversal patterns that can be recognized through three characteristics.

We’ll use the Evening Star Pattern on the right as an example of what
you may see:
 ​ The first candlestick is a bullish candle, which is part of a recent uptrend.

​ The second candle has a small body, indicating that there could be some

indecision in the market. This candle can be either bullish or bearish.

​ The third candlestick acts as a confirmation that a reversal is in place, as the

candle closes beyond the midpoint of the first candle.

Three White Soldiers and Black

Crows

The Three White Soldiers pattern is formed when three long

bullish candles follow a DOWNTREND, signaling a reversal has
occurred.

This type of triple candlestick pattern is considered as one of the most potent
in-yo-face bullish signals, especially when it occurs after an extended downtrend and
a short period of consolidation.

The first of the “three soldiers” is called the reversal candle. It either ends the
downtrend or implies that the period of consolidation that followed the downtrend is
over.
For the Three White Soldiers pattern to be considered valid, the second candlestick
should be bigger than the previous candle’s body.

Also, the second candlestick should close near its high, leaving a small or
non-existent upper wick.

For the Three White Soldiers pattern to be completed, the last candlestick should be
at least the same size as the second candle and have a small or no shadow.

The Three Black Crows candlestick pattern is just the opposite of the Three White
Soldiers.

It is formed when three bearish candles follow a strong UPTREND, indicating that a
reversal is in the works.

The second candle’s body should be bigger than the first candle and should close at
or very near its low.

Finally, the third candle should be the same size or larger than the second candle’s
body with a very short or no lower shadow.

For the Three Black Crows pattern to be completed, the last candlestick should be at
least the same size as the second candle and have a small or no shadow.

Three Inside Up and Down

The Three Inside Up candlestick formation is a trend-reversal pattern that is found at

the bottom of a DOWNTREND.
This triple candlestick pattern indicates that the downtrend is possibly over and that a
new uptrend has started.

For a valid three inside up candlestick formation, look for these properties:

​ The first candle should be found at the bottom of a downtrend and is

characterized by a long bearish candlestick.

​ The second candle should at least make it up all the way up to the midpoint of

the first candle.

​ The third candlestick needs to close above the first candle’s high to confirm

that buyers have overpowered the strength of the downtrend.

Conversely, the Three Inside Down candlestick formation is found at the top of an
UPTREND.

It means that the uptrend is possibly over and that a new downtrend has started.

A Three Inside Down candlestick formation needs to have the following

characteristics:

​ The first candle should be found at the top of an uptrend and is characterized

by a long bullish candlestick.

​ The second candle should make it up all the way down the midpoint of the first

candle.

​ The third candlestick needs to close below the first candle’s low to confirm that

sellers have overpowered the strength of the uptrend.