Japanese Candlestick Anatomy: Body, Wick, Open and Close

Explaining Japanese candlesticks in detail isn’t simple, yet the term comes up constantly among forex traders. This article breaks down Japanese candlesticks, how traders use them to read price movement, and the basic information you need to understand every part of a candle.

How did Japanese candlesticks start?

Japanese candlesticks were created by Japanese traders once they moved into forex-style trading, where they made major advances and developed new technical analysis methods for the markets. Steve Nison came later and used Japanese candlesticks in his own technical and trading analysis, adding his own contributions because of how much the method interested him.

The method was then carried to Europe, and within twenty years Japanese candlesticks became the preferred charting tool among investors worldwide. That popularity led Steve Nison to write a number of books explaining Japanese candlesticks, and the subject eventually became a full field taught at universities because of how closely it’s studied for reading stock and market changes.

Read also: Forex market types — what are they and how do they work?

Definition of Japanese candlesticks

The inventor of Japanese candlesticks is known as Homma Munehisa, a Japanese speculator. As mentioned above, Japanese candlesticks work by reading price action and showing the price a currency has reached. This type of candle helps show potential future movement, the pace of past movement, and general trend information, which makes trading easier and gives you full information on the opening and closing prices.

Japanese candlesticks can be described as tools that give you the chart data you need and help estimate future price movement. What stands out most about Japanese candlesticks is that the method keeps evolving, taking on new and different forms that help an investor read data faster and more easily — the same goes for estimating future movement.

Read also: Definition of all order types in the forex market

How to read Japanese candlesticks?

There’s no shortage of Japanese candlestick types — they number more than 100. To understand how to read and work with these types, we first need to look at these two categories.

Reversal candles

These are candles that help you understand a stock’s price and whether it’s about to reverse from a downtrend to an uptrend or the other way round.

Continuation pattern

This is a pattern that shows clearly whether a rising stock keeps rising or a falling stock keeps falling. It’s a very important pattern.

Types of charts used with Japanese candlesticks

1- Bar charts
2- Line charts
3- Candlestick charts

This article focuses on Japanese candlesticks, since the other two chart types aren’t as widely known or used as candlestick charts.

How is a Japanese candlestick built, in detail?

There are a number of important signals here: how long or short the candle’s body is shows how strong buying or selling pressure was. If you see a long green candle, that shows the closing price ended well above the opening price, which points to buyers coming out ahead.

On the other hand, a long red candle shows the closing price ended well below the opening price, which points to sellers coming out ahead this time. During quieter periods, candles turn red or green but stay short, which shows buying and selling pressure were roughly equal.

A candle also has a wick. A long wick shows how far the trading range extended. Looking at the chart, the extensions above price levels and below the lows over a set period show that price moved away from the open or close, and that there was a push between buyers and sellers.

A Japanese candle is made up of a body and a wick. The body itself has an opening point and a closing point, and it’s the closing point that sets the candle’s direction.

As for the candle’s wick, there’s an upper wick that runs from the top of the body to the highest point reached, and a lower wick that runs from the lowest point reached to the bottom of the body.

How a Japanese candlestick’s length is determined, in detail

Most trading platforms have a feature that shows information when you hover your mouse over a specific candle — for example the candle’s opening price, its highest price, its lowest price, or its closing price.

If you’re working on, say, a 4-hour timeframe, each candle covers 4 hours. So if a candle closes at 10 a.m., the next candle opens at 2 p.m., four hours later.

What are the reversal candlestick patterns?

Japanese candlestick patterns vary widely, and each one has its own distinct characteristics.

Doji

One of the strongest Japanese candles, where the opening and closing prices match. Because buying and selling pressure are equal, its appearance signals a possible reversal in market direction.

The doji has several forms: the well-known one looks like a plus sign (+), the regular doji looks like a dash (-), another version has one long wick and one short wick, and a fourth version has a long wick on only one side.

Hammer

One of the best-known candles, named the hammer because its shape on the chart resembles one. To identify it, the body needs to be short with a lower wick at least twice the length of the body — the longer the wick, the stronger the candle.

There’s also an inverted hammer, a mirrored version of the hammer shape that points to the opposite direction.

Hanging Man

This one really does look like a hanging man — the body sits at the top with a long wick below. It’s shaped like the hammer, but it signals a reversal from an uptrend to a downtrend.

Shooting Star

It closely resembles the inverted hammer, but it points to price changing direction from an uptrend to a downtrend.

Engulfing

This pattern is different from the previous ones — it’s made of two candles, the first rising and the second falling, or the other way round, where the second candle’s body fully engulfs the first.

When the second candle is long, it signals a shift from a downtrend to an uptrend. The bearish engulfing pattern is the complete opposite — the first candle rises and the second falls, showing the pattern turning from an uptrend into a downtrend.

Reversal

These two candles signal a price change at the end of a trend, from a downtrend to an uptrend or the reverse. They are two long candles with very short wicks, and the three candles before or after them need to be smaller and shorter in comparison.

Morning Star (Evening Star)

This is a three-candle pattern: a large rising candle, then a small rising candle, then a third candle like the first. At times you can skip past it, but be careful — the upper wick needs to sit higher than the other wicks. It’s one of the reversal examples, and it’s worth remembering that the first two candles share the same color before the reversal candle appears. This candle is the counterpart to the evening star, and it signals a price change.

There are other candles too, such as the piercing line, the dark cloud cover, the high-wave candle, the inside bar, and the bearish candle.

Read also: What are hollow candles?

Continuation patterns in Japanese candlesticks, in detail

Just as there are reversal patterns, there are continuation patterns that signal an uptrend continuing. Here we’ll cover a bullish continuation pattern made up of 5 candles coming out of a downtrend and continuing it: the first candle is a large bearish one, the second through fourth are small bullish candles, and the fifth is large with a short wick.

The Three Soldiers

This pattern is made up of 3 different candles, and it typically shows up after the pair has been rising, signaling a reversal in direction from an uptrend to a downtrend.

The Three Beauties

This pattern is made up of 3 rising candles. It repeats and matters a lot, since it points clearly to the uptrend continuing, and it appears after a downtrend. At times, a doji candle shows up right before it.

Read also: The most important types of Japanese candlesticks and how to read them

Guidelines for using Japanese candlesticks, in detail:

1. These candles are typically used on larger timeframes, not the 1-minute or 10-minute charts.
2. Wait for the candle’s pattern to fully form, and don’t jump to conclusions before the last candle closes.
3. Most of the time, you should track these alongside trend lines and continuation patterns.
4. You can combine a number of candle patterns with your own strategies.
5. For reversal patterns, rely on support and resistance levels, since they tend to be the stronger reference points.
6. Traders use detailed Japanese candlestick charts to gauge potential price movement based on past patterns.
7. Candlesticks are useful when trading because they display four price points — open, close, high, and low — across whichever time period the trader sets.
8. Many algorithms rely on the same price information shown on detailed Japanese candlestick charts.

Read more: Top 9 Japanese candlestick patterns

Frequently Asked Questions

How do I read a Japanese candlestick?

Japanese candlesticks are one of the tools traders use to read price movement and estimate potential direction, which helps in planning trade entries and exits.

How many types of Japanese candlesticks are there?

There is a large number of Japanese candlestick types. Some sources put the count at over 100, though not all are used equally often — between 9 and 19 types are considered the most common among traders, including the doji, the hammer, and the three soldiers pattern.

How do traders estimate the next candle?

By tracking the candle’s body, wick and shadow to read price direction, whether the asset is moving lower or higher.

What are the types of candles?

Japanese candlestick types and patterns vary and are defined by price direction and whether that direction reverses. They fall into two groups: reversal patterns and continuation patterns.

Who invented Japanese candlesticks?

Munehisa Homma, also known as Sokyu Homma, is credited as the inventor of Japanese candlesticks. He was a Japanese rice trader born in 1724 and died in 1803.

What do the wicks mean in Japanese candlesticks?

The wicks represent price extensions, showing the highest highs and lowest lows reached during a set time period. A longer wick signals that price moved further away from the opening price.

What does a doji candle indicate?

It signals indecision between buyers and sellers, since the closing price is equal to the opening price.

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