Japanese candlestick patterns: the complete guide

Anatomy of a candle

Each candle shows four prices for a period: open, high, low and close. The body is the range between open and close, and the thin lines above and below, the shadows or wicks, show the extremes reached. A body that closes above its open is usually drawn green (or white), one that closes below, red (or black).

Japanese rice traders developed the technique in the 18th century, and Steve Nison popularized it in the West in the 1990s.

Single-candle patterns

• Doji: open and close are almost equal. It shows indecision, and matters most after a long move.
• Hammer: a small body at the top, a lower shadow at least twice the body, and almost no upper shadow, appearing after a decline. Sellers pushed the price down but buyers recovered most of it.
• Shooting star: the mirror image after an advance, with a long upper shadow.
• Marubozu: a long body with no shadows, showing one side in control for the whole period.

Multi-candle patterns

• Bullish engulfing: a large green body that completely covers the previous red body.
• Bearish engulfing: the opposite, after an advance.
• Morning star / evening star: three candles in which a small-bodied candle sits between a large candle and a large candle in the other direction.
• Harami: a small body contained inside the previous large body, a sign of slowing momentum.

Why context decides

A hammer in the middle of a range means little. The same hammer after a decline, at a support zone, on above-average volume deserves more attention. Even then, studies on candlestick patterns show modest and unstable results, which is why they are best used to frame risk rather than as stand-alone signals.

Always wait for the candle to close before judging it: a candle that looks like a hammer at mid-session can end as something else.

Candlesticks in InvestAI

InvestAI’s price-action reading detects classic candlestick formations on the latest candles, and presents them next to the trend, the structure and the support and resistance zones. A formation is shown as information about what just happened, never as an instruction.