Japanese candlesticks are a way of displaying price movements where each “candle” shows the open, close, high, and low for a chosen time period. They are useful because their shapes and patterns reveal shifts in market sentiment, helping traders spot trends, reversals, and potential entry or exit points more clearly.
Introduction
Japanese candlestick charting, legend has it, was invented by rice traders in western Japan in the 1700s. Trading platforms contain line charts and bar charts – and candlestick charts, which contain more information than line charts and are easier to read than bar charts.
Before looking at patterns, it is important to understand how a single candlestick works. Each candle represents a chosen time period (e.g., one day, one hour) and is made up of two parts:
- The body (the rectangular block) shows the opening and closing prices for that period. If the closing price is higher than the opening price, the body is usually colored (usually green) or hollow to indicate a bullish move; if it is lower, it is typically filled or shown in a contrasting color (usually red) to indicate a bearish move.
- The wicks or shadows (the thin lines above and below the body) show the highest and lowest prices reached during that period. The upper shadow stretches from the top of the body to the highest price and the lower shadow from the bottom of the body to the lowest price.
Once the eye becomes used to candlesticks, the chart becomes much richer with information.
Line charts show the closing price. Bar charts and candlestick charts both show the opening price, closing price, highest and lowest traded price of the period. In addition to this, the color of the body of the candle makes it easy to grasp the direction of the price movement.
Rising prices are generally shown using hollow bodies and falling prices with filled-in bodies. Other color combinations exist. Candlestick patterns that might inspire trades can consist of a single candle, but usually contain two or even three candles. Candlesticks can be applied to any timeframe, but are particularly useful to analyzing the short-term direction of the market.
The existence and length of candlestick body and shadow contain information about market psychology. The strength of a price change is shown by the size of the body of the candle in relation to the length of the shadow: long bodies and short shadows imply consensus about the price, while indecisive markets often have small bodies and long shadows of price exploration. Some traders enjoy focusing on analyzing candlestick bodies, while others find trade opportunities in the choppy charts of candlestick shadows.
In the following, we will look at candlestick patterns that often precede trend reversals.
“Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology, their own feelings and the mass psychology of the markets.”
Bullish Trend Reversal Patterns
Bullish trend reversal patterns appear after a downtrend and suggest that buyers may be stepping back in. These candlestick setups help traders identify moments where selling pressure weakens and a potential upward move begins. Below are the key bullish reversal signals to watch for.
Bullish Piercing Line – How to Spot the First Signs of a Reversal
What you see: Following a downtrend are two candles, the first closing lower than opening, the second opening below the price range of the first period, and closing higher than the middle of the first candle.
What often happens: Trend reversal
This pattern shows a close that is much higher than the preceding period's. This may mean a reversal of the prevailing trend, especially when the close of the second candle is well above the middle of the body of the first candle. If the price moves above the close of the second candle, it is worth confirming the buy signal by other means, such as other chart patterns. If the price moves below the low of the second candle, the signal is not confirmed, this is the stop loss level unless a new bearish price move is anticipated.
Related candlestick patterns:
- Dark cloud cover is the exact opposite.
- Bullish engulfing, where the second candle closes higher than the first. Bearish engulfing is the exact opposite.
Bullish Engulfing – The Strong Signal Traders Trust
What you see: Following a downtrend are two candles. The first closes lower than it opens (bearish). The second opens at or below the first candle’s close and closes above the first candle’s open. In short, the body of the second candle should be longer than and fully engulf the body of the first.
What often happens: Trend reversal
This pattern shows a close that is much higher than the preceding period's. The first candle is typically small and bearish, sometimes even resembling a doji, which shows weakness in the downtrend. The strong bullish candle that follows may mean a reversal of the prevailing trend. If the price moves above the close of the second candle, it is worth confirming the buy signal by other means, such as price change momentum or trade volume. If the price moves below the low of the second candle, the signal is not confirmed, this is the stop loss level unless a new bearish price move is anticipated.
Related candlestick patterns:
- Bearish engulfing is the exact opposite.
- Bullish piercing line, where the second candle closes above the middle of the first but within its body.
- Dark cloud cover is the exact opposite.
Risk Management Tip: When opening a position, always consider at which level you wish to take profits or stop loss. It is possible to create orders to trade automatically at these price levels. Take profit orders should be further away from the entry level than the stop loss order, so that profits can cover a few bad trades. As a rule of thumb, the potential profit should be three times the potential loss.
Hammer – When One Candle Can Mark the Bottom
What you see: Following a downtrend, a candle appears with a small real body near the top of the range, little or no upper shadow, and a lower shadow at least twice the body length. The colour of the body is less important, but a bullish (close above open) hammer is stronger.
What often happens: Trend reversal
Since both the open and close are far above the lowest price of the period, this candle often indicates that the next movement of the market will be higher. This observation rests on the buyers bringing the price so far up in spite of sellers' efforts during the trading period. In other words, at closing, the buyers' efforts outweigh the sellers'.
If the price moves above the high of the Hammer candle, it is worth confirming the buy signal by other means, such as trade volume. A stop loss can be placed at the lowest price of the Hammer's shadow unless a new bearish price move is anticipated.
Related candlestick patterns:
Inverted Hammer
Inverted Hammer – Is This Really a Bullish Reversal?
What you see: Following a downtrend, there is a box with a stick on top, that is, an upside-down hammer. There is no or very little lower shadow. The direction of the price movement of the period is unimportant, but the body should be small and located near the bottom of the candle’s range. The upper shadow is at least twice the length of the body of the candle. The colour of the body is less important, though a bullish close (above open) is stronger.
What often happens: Trend reversal
Since the price exploration of this period was mostly upwards, this candle often indicates that the next movement of the market will be higher. Confirmation is required: traders usually wait for the next candle to close above the high of the Inverted Hammer before considering it a valid reversal signal. If this happens, it is worth confirming the buy signal by other means, such as volume. Stop loss is typically set at the low of the Inverted Hammer.
Related candlestick patterns:
Hammer
Bullish Harami – What This Pattern Reveals About Market Sentiment
What you see: Following a downtrend, the first candle is large and bearish (closes below the opening price). The body of the candle of the next period is shorter than this candle's. The body of the second candle must be completely contained within the body of the first candle. The direction of the price movement does not matter, the short candle can be either colour, though a bullish (close above open) second candle is stronger.
What often happens: Trend reversal
Since the second candle’s small body lies entirely within the first candle’s body, these two candles may be a sign that the downtrend is about to reverse. If the price moves above the high of the second candle, the bullish signal is considered confirmed. If the price moves below the lowest price of the two periods, the signal is not confirmed – this is the stop loss level unless a new bearish price move is anticipated.
Related candlestick patterns:
- Bearish Harami
- Bullish/Bearish Harami Cross
Etymology Note: The Japanese word "harami" is an old expression for pregnant woman, literally "body in the stomach". The shape of the pattern is similar to a pregnant woman's belly if you draw a line around the two candles: the first candle is the "mother", the second is the "baby".
Bullish Harami Cross – A Rare but Powerful Setup
What you see: Following a downtrend, the first candle is large and bearish (closes below the opening price). The candle of the next period closes at almost the same price as it opens, i.e. has virtually no body (a Doji). The price range of the second candle is entirely within the body of the first candle.
What often happens: Trend reversal
Since the second candle forms a Doji entirely within the first candle’s body, these two candles may be a sign that the downtrend is about to reverse. The entry level depends on the size of the first candle. If the price moves above the high of the doji (second candle), the bullish reversal is considered confirmed. However, if the first candle is short, the Harami Cross signal is weaker and confirmation becomes more important. Trade opportunities should always be confirmed by several different analyses, for example chart, momentum and volume. If the price moves below the lowest price of the two periods, the signal is not confirmed, this can be the stop loss level unless a new bearish price move is anticipated.
Related candlestick patterns:
- Bearish Harami cross
- Bullish/bearish Harami
Japanese Trading Terms: The word Doji is generally understood as “same thing,” reflecting the fact that the candle’s opening and closing prices are virtually identical. Some sources also link it to the Japanese character for “ten” (十), which resembles a cross and visually mirrors the shape of many Doji candles. If a candle is not a perfect Doji but has only a small body, it is called a Star. A Doji usually signals market indecision, with buyers and sellers in balance. The longer the shadows, the more important the signal, as it shows the reversal was hard-fought.
Morning Star – Why Traders Call It the Dawn of a Trend
What you see: Following a downtrend, the first candle is a large bearish candle that closes below its opening price. It is followed by a small candle (bullish, bearish or even a Doji) that typically gaps down and remains within the range of the first candle. The third part of this pattern is a strong bullish candle that opens above or near the low of the second candle and closes well above its opening price, ideally above the midpoint of the first candle’s range.
What often happens: Trend reversal
If the price moves above the high of the third candle, the bullish reversal is considered confirmed. It is worth validating the signal with other tools, such as chart patterns, momentum indicators or volume. If the price moves below the lowest price of the last two candles, the signal is not confirmed: this can serve as the stop loss level unless a new bearish move is anticipated.
Related candlestick patterns:
- Evening Star (the bearish counterpart)
- Abandoned Baby (a variation where the middle candle is a doji with gaps on both sides)
Abandoned Baby (Bullish) – How to Read This Unusual Signal
What you see: Following a downtrend, the first candle is a strong bearish candle that continues the decline. It is followed by a gap down to a Doji (a candle where the open and close are nearly the same). Finally, there is a gap up to a bullish candle that closes well above the closing price of the first candle. The strength of this pattern lies in the fact that the Doji does not overlap with the shadows of the two surrounding candles, leaving it completely “abandoned.”
What often happens: Trend reversal
The two gaps in opposite directions reflect strong indecision followed by a decisive shift in sentiment. This often signals that the downtrend is exhausted and a bullish reversal may follow. If the price moves above the high of the third candle, the reversal is considered confirmed. If the price moves below the lowest point of the last two candles, the signal is not confirmed, this can serve as the stop loss level unless a new bearish move is anticipated.
Related candlestick patterns:
- Abandoned Baby (Bearish)
- Morning Star / Evening Star
Bearish Trend Reversal Patterns
Not every rally lasts forever. When candlesticks start flashing bearish reversal patterns, they often reveal the moment enthusiasm fades and sellers step back in. Here are the key signals that can warn of a shift from strength to weakness.
Dark Cloud Cover – Warning of Stormy Market Conditions
What you see: Following an uptrend are two candles, the first closing higher than opening, the second opening above the price range of the first day, and closing lower than the middle of the first candle.
What often happens: Trend reversal
This pattern shows a close that is much lower than the preceding period's. This may mean a reversal of the prevailing trend, especially when the close of the second candle is well below the middle of the body of the first candle. If the price moves below the close of the second candle, it is worth confirming the sell signal by other means, such as other chart patterns. If the price moves above the low of the second period, the signal is not confirmed – this is the stop loss level unless a new bullish price move is anticipated.
Related candlestick patterns:
- Bullish piercing line
- Bullish engulfing, where the second candle closes higher than the first. Bearish engulfing is the opposite.
Bearish Engulfing – The Clear Sign of Seller Strength
What you see: Following an upwards trend are two candles, the first closing higher than opening, the second opening at the same level or even higher than the first, and closing at the same level or lower than the first candle. In short, the body of the second candle should be longer than the body of the first.
What often happens: Trend reversal
This pattern shows a close that is much lower than the preceding period's. The indecision indicated by the small candle body – which may even be a cross - might mean a reversal of the prevailing trend. If the price moves below the close of the second candle, it is worth confirming the sell signal by other means, such as price change momentum or trade volume. If the price moves above the high of the second period, the signal is not confirmed – this is the stop loss level unless a new bullish price move is anticipated.
Related candlestick patterns:
- Bearish engulfing is the exact opposite.
- Bullish piercing line, where the second candle closes above the middle of the first, but within the body of it. Dark cloud cover is the exact opposite.
Hanging Man – When a Candle Hints at Trouble Ahead
What you see: Following an upward trend, there is a box on a stick, that is, a hammer. There is no or very little upper shadow. The direction of the price movement of the period is unimportant, but the bottom of the candle's body is above the bodies of the two previous up-trending candles. The bottom shadow is at least twice the length of the body of the candle. The candle as a whole is of normal length.
What often happens: Trend reversal
Since this small body is seen after a generally rising trend, but explored lower prices, this candle often indicates that the next movement of the market will be lower. If the close is below the open, the buyers did not completely outweigh the downward price pressure of the trading period. If the price moves below the close of the Hammer candle, it is worth confirming the buy signal by other analyses. Set stop loss at the higher of the last two trading periods, unless a new bullish price move is anticipated.
Related candlestick patterns:
- Shooting star
- Bullish Hammer
Shooting Star – Spotting the Top Before Prices Fall
What you see: Following an upward trend, there is a box with a stick on top, that is, an upside-down hammer. There is no or very little lower shadow. The direction of the price movement of the period is unimportant, but the bottom of the candle's body is below the body of the previous up-trending candle's. The upper shadow is at least twice the length of body of the candle. The candle as a whole is of normal length.
What often happens: Trend reversal
Since the price exploration of this period was mostly upwards but ended near the opening price, this candle shows that at the end of trading, the sellers were outweighing the buyers. This often indicates that the next movement of the market will be lower – particularly if is the closing price is below the opening. If the price moves below the body of the Hammer candle in the next trading period, it is worth confirming the sell signal by other means. Set stop loss at the highest price of the Shooting Star's upper shadow unless a new bullish price move is anticipated.
Related candlestick patterns:
- Hanging man
- Bullish inverted hammer
Bearish Harami – What This Tells You About a Weakening Trend
What you see: Following an upwards trend, a normal candle that closes above opening price. The body of the candle of the next period is shorter than this candle's, and should be completely within the first candle body's price range. The opening or closing prices of the two candles may be the same. The direction of the price movement does not matter – the short candle can be either color.
What often happens: Trend reversal
Since the opening and closing prices of the second period are below the closing price of the first candle, these two candles may be a sign that the upwards trend is about to reverse. If the price moves below the middle of the first candle, or the close of the second candle (whichever is lower), it is worth confirming the sell signal by other means. If the price moves above the highest price of the two periods, the signal is not confirmed – this is the stop loss level unless a new bullish price move is anticipated.
Related candlestick patterns:
- Bullish Harami
- Bullish/bearish Harami cross
Bearish Harami Cross – A Subtle but Effective Warning
What you see: Following an uptrend, a normal or short candle that closes above its opening price. The candle of the next period closes at almost the same price as it opens, i.e. has virtually no body. The price range of the second candle is entirely within the body of the first candle.
What often happens: Trend reversal
Because the cross indicates even more indecision than the star of the classic Harami pattern, the Harami cross can be taken as a stronger signal. Given that the opening and closing prices of the second period are below the closing price of the first candle, these two candles may be a sign that the upwards price trend is about to reverse. The entry level depends on the size of the first candle. If the first candle is of normal size, the opening trade can be at a level below the middle of the first candle. However, if the first candle is short, the opening trade should be at or below its opening price. Trade opportunities should always be confirmed by several different analyses, for example chart, momentum and volume. If the price moves above the highest price of the two periods, the signal is not confirmed – this is the stop loss level unless a new bullish price move is anticipated.
Related candlestick patterns:
- Bullish Harami cross
- Bullish/bearish Harami
Evening Star – The Classic Pattern Signaling Decline
What you see: Following an uptrend, there is a normal candle that closes above its opening price. It is followed by one short candle that opens at or above the closing price of the first candle and forms a small body (the direction of the price move is unimportant). The third part of this pattern is a normal candle that opens at or below the highest price of the body of the second candle, and that should close well below its opening price, preferably below the middle of the body of the first candle.
What often happens: Trend reversal
If the price moves below the close of the third candle, it is worth confirming the sell signal by other means, such as other chart patterns. If the price moves above the highest price of the last two periods, the signal is not confirmed – this is the stop loss level unless a new bullish price move is anticipated.
Related candlestick patterns:
- Morning star
- Abandoned baby
Abandoned Baby (Bearish) – Recognizing This Rare Top Reversal
What you see: Following an upwards trend, there is one normal candle that continues the trend, followed first by a gap to a cross, and then by a normal candle that closes well below the closing price of the first candle. The strength of this indication is shown by the fact that not even the shadow of the cross overlaps with the shadows of the two other candles of the pattern.
What often happens: Trend reversal
The great indecision of the market indicated by the two gaps in opposite directions serves as a reminder to keep a close eye on the security in question. If the price moves below the close of the third candle, it is worth confirming the sell signal using other patterns or indicators. If the price moves above the high of the last two periods, the signal is not confirmed – this is the stop loss level unless a new bullish price move is anticipated.
Related candlestick patterns:
- Abandoned baby (bullish)
- Morning star/evening star
Japanese candlestick patterns offer valuable insights into market psychology and potential trend reversals. However, successful trading requires combining these patterns with other forms of analysis, proper risk management and continuous learning. Remember that no single indicator is foolproof, and always consider multiple confirmation signals before making trading decisions.
The key to mastering candlestick analysis is practice and patience. Start by observing these patterns in historical charts, then gradually incorporate them into your trading strategy with appropriate risk management measures in place.
The content in this article is provided for educational and marketing purposes only. It does not constitute investment advice or financial recommendations.
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