What are Japanese candlesticks and how to read them?

A Japanese candlestick packs four prices — open, close, high and low — into a single mark you can read in a second. That is why it pushed line charts off almost every trading platform. The trouble starts when a beginner treats it as a button: there is a hammer, so I buy. A candle does not instruct you to do anything; it summarises how the fight between buyers and sellers went in that slice of time. Below we take it apart and go through the three patterns that genuinely help when you have a decision to make.

Candle anatomy — what does it actually show?

Every candle describes four prices from a single time period:

• Open — the first price in the period, for example the start of the hour on an H1 candle.
• Close — the last price in that period, the end of the hour.
• High — the highest price the market reached during the period.
• Low — the lowest price in the same period.

On the chart these map onto three graphical elements:

What follows from that? Buyers had the upper hand in this hour — the close landed above the open. They tried to lift price another 15 pips, to 1.0905, and ran into supply there. Sellers, for their part, dragged the rate 10 pips below the open, to 1.0840, and were quickly pushed out. That whole story fits into one graphical mark.

How to read a candle in a second

The rule that gets you through day-to-day chart reading: a candle with a long body and short wicks is a strong directional move with one side clearly on top. A candle with a short body and long wicks is a fight with no verdict — price moved both ways and ended up roughly where it began.

Three patterns worth knowing

Steve Nison describes several dozen candle patterns in his classic book. In practice, most of the situations where a candle adds anything at all to a decision come down to the three below.

Doji — the candle of indecision

The body is tiny or non-existent, because the open and close landed in almost the same place. The wicks can be long on both sides. A doji says only this: buyers and sellers came out even. It shows up often at turning points, but on its own it means nothing — what counts is context. A doji after a long down-leg, right on meaningful support, is a sign that selling pressure is running out. The same candle in the middle of a sideways range carries no information at all.

Hammer and shooting star — a hint of reversal

The hammer has a small body in the upper part of the candle and a long lower wick, usually at least twice the length of the body. It forms after a down-leg: sellers tried to force the rate lower, and buyers took the entire move back before the period closed.

The shooting star is its mirror image — a small body near the bottom edge and a long upper wick, forming after an up-leg. It points to a possible reversal downward.

Location is what decides. A hammer that appears at the very top of the chart, just as a downtrend is getting under way, tells you close to nothing. The same hammer in the third down-leg, resting on support visible on the daily chart, is evidence you can actually work with.

Bullish and bearish engulfing — a change of direction

Bullish engulfing: after a bearish candle comes a bullish one whose body completely covers the body of the previous candle. Buyers did not just take back the lost ground, they went beyond it.

Bearish engulfing: the reverse — a red body covers the green body of the previous candle. Sellers take control.

Engulfing is often treated as stronger evidence than a lone hammer, because it describes market behaviour across two full periods rather than one. It is still only evidence, though, not a guarantee.

A Japanese candle is not a buy signal. It is information. Only traders who use information in context make money. The rest click "Buy" because hammer.

Classic candle-reading traps

Four mistakes come back more often than any others when people read candles:

1. Treating a single candle as a signal. Without context — the direction of the trend, the nearest support and resistance, the picture from a higher timeframe — a candle is just a record of four prices. Before you react, check how the same moment looks one or two timeframes up.
2. Treating every pattern as equal. A bullish engulfing on support visible on the daily chart weighs considerably more than an identical configuration in the middle of a five-minute consolidation.
3. Reacting to an unfinished candle. A candle is settled only at the moment it closes. What looks like a hammer for forty minutes can turn into an ordinary bearish candle in the last five.
4. Confusing the visualisation with the data. Candles are one way of showing the same four numbers. A bar chart or a line chart describes exactly the same market. It is worth getting attached to the data, not to the form your platform happens to draw it in.