How to Read Japanese Candlesticks

Where this page's information comes from

• StockCharts' ChartSchool, its introduction to candlesticks, its candlestick pattern dictionary and its guides to bullish and bearish reversal patterns, for the definitions, the shape criteria and the role of the prior trend and confirmation. Those points are attributed in the text.
• Thomas Bulkowski's pages on the hammer and the bullish engulfing pattern on ThePatternSite, for his identification guidelines only.
• StockCharts' help pages, for how its charts display extended-hours trading.
• TradingLoot's own explanations and diagrams. They describe how candles are commonly read, not rules that guarantee an outcome.

Bulkowski's pages also publish performance statistics and trading tips. This guide leaves them out, because the market, period and method behind the figures aren't set out on those pages. ChartSchool traces candlestick charting, following Steve Nison's account, to Japanese rice trading after 1850 and largely to a trader named Homma. For Nison's own comments on reading candles, see our summary of his book, which draws on publisher material and his interviews.

Anatomy of a candle

Each candle needs four prices for its period: the open, the high, the low and the close. ChartSchool calls the block between the open and the close the real body, and the thin lines above and below it shadows, also known as wicks or tails. The upper shadow reaches the high; the lower shadow reaches the low. When a shadow is missing, the period's open or close was also its high or low.

In ChartSchool's convention, the body is hollow when the close is above the open and filled when it's below. Many platforms use colours such as green and red instead, and most let you change both the colours and the fill. Whatever the style, it's a display choice: check what it means on your chart before reading anything into it. ChartSchool reads a long body as strong buying or selling pressure and a short body as little movement between the open and the close. A long upper shadow means price traded well above where the period closed; a long lower shadow means it traded well below.

What a candle doesn't show

A candle records four prices, not the path between them. The open is the period's first price and the close its last, but the candle doesn't say whether the high came before the low, how long price spent at any level, or how much traded there. ChartSchool makes the same point: two different sequences of highs and lows can produce the same candle.

That limits what a shape can tell you. A long lower shadow shows that price traded well below the close at some point; on its own, it doesn't show when, or whether that low came before or after the high.

Unfinished candles. Until a period ends, its candle is provisional. The latest price stands in for the close, and the high or low can still extend. A candle that looks like a hammer halfway through the period can end as a different shape, so the names in this guide describe completed candles.

Timeframes, sessions and data feeds

A candle summarizes whatever period the chart uses. One daily candle covers the same trading as many hourly candles, so the same market can show a hammer on one timeframe and an ordinary candle on another. Neither reading is the true one; they describe different periods.

Where a period starts and ends also matters. StockCharts' help pages say its intraday charts can add extended-hours bars, in separately coloured sections, when that setting is switched on. They don't say how daily candles are built, and other providers make their own choices. In TradingLoot's view, session settings, time zones and the trades a data feed includes can all change a candle's open, high, low or close, so two platforms can show slightly different candles for the same day. When a shape depends on a small difference, check the data behind it.

ChartSchool's definitions are mostly written in daily terms, such as the day's high and low. The shapes can be drawn on any timeframe; that wording is a reminder of the period the definitions were written for.

Single candles and multi-candle patterns

Some candlestick names describe one candle: the doji, the marubozu, the hammer, the hanging man, the inverted hammer and the shooting star. Others describe how two or more candles relate. The engulfing pattern is the two-candle example in this guide; three-candle patterns such as the morning and evening star, and others such as the harami, are left for a later guide.

Two questions are worth keeping apart. The first is about shape: does the candle, or the group of candles, match the definition? The second is about context: what was price doing before? For the reversal candles below, the shape alone doesn't settle the name; the prior trend does. Candle patterns also work at a smaller scale than chart patterns, which describe structures that form across many periods.

Doji and marubozu

ChartSchool defines a doji as a candle whose open and close are virtually equal, and reads it as indecision. It says the open and close ideally match, but that capturing the essence matters more than exact equality: the body should be very small, a thin line compared with the candles before it. It doesn't set one universal threshold. On its own, ChartSchool treats a doji as neutral.

A marubozu has no shadows. In ChartSchool's introduction, a white marubozu opens at the low and closes at the high, and a black one opens at the high and closes at the low; it reads the long body as strong buying or selling pressure. Its pattern dictionary uses the name more loosely, for a candle with no shadow at the open, the close or both.

Hammer and hanging man

The hammer and the hanging man share one shape: a small body near the top of the range, a long lower shadow and little or no upper shadow. Price traded well below the open at some point and closed near the top of the range. ChartSchool says the long shadow should generally be at least twice the length of the body. Bulkowski's guidelines for the hammer ask for a lower shadow at least two or three times the height of the body.

What separates them is the trend before the candle. ChartSchool calls the shape a hammer after a decline, where it's read as potentially bullish, and a hanging man after an advance, where it's read as potentially bearish. It says both need confirmation. Bulkowski's hammer guidelines ask for a downward price trend; they don't list body colour or confirmation.

Inverted hammer and shooting star

Turn the shape over and you get the second pair: a small body near the bottom of the range, a long upper shadow and little or no lower shadow. Price traded well above the open at some point and closed near the bottom of the range.

Again, the prior trend decides the name. ChartSchool calls the shape a shooting star after an advance, read as potentially bearish, and gives a guideline of an upper shadow at least twice the length of the body. After a decline, it calls the shape an inverted hammer, read as potentially bullish, and describes it without a numerical ratio. It says the inverted hammer needs bullish confirmation, and its guide to bearish reversals says most of those patterns need bearish confirmation too.

Bullish and bearish engulfing

An engulfing pattern takes two candles of opposite colour. In ChartSchool's dictionary, the second candle's body completely engulfs the first candle's body. A bullish engulfing pattern forms after a decline, with a hollow body engulfing a filled one; a bearish engulfing pattern forms after an advance, with a filled body engulfing a hollow one.

What gets engulfed is the body, not the whole candle. ChartSchool says the pattern doesn't require the entire range, high to low, to be engulfed, and contrasts it with the outside reversal, which does require the full range. Its reversal guides add that the first candle shouldn't be a doji, which is easy to engulf, and that engulfing the shadows too is ideal but not required. Bulkowski's bullish engulfing guidelines say the same about shadows, "ignore the shadows", and describe the second candle opening below the prior close and closing above the prior open.

Neither source spells out what happens when the two bodies share an edge exactly. The examples below leave a clear margin, so they fit either source's wording without settling that case.

Context and confirmation

A reversal candle needs something to reverse. ChartSchool's guides say bullish reversal patterns should form within a downtrend, and that bearish ones need an existing uptrend, which can be short-term. The same shape in a sideways market says much less.

ChartSchool also says most reversal patterns need confirmation, such as a gap, a long candle or a move on heavy volume in the new direction. Without it, it treats them as neutral, marking at best a possible support or resistance level. Its guides suggest reading candles alongside other tools, such as support and resistance, momentum and volume, and say candlesticks shouldn't be used alone. Confirmation shows that price followed through for a while; it doesn't guarantee the move continues.

Nison has made the same point in interviews: how he reads a pattern depends on where it forms. See context and confirmation in our summary of his book.

Failed signals

A candle signal can fail before confirmation or after it. A hammer can be followed by more selling; a confirmed bearish engulfing pattern can give way to new highs. In TradingLoot's view, the useful habit is deciding in advance what would show the reading was wrong. For a hammer, that might be price trading back below its low; for a shooting star, back above its high. Those are examples of a boundary, not universal rules, and where a reading counts as wrong depends on the chart and on the reader's method.

A failed signal still tells you something: the side that seemed to be gaining ground couldn't follow through. The same idea applies to chart patterns; see false breakouts and failed patterns.

Common misreadings

These are ways candles are often misread, as TradingLoot sees it.

"A green candle means price went up."

It depends on the platform's settings. In the convention used here, a hollow body only means the close was above the open in that period.

"A hammer is bullish wherever it appears."

The name depends on the prior trend. After an advance, the same shape is a hanging man.

"The long lower shadow shows buyers stepped in at the end."

The candle doesn't record when the low was reached, only that it was.

"Engulfing means the whole candle is covered."

The sources define it by the bodies. Covering the full range is a different pattern, the outside reversal.

"The current candle is a shooting star."

Not until the period closes. Until then, the shape can still change.

"Candle definitions are standard."

The broad shapes are, but the numbers differ: ChartSchool and Bulkowski give different shadow ratios for the hammer.

Key takeaways

• A candle shows a period's open, high, low and close; its colours and fills are display conventions.
• It doesn't show the order of trades inside the period, and it isn't final until the period ends.
• Timeframe, session settings and the data feed all shape the candles you see.
• Hammer and hanging man, and inverted hammer and shooting star, are the same shapes in different trends.
• Engulfing patterns are defined by the bodies, not the full range.
• Shape criteria differ between sources, and a signal needs context and confirmation, and can still fail.

Further reading

• Japanese Candlestick Charting Techniques by Steve Nison: our summary of the book, including reading a single candle and reversal and continuation patterns.
• Technical Analysis of the Financial Markets by John J. Murphy: a broad foundation in which candlesticks are one of many tools.
• Technical Analysis Books: more books, grouped by what each teaches.
• Chart Patterns: structures that form across many periods, and how to read any chart pattern.
• Free visual guide (PDF): TradingLoot's free 27-page English visual guide to Japanese candlesticks and chart patterns, which you can preview and download.
• Historical replay: a way to practise reading candles one period at a time, without seeing what comes next.