Japanese Candlesticks: Essential Models, Reversal Patterns, and Trend Continuation Signals

How to Use Japanese Candlestick Patterns for Market Analysis

In our previous article, we thoroughly discussed the concept of Japanese candlesticks. Now, let’s move on to candlestick patterns, which are powerful tools for forecasting market movements. While individual candlesticks provide valuable insight into market conditions, understanding the correct interpretation of candlestick patterns will allow you to analyze price charts with greater precision.

Key Candlestick Patterns for Trend Analysis

While it's impossible to cover all candlestick formations in a single article, we will focus on the most important and frequently used patterns that help traders across financial markets. Mastering these models will enhance your ability to use technical analysis effectively and improve your results in binary options trading, Forex, and stock market trading.

Understanding Japanese candlestick patterns is an essential part of technical analysis. These formations enable traders to make more accurate market forecasts by identifying both potential reversal points and trend continuations, significantly increasing trading efficiency. Keep in mind that successful trading requires more than just knowledge of patterns—applying other analytical tools such as support and resistance levels, as well as employing solid risk management, is also crucial.

Bullish Candlestick Patterns for Market Forecasting

Bullish Japanese candlestick patterns are formations that indicate potential price increases. These patterns often form at support and resistance levels, signaling a change in price direction. If the pattern occurs outside of key levels, its reliability may decrease, and it is better to avoid using it in isolation.

Abandoned Baby — A Reversal Candlestick Pattern

Abandoned Baby is a three-candlestick pattern. The first candle indicates trend continuation, the second candle forms a doji, symbolizing market uncertainty, and the third bullish candle engulfs the previous two, confirming an upward reversal. Technical analysts recommend entering a trade after the third candle closes.

Morning Star Doji — A Reversal Signal Candle

Morning Star Doji is another three-candle pattern that signals a potential trend reversal. The first candle is a strong bearish one, followed by a doji, and the third is a smaller bullish candle. For confirmation, traders often look for a break above the high of the first candle before entering a trade to go long.

Three Inside Up — Trend Reversal Pattern

Three Inside Up is a reversal pattern where the second and third candles engulf the first bearish candle, signaling an upward reversal. It is recommended to enter a buy trade after the third candle closes.

Three Outside Up — Candlestick Pattern for Upward Trends

The Three Outside Up pattern is similar to the engulfing model. It starts with a bearish candle, followed by a bullish candle that engulfs the first one, and then a third bullish candle confirming the trend continuation. Enter a trade after the final candle closes.

Three White Soldiers — Trend Continuation Pattern

Three White Soldiers consists of three consecutive bullish candles. This pattern signals a trend continuation and does not necessarily require support or resistance levels. The pattern is considered reliable when the candles are of similar size with no long wicks. Enter the market after the third candle closes.

Breakaway Candle — Market Signal Candle

The Breakaway Candle is a five-candlestick formation where the first four candles indicate a downtrend. The fourth candle signals trend exhaustion as sellers meet support. The fifth bullish candle is significantly larger, indicating a reversal. Traders can enter a long position after this candle closes.

Doji Star — Candle of Indecision and Reversal

Doji Star forms after a downtrend. However, be cautious: a doji does not always indicate a reversal. It may represent trend stalling or market indecision. If the pattern forms at a strong support level, it could signal a reversal. It is recommended to wait for confirmation before entering a trade.

Dragonfly Doji — A Strong Reversal Pattern

Dragonfly Doji features a long lower wick, signaling a potential reversal. This pattern forms at key support levels, indicating a possible start of an uptrend. Confirmation often comes from a bullish candle following the doji.

Engulfing Pattern: Price Reversal

Engulfing, also known as bullish engulfing, is a powerful reversal pattern frequently found at support and resistance levels. The left bearish candle is fully engulfed by the right bullish candle, signaling a change in market sentiment. This pattern may occur in both reversals and trend continuations. A trade should be entered after the engulfing bullish candle forms.

Three Stars in the South: Seller Exhaustion Signal

The Three Stars in the South pattern consists of three consecutive bearish candles. The first is the largest, the second is smaller, and the third is the smallest, indicating seller exhaustion. This pattern signals a potential trend reversal, as sellers are losing momentum. A strong bullish entry signal occurs after the pattern completes.

Hammer: Reversal Signal at Support Levels

Hammer is a classic reversal pattern often seen at support levels. The pattern has a small body and a long lower wick, indicating a shift in power between buyers and sellers. A buy entry can be made immediately after the hammer forms or after confirmation from the following bullish candle.

Lower Ladder: Reversal Pattern After Price Decline

The Lower Ladder pattern consists of five candles, with the first three indicating a price decline. The fourth candle, with a long upper wick, signals weakening trend strength, and the fifth candle is the reversal candle. The pattern completes after the appearance of a bullish candle that closes above the previous lows.

Morning Star: Predicting Reversal with Japanese Candles

The Morning Star pattern consists of three candles and is a strong reversal signal. The first candle is bearish, the second is a small bearish or doji candle, and the third is bullish. This pattern signals a trend reversal, especially when confirmed by support levels.

Piercing Line: A Model for Market Signal Analysis

The Piercing Line is a two-candle reversal model. The first candle is bearish, followed by a bullish candle that closes above the midpoint of the first. This pattern signals a trend change. Enter a buy trade after the candle closes above the first candle's high.

Three Stars: A Strong Support Level Signal

Three Stars consists of three doji candles that form at a support level. They indicate that the market has reached a strong support level and cannot continue moving down. Wait for the formation of a bullish candle after the third star for a buy entry.

Belt Hold: A Strong Bullish Reversal Signal

The Belt Hold pattern is a powerful bullish reversal signal. The first candle is bearish, the second is a doji or small bearish candle, and the third is a large bullish candle that closes above the high of the first candle. This is a strong buy signal immediately after the last candle forms.

Gravestone Doji: Indicator of Bearish Trend End

Gravestone Doji is a candlestick pattern that forms at the end of a bearish trend. The main candle is a doji with a long upper wick, indicating a weakening of the bears and a potential trend reversal. Enter a buy trade after the formation of a confirming bullish candle.

Inverted Hammer: Reversal Pattern with Japanese Candles

The Inverted Hammer is a popular reversal candle formation that signals a potential trend change. The first candle indicates a price decline, followed by an inverted hammer with a long upper wick and no lower wick, and the third candle is bullish, confirming the trend reversal. This pattern works well at Fibonacci levels and support levels. Enter the trade after the bullish candle closes.

Tweezer Bottom: A Two-Candle Reversal Pattern

Tweezer Bottom is a reversal pattern consisting of two candles. The first candle is bearish, and the second has a body equal to the upper wick of the first candle. It is important for the second candle to be bullish, indicating a trend reversal. To confirm the reversal, wait for the break above the high of the first candle, then enter a buy trade.

Bearish Candlestick Patterns: Signals for Price Decline

Bearish Japanese candlestick patterns are formations that usually precede a price decline. These patterns signal trend reversals at resistance levels or at Fibonacci retracement levels. To filter signals, it is recommended to use indicators that predict price reversals.

Abandoned Baby — Bearish Pattern

Abandoned Baby is a mirror bearish pattern similar to its bullish counterpart. The first candle is bullish, the second is a doji with small wicks, and the third is a bearish reversal candle. The pattern forms at strong resistance levels. Enter a trade after the third candle closes.

Dark Cloud Cover: Bearish Reversal Signal

Dark Cloud Cover is a reversal candlestick pattern that forms after an uptrend. The second candle breaks above the high of the first but closes below its open, indicating growing bearish strength. This pattern signals the start of a downtrend, and a trade should be entered immediately after the pattern forms.

Evening Star Doji: Reversal at the Peak

Evening Star Doji is a reversal model that forms at the peak of an uptrend. The first candle is bullish, the second is a doji, and the third is bearish, signaling a strong price reversal. Enter a sell trade after the third candle closes.

Evening Star: Classic Bearish Pattern

Evening Star is a classic bearish pattern similar to the "Evening Star Doji," but with a key difference: instead of a doji, a small candle with a top wick is used. This pattern forms at the peak of a trend and signals a reversal. Enter after the pattern completes.

Three Inside Down: Bearish Reversal Pattern

Three Inside Down is a reversal candlestick pattern that consists of an inside bar and a break below the mother candle. The third candle confirms the trend reversal, and a sell trade should be entered after it closes.

Three Outside Down: Strong Reversal Signal

Three Outside Down is a bearish reversal pattern made up of three candles. The second candle engulfs the first bullish candle, and the third candle confirms the trend reversal. This pattern often forms at the peak of trends, and a sell trade should be entered after the third candle closes.

Counterattack: A Trend Reversal Signal

Counterattack is a Japanese candlestick model that signals a trend reversal. The pattern includes three bullish candles, the last of which has a long upper wick. The fourth candle is a reversal, often forming a bearish CPR, indicating the start of a downtrend. Enter a trade after the fourth candle forms.

Breakaway Candle: Bearish Reversal Signal

Breakaway Candle is a five-candle formation that signals a trend reversal. The first four candles move upward, while the fifth bearish candle engulfs the last three candles. This is a strong signal to open short positions. Enter after the final candle forms.

Deliberation: Reversal or Continuation Pattern

Deliberation is a pattern that can act as either a reversal or a continuation model. The second candle is inside the first, and the third is a doji or a small-bodied candle. The fourth candle is the reversal candle, and a short position is recommended after it forms.

Tasuki Gap Down: A Bearish Candlestick Reversal Pattern

Tasuki Gap Down is a three-candle reversal model. The first two candles are bearish, with a gap between them, and the third candle is bullish. It forms from the middle of the second candle, signaling trend weakening. A sell entry is recommended after the third candle completes.

Dragon Doji: A Reversal Japanese Candlestick Model

Dragon Doji is a reversal pattern that appears after a strong uptrend. The doji candle forms with a long upper wick, signaling buyer weakness. A sell trade is recommended after a confirming reversal candle forms.

Bearish Engulfing: Market Reversal Signal

Engulfing is one of the most powerful reversal patterns, where the second candle fully engulfs the first. In its bearish form, the second candle closes significantly below the first, signaling the start of a downtrend. Enter a trade after the pattern completes.

Meeting Lines: Trend Reversal Signal

Meeting Lines is a reversal candlestick pattern where a bullish candle is followed by a bearish candle that closes at the same level as the first candle's high. This pattern signals an end to the uptrend and the start of a downward move. A sell trade is possible after the second candle forms.

Three Stars: Reversal Pattern in Japanese Candles

Three Stars is a reversal pattern consisting of three doji candles, all forming at the top of an uptrend. This pattern indicates a strong resistance level and signals a likely price decline. Enter after a confirming bearish candle forms.

Gravestone Doji: Strong Reversal Signal

Gravestone Doji is a pin bar that forms at the top of an uptrend. This pattern signals a market reversal to the downside. It works best at strong resistance levels. Enter after a confirming bearish candle forms.

Hanging Man: A Signal for Trend Reversal

Hanging Man is a reversal pattern that forms at the peak of an uptrend. The candle has a small body and a long lower wick, signaling weakening buyer strength. The color of the candle is irrelevant; what matters is its position on the chart. This pattern works best at resistance levels, where a reversal is likely. Enter a trade after the following candle confirms the bearish signal.

Belt Hold: A Reversal Candlestick Pattern

Belt Hold is a powerful reversal model where one bearish candle engulfs the three previous bullish candles. This pattern often forms at the top of trends or during strong price corrections. To confirm the reversal, wait for a candle to close below the low of the first candle in the model. This will help avoid false signals at strong Fibonacci levels.

Harami: Trend Reversal Candlestick Model

Harami is a reversal pattern where the second candle closes within the range of the first, forming an inside bar. This pattern signals a potential trend change, but it is recommended to wait for confirmation by a break below the low of the first candle before entering a short trade. The model works best at strong resistance levels.

Shooting Star: Predicting Trend Reversal

Shooting Star is one of the most common reversal patterns at the top of a trend. This pin bar signals weakening buyer strength and may indicate a pending price reversal downward. For reliability, it is recommended to wait for confirmation from a resistance level and the subsequent bearish candle that confirms the reversal.

Harami Cross: A Reversal Model with Japanese Candles

Harami Cross is a reversal candlestick pattern that includes a full-bodied candle followed by a doji. This pattern forms at local highs and indicates market indecision. To open a short position, wait for the confirming candle that breaks below the low of the first candle.

Tweezer Top: Signal for Price Decline

Tweezer Top is a reversal formation consisting of a full-bodied bullish candle followed by a bearish candle with a long lower wick. This pattern typically signals a price reversal at resistance levels. Enter a trade after the break below the first candle's low.

Candlestick Patterns: Summary and Usage Tips

Candlestick patterns are one of the key tools in technical analysis, but they are not a standalone trading strategy. For effective usage, they should be combined with other analytical tools such as support and resistance levels, Fibonacci retracement levels, oscillators, trend lines, and indicators. Without additional filtering, the signals may be less reliable.

Simply opening a price chart and identifying patterns may yield positive results, but they will not be optimal. Therefore, it is important to consider the market context and apply candlestick patterns in combination with other analysis methods.

Key Rules for Using Candlestick Patterns

To maximize efficiency when trading with Japanese candlesticks, it is recommended to follow a few key rules:

• Filter candlestick patterns by support and resistance levels. This will help you pinpoint more reliable market entry points.
• Use oscillators like RSI or Stochastic to confirm trend reversals indicated by candlestick models.
• Fibonacci levels help better understand potential price retracements, and combining them with candlestick patterns enhances signal accuracy.
• Analyze trends using trendlines and channels to ensure that candlestick patterns signal either a trend continuation or a reversal.

How to Properly Study Candlestick Models

There are many candlestick models, and for beginners, it's important to study them gradually. Start by learning 3-4 straightforward patterns, such as the "pin bar", "engulfing", and "morning star", and identify them on charts. Apply these models in conjunction with additional filtering levels, such as support and resistance levels.

Once you have learned to identify and use basic models in real trading, move on to studying more complex candlestick formations and their practical applications. Continuously improving your skills in technical analysis using Japanese candlesticks will allow you to better understand market trends and improve your trading results.

Practical Use of Candlestick Models in Trading

Successful technical analysis requires not only theoretical knowledge of candlestick models but also their practical application. Traders must be able to recognize patterns on charts, combine them with other analysis methods, and make informed decisions. Using candlestick patterns to predict market movements can significantly improve trading results when applied correctly.