Japanese Candlestick Patterns Explained With Examples
Candlestick charts are among the most used technical tools for analyzing price trends.
Traders and investors use candlestick charts to look for patterns that might help predict price movements.
You can learn how to read candlesticks here if you are not yet familiar with them.
In this article, I will explain commonly used candlestick patterns with illustrations.
The Engulfing Bar Candlestick Pattern
It produces an engulfing bar when it entirely consumes the candlestick before it.
Even though it might engulf several candlesticks, it is only regarded as an engulfing bar if it consumes at least one candlestick.
The bearish engulfing bar is one of the most popular candlestick pattern.
This candlestick pattern has two bodies (The first body and second body, which engulfs the first)
See the illustration below:
On your charts, a bearish engulfing bar pattern appears like this. This candlestick pattern provides valuable information about market bulls and bears.
A bearish engulfing bar indicates that sellers are in charge of the market.
This pattern suggests that buyers are being engulfed by sellers at the peak of an uptrend, indicating a trend reversal.
Here’s an illustration:
When this price action pattern appears during an uptrend, it indicates a trend reversal since sellers are trying to force the market down as buyers are no longer in control of the market.
Not every bearish candlestick pattern you discover on your chart is tradable; you must use additional technical tools to verify your entries.
In my subsequent article, I’ll go into further details on this. For now, I only want you to recognize any bearish candlestick patterns you find on your candlestick charts.
The Bullish Engulfing Bar Pattern
The bullish engulfing bar is formed by two candlesticks, the first of which is the tiny body and the second of which is the engulfing candlestick.
Look at this illustration:
The bullish engulfing bar pattern indicates that buyers will dominate the market since the sellers are no longer in control.
A continuation signal is noteworthy when a bullish engulfing candlestick appears during an uptrend market.
The reversal is significantly more potent when a bullish engulfing candlestick appears at the bottom of a downtrend market as it also denotes a capitulation bottom.
Here’s an illustration:
The image above makes it quite evident how the market shifts after a bullish engulfing bar pattern appear.
The larger body that indicates buying power engulfs the shorter one that represents selling power.
It doesn’t matter what color the bodies are. What matters is that the second candlestick completely engulfs the smaller one.
To determine if the pattern is worth trading or not, you will need to consider other confluent factors, so don’t trade the market using this price action setup alone.
What I want you to learn right now is how to identify the bullish and bearish engulfing bars on your charts.
The Doji Candlestick Pattern
The Doji candlestick pattern is helpful for Japanese Candlestick Analysis. When the market opens and closes at the same price, it indicates that neither buyers nor sellers have control of the market and that both are equally undecided.
Here’s an example:
As you can see, the opening and closing prices are the same, indicating that the market has not decided which direction to take.
When this pattern appears in either an uptrend or a downtrend, it indicates a market reversal possibility.
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See the example for more details:
The chart above depicts how the market changed trend following the formation of the Doji candlestick.
The market was going up, indicating that buyers were in control.
The Doji candlestick appearance indicates that buyers couldn’t maintain higher prices allowing sellers to move the price down to the opening price.
It is a clear sign that a trend reversal is likely to occur.
Always recall that a Doji indicates market equality and indecision; it often appears after a massive higher or lower move.
When it appears at the bottom or top of a trend, it reveals the preceding market trend is losing strength.
If you are already riding that trend, it is time to take profits; however, it can also be used as an entry signal when combined with other technical analysis tools.
The Dragonfly Doji Pattern
The Dragonfly Doji (a bullish candlestick pattern) appears when the open, high, and close price is the same or equal.
The long lower shadow of the dragonfly Doji depicts the buyer’s resistance and endeavor to drive the market higher.
See the example:
The above illustration depicts a perfect dragonfly Doji.
The long lower shadow indicates that supply and demand forces are approaching a balance and that the trend’s movement may be closing a turning point.
The following example shows a bullish reversal signal created by a Dragonfly Doji.
In the above chart, the market was testing the previous support level, which resulted in a strong rejection from this area.
The Dragonfly Doji formation with the long lower tail shows a strong buying pressure in the area.
You will be able to see where support and demand are on your chart if you can recognize this candlestick pattern.
It is seen as a bullish reversal signal when it appears during a downtrend.
However, remember that you cannot trade candlestick patterns alone; you will also need other indicators and tools to identify the high possibility of Dragonfly Doji signals in the market.
The Gravestone Doji
The Gravestone Doji is the bearish counterpart to the dragonfly Doji, formed when the open and close prices are the same or near.
The long upper tail of the Gravestone Doji distinguishes it from the Dragonfly Doji.
The appearance of a long upper tail indicates that the market is approaching a supply or resistance area.
See the following example:
The image above depicts an ideal Gravestone Doji. It indicates that buyers drove the prices significantly higher than the open.
Then sellers flooded the market later, causing the price to fall again.
It is also a sign that the bulls are losing momentum, and the market is preparing for a reversal.
See another example below:
Following a period of massive bullish activity, the chart above shows a Gravestone Doji at the top of an uptrend.
The formation of this candlestick pattern indicates that buyers have lost control of the market.
This pattern must appear near a resistance level for it to be reliable.
Conclusion
To interpret the gravestone Doji effectively as a trader, you will need additional information about its placement and context.
I’ll write about it in my subsequent posts.
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