Essential Guide to Japanese Candlesticks

Candlestick Patterns Cheat Sheet

Author

Tobi Frenzen

Co-Author

Jason Bush

Published

October 31, 2024

Candlestick Patterns

Interactive Cheat Sheet

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1-Bar Patterns
2-Bar Patterns
3-Bar Patterns
Confirmation

Bullish
Bearish
Neutral

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The Story Behind Candlestick Charts

Ever wonder why some traders seem to read price charts like ancient scrolls? The secret might lie in those little shapes we call candlesticks - a charting style born in Japanese rice markets centuries ago. A rice merchant named Munehisa Homma noticed patterns in prices, much like farmers noticed patterns in weather. He started drawing these patterns, and without knowing it, created one of trading's most enduring tools.

Think of candlesticks as tiny stories condensed into shapes. Each one tells you about the mood swings and battles between buyers and sellers during a specific time period. It's human nature captured in geometry - fear, greed, doubt, and confidence all packed into simple forms.

The Building Blocks: Anatomy of a Candlestick

A candlestick isn't just a pretty shape on your screen - it's four price points doing a coordinated dance. The thick part (we call it the "real body") shows the opening and closing prices. When it's green or white, prices closed higher than they opened. When it's red or black, prices closed lower.

Those thin lines poking out from the top and bottom? Those are the "shadows" or "wicks" - they show the highest and lowest prices during that period. Long shadows mean wild price swings. Short ones suggest more stable trading.

What makes these little shapes so valuable? They pack a lot of data into clean, visual signals. Your brain can spot patterns in shapes faster than in columns of numbers. Plus, since they show how prices moved within a time period, they reveal clues about market psychology - who's winning the tug-of-war between buyers and sellers.

Basic Candlestick Elements

Real Body

The rectangle showing open-to-close range
Upper Wick

The line above showing the highest price
Lower Wick

The line below showing the lowest price
Color

Green/white for up moves, red/black for down moves

Getting the Most from Your Pattern Guide

Let's be honest - pattern recognition isn't about memorizing shapes. It's about understanding what those shapes tell us about market behavior. Think of this cheat sheet as your field guide to market psychology, not a crystal ball.

The Foundation: Building Your Pattern Recognition Skills

Start with the trend - every pattern sings clearer when it's in harmony with the market's main direction. Watch the size, because those large, clear patterns? They're often the ones that make real moves. And always keep an eye on volume - it's like the heartbeat of a pattern, telling you how much muscle is behind the move.

Beyond the Basic Pattern

How do smart traders verify their patterns?

They build a case, like detectives gathering evidence. First, they check if volume backs up the price action. Then they look at support and resistance levels to see if they align. Finally, they zoom out to larger timeframes - because a pattern on a 5-minute chart means little if the daily trend disagrees.

Common Pattern Traps to Avoid

Seeing patterns in every market squiggle
Trading without checking market context
Jumping in before patterns complete
Turning a blind eye to conflicting signals

Remember

These patterns show up again and again because we humans are creatures of habit. The market is just a massive crowd of people making decisions based on fear and greed. Stay cool, keep your analysis clean and simple, and always let the market confirm your hunches before putting money on the line.

Pro Tip

Time your trades like a surfer times waves. Wait for the pattern to form, confirm with other indicators, then ride the move when everything lines up.

Market Psychology Behind Candlesticks

Behind every candlestick pattern lies a story of human emotion. Each wick and body captures a moment where hope meets fear, where greed dances with panic. These aren't just shapes on a chart - they're snapshots of mass psychology playing out in real time.

Man thinking on front of screens showing candlestick charts

The Emotional Price Tag

When prices shoot up rapidly, you're not just seeing numbers climb - you're watching fear grip the market. FOMO (fear of missing out) kicks in, buyers rush in, and suddenly that candlestick stretches upward like a runner at full sprint. But what goes up too fast often comes down just as quickly when exhaustion sets in.

Reading the Market's Mood

What does a long upper wick tell us?

It reveals rejected optimism - buyers pushed prices up but couldn't hold them there. The market tried to rally but ran out of steam.

And those hammer patterns at the bottom of downtrends?

They show the moment when sellers exhausted themselves. Like a boxer who's punched themselves out, the bears finally step back and bulls start stepping in.

Understanding Market Momentum

Strong bodies with small wicks

Confident moves
Long wicks

Uncertainty and fighting
Gaps between candles

Sudden mood shifts
Tight ranges

Indecision or calm before storms

Remember this truth about markets

They're powered by two primal forces - fear and greed. When you understand these emotions, patterns stop being abstract shapes and start telling clear stories about market psychology.

Trading Tip

The best trades often come when you spot the disconnect between price action and emotion. When everyone's panicking but the candles show strength? That's your moment.

Trading Context Matters

Patterns don't exist in a vacuum - they live and breathe within larger market movements. Each pattern plays its part in a bigger story, from tiny 5-minute ripples to massive monthly waves. The magic happens when multiple timeframes align, telling the same story from different angles.

Rising chart superimposed with an hourglass

The Time Game

Trading without checking multiple timeframes is like reading single sentences from different books. A bullish pattern on a 5-minute chart means little when the daily trend points down. Your odds improve dramatically when patterns line up across different time windows.

Reading the Market's Mood

Did you know?

Professional traders often check at least three timeframes before making trades. They start with their target timeframe, then look one level higher for trend context and one level lower for precise entries.

Did you know?

Markets spend roughly 70% of their time moving sideways in ranges between support and resistance levels. The real profit opportunities often come from spotting the other 30% - when these ranges break.

Volume: The Truth Serum

Volume reveals the muscle behind price moves. Big volume on breakouts suggests conviction, while low volume hints at weakness. Think of volume as the market's lie detector - it shows whether other traders really believe in a price move.

Reality Check

Support and resistance levels are like invisible walls where price bounces have happened before.

The more times price has reversed at a level, the stronger that wall becomes.

Trading Wisdom

Great trades are like perfect storms - they need multiple factors coming together.

+ Pattern
+ Volume
+ Trend
+ Support/Resistance

= Higher Probability Trades

Getting Started with Pattern Trading

Pattern trading isn't about finding perfect setups - it's about finding good opportunities with manageable risk. The best traders start small, focusing on one or two patterns until they become second nature. Your goal isn't to catch every move, but to catch the moves you understand best.

Dos of Pattern Trading

Start with daily charts - they're cleaner and less noisy
Paper trade until you see consistent results
Focus on high-volume, liquid stocks
Keep a trading journal of your patterns
Set clear stop losses before entering trades

Don'ts of Pattern Trading

Don't trade every pattern you see
Don't skip your pre-trade checklist
Don't risk more than 1% per trade
Don't fight the main trend
Don't overtrade your account

Tools of the Trade

A good charting platform is like a chef's knife - it's your most basic and important tool. Popular choices include TradingView for its clean interface and TD Ameritrade's ThinkOrSwim for its robust features. Both offer solid candlestick charting and pattern recognition tools.

The Money Game

Risk management isn't the exciting part of trading, but it's what keeps you in the game long term. Smart traders know that protecting their capital matters more than finding perfect patterns. They size their positions small enough to sleep well at night, use stops religiously, and never bet the farm on a single setup.

Trading Truth

The goal isn't to trade perfectly - it's to trade well enough to be profitable over time. Start small, stay consistent, and let your edge play out over many trades.

The Essential Pattern Playbook

Here's the thing about candlestick patterns - you don't need to memorize them all. You just need to master the ones that consistently tell the clearest stories.

The Heavy Hitters: Most Reliable Patterns

Hammer/Hanging Man

The market tries to push down but fails
Engulfing Patterns

One side completely overpowers the other
Morning/Evening Stars

The market pauses, then reverses
Doji

Perfect indecision, often leading to sharp moves

Pattern Confirmation Checklist

Pattern forms in the direction of the larger trend
Volume supports the pattern's story
Price is near a support or resistance level
Multiple timeframes show alignment
No major news events conflict with the setup

IfThen Pattern Scenarios

If pattern forms at support

Higher probability of bullish move
If volume spikes on pattern completion

Stronger confirmation
If larger trend matches pattern

Better success rate
If multiple patterns cluster

Stronger signal
If pattern fails

Quick exit, small loss

Did you know?

The most profitable traders often use simple patterns but pay extra attention to market conditions and risk management.

The Market Conditions That Matter

General Conditions:

Indicators of Pattern Strength

Trading volume is above average
Price is at proven support/resistance
Multiple timeframes align
Sector trends support the move
Market breadth confirms direction

Bullish Signs:

Quick Signal Reference for Bulls

Long lower wicks
White/green real bodies
Gaps up with volume
Support holds after tests

Bearish Signs:

Quick Signal Reference for Bears

Long upper wicks
Black/red real bodies
Gaps down with volume
Resistance holds after tests

Remember

Risk management beats pattern perfection every time. The best pattern in the world means nothing without proper position sizing and stop losses.

FAQs

Frequently Asked Questions

How reliable are candlestick patterns, really?

Like weather forecasts, patterns suggest probabilities, not certainties. The best patterns work about 60-70% of the time when properly confirmed with other indicators. But here's the cool part: even being right 60% of the time can lead to profitable trading when you manage your risk well.

Which patterns should beginners start with?

Start with the simple, high-probability patterns like hammers, engulfing patterns, and doji stars. These basic patterns show up often and tell clear stories about market psychology. Master these before moving to complex patterns.

How do I know if a pattern is valid?

Look for the three C's: Context (overall trend), Confirmation (supporting indicators), and Common sense (does the volume match? Are there major news events?). A pattern is only as good as its supporting evidence.

What timeframe works best for pattern trading?

Daily charts offer the best balance of signal quality and noise reduction. But here's a secret - the best timeframe is the one that matches your personality and schedule. Day traders might use 5-minute charts, while swing traders prefer daily or weekly views.

Why do some patterns fail even when they look perfect?

Because markets aren't just patterns - they're driven by real money and emotions. Perfect patterns can fail when big players make unexpected moves or when market conditions suddenly change. This is why smart traders always use stop losses.

How long should I wait for a pattern to confirm?

Give it one to two candles after the pattern completes. Quick confirmation suggests strong momentum, while delayed confirmation often leads to weaker moves. But don't wait too long - old patterns are like old news.

Candlestick Patterns Cheat Sheet

Anatomy of a Bullish Candlestick

Basic Elements of a Bullish Candle

Bullish Candle Diagram

Anatomy of a Bearish Candlestick

Basic Elements of a Bearish Candle

Bearish Candle Diagram

Candlestick Patterns

Free Candlestick Patterns Cheat Sheet

Downloadable Worksheet

Doji

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Long-Legged Doji

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Spinning Top

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Hammer

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Inverted Hammer

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Dragonfly Doji

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Bullish Spinning Top

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Bullish Marubozu

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Shooting Star

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Hanging Man

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Gravestone Doji

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Bearish Spinning Top

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Bearish Marubozu

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Bullish Kicker

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