Japanese candlestick patterns are the modern-day version of reading stock charts. Bar charts and line charts have become antiquated. Candlesticks have become a much easier way to read price action, and the patterns they form tell a very powerful story when trading. Japanese candlestick charting techniques are the absolute foundation of trading. They tell the important story of support and resistance, and that’s the most important part of trading. Buy low and sell high.
Table of Contents
How Do You Read Candlestick Patterns and Charts?
Best Candlestick Books
- The Candlestick Course by Steve Nison
- Japanese Candlestick Charting Techniques by Steve Nison
- Technical Analysis From A-Z by Steven Achelis
You can buy these books here.
Magic Eye
Have you ever been looking at how to read candlestick charts and felt like there was a piece of the trading puzzle missing? Stock trading isn’t easy. However, you can learn some important things to make it less complicated.
Stock patterns are the first line of defense in trading. Technical analysis, such as moving average lines, RSI, and MACD trading, wouldn’t mean anything without them. Therefore, you must learn how to read candlesticks charts first!
Thanks to a 17th-century rice trader named Homma, we have candlestick charts. He saw that there was a correlation between emotion and supply and demand. As a result, he wanted to come up with a way to track it, and that’s how we got candlesticks.
Reading candle charts becomes much like those Magic Eye pictures back in the day, where you would have to adjust your eyes to see the picture within the picture. It took a while to see the big picture, but when you did, the reward was worth it. It’s the same with candlesticks charts.
Obsession
Candlestick charts are very frustrating to learn when you’re first getting started. You’re going to have to look at a ton of charts before these patterns are going to start to make sense.
But…if you give them the time they deserve, they will eventually start to jump right out at you, and it’s such a great feeling once that happens. You’ll start seeing these patterns in everyday life, not just on stock charts.
You’ll start to become obsessed with them. You’ll start to dream about them at night. We’re not kidding, haha. But this is when trading will start to become fun. Stock patterns are everything when it comes to trading. You’ll see and thank us later for teaching you how important they are when trading.
Study
You wouldn’t bring your car to a mechanic who didn’t study and learn how to work on cars properly. That would cost you a lot of money and maybe even cause you to buy a new car.
You trust that your mechanic, doctor, repairman, or woman has had the proper training. In this case, trading demands the same level of respect and study. Think about it. You’re taking the money you worked hard to earn and trying to grow it into something bigger. As a result, you can’t just “wing it.”
Don’t you want to be as prepared as you can be to grow your trading skills? To do that, you need tools. Our candlesticks patterns & charts, eBook, and wallpaper backgrounds are great tools to help you get started.
Wouldn’t you love to have all the major candlesticks and reversal patterns all in one place? Luckily the Bullish Bears realized what a useful tool this would be. We also created custom-made candlesticks charts and desktop wallpaper backgrounds as well.
We wrote our eBook on how to read candlesticks patterns as a simple way to study, and study you must. As a result, we created our candle chart wallpaper backgrounds to help further your knowledge by allowing these patterns to seep into your subconscious when you look at them daily on your computer.
Bulls vs. Bears
The more you stare at this stuff and let it sink in, the more familiar it will become. Stock trading is a tug-of-war between the bulls and the bears. Some days the bulls win; some days, the bears win. That being said, this battle is the foundation and essence of stock training.
As a result, candlestick patterns are needed to let traders know who’s in control. Our candlestick eBook has the major patterns and candlesticks under one cover. In our trading rooms, we teach real-time charting, support and resistance, and how to read candle charts.
Since our candlestick eBook is electronic, you can pull it up anywhere. We never go anywhere without our phones, right? Hence, you can pull up our eBook while waiting for an oil change or at the dentist’s office. Our eBook is so easily accessible that there’s no excuse for putting the work into learning how to read candlestick charts.
Support and Resistance
Candlestick patterns and charts form key support and resistance levels. Furthermore, these levels are important to know to manage profit and loss and entries and exits in trading. How can you buy low and sell high without knowing where the highs and lows are and where the support and resistance are?
Most new traders don’t know where to buy or sell and end up buying and selling at the wrong time. If this is you, then it’s time to stop this cycle! What’s used to form support and resistance? The real bodies and wicks of candlesticks as well as patterns. As a result, with our eBook, you can learn how to read candlestick charts and pattern meanings, as well as entries and exits, including stop areas.
Being able to read charts is critical. Patterns are always forming. When looking at a chart, it isn’t a bunch of candlesticks with no rhyme or reason. Flags, head, and shoulders, cup and handles, triangles, and wedges form. They can overlap or be separate. You can always see patterns, but you have to study. They’re not going to be perfectly noticeable every single time.
Flags
Bull and bear flags are continuation technical analysis patterns. Bull flags are bullish. Finally, you have the move-up, which is the flag pole.
It’ll trade sideways for a bit which is the flag, before continuing up. Just like a bear flag forms and then moves down. Flags are the easiest patterns to identify.
Cup and Handles
A cup and handle pattern is a bullish continuation pattern. This pattern forms with a consolidation period followed by a breakout. The cup forms a U-shaped pattern.
The handle is formed when a trading range happens. It’s the final consolidation before breaking out. Volume is needed to cause the breakout. Without volume, the pattern breaks down.
Head and Shoulders
Head and shoulders patterns are also reversal patterns. You have a left shoulder, head, right shoulder, and neckline. There is two head and shoulders pattern: inverse and top.
The top head and shoulders pattern is also known as the F you pattern. The head looks like a middle finger. This is a bearish pattern. People can get trapped in an F-you pattern because the pullbacks can look like dip buying. The neckline of a head and shoulders pattern is supported. Price is about to break below it and fall.
An inverse head and shoulders is a bullish pattern. The neckline in this pattern is resistance. When the price breaks the neckline, it goes up.
Candlestick Reversal Patterns
- Doji – indecision pattern
- Hammers – bullish reversal pattern
- Morning star – bullish reversal pattern
- Evening star – bearish reversal pattern
- Tweezer bottoms – bullish reversal pattern
- Tweezer tops – bearish reversal pattern
- Bullish harami – bullish reversal pattern
- Bearish harami – bearish reversal pattern
- Bullish engulfing – bullish reversal pattern
- Bearish engulfing – bearish reversal pattern
What is a candlestick reversal pattern? According to the Cambridge Dictionary, it is a complete change of direction, order, or position. You’ve heard that saying, “what goes up must come down,” and visa versa.
The market trades in cycles. This means stocks are also going to trade in cycles. What goes down is going to go back up. What’s up is going to go down. So they can, give us a signal of the impending reversal. You can also pair reversal chart patterns with moving averages for confirmation.
When a bullish reversal pattern like a tweezer bottom occurs, that’s a signal that you can place a trade. However, make sure you get confirmation beforehand. That way, you’re not stuck in a bear trap.
Just like when a bearish reversal happens. If you’ve been in a trade and bearish reversal chart patterns appear, you may want to consider closing out the trade.
Especially if you have profit. You never go broke taking your profits. Trying to hit it out of the park every trade is mistake traders make. Which, in turn, causes them to lose instead of win.
You must know how to trade candlestick chart reversal patterns to protect yourself. As a result, you’ll be able to find good entries and exits. We teach how to trade candlesticks each day in our trade rooms.
Falling Wedge Patterns
A falling wedge is a bullish reversal pattern. It starts wide at the top and contracts as the price moves lower. It’s a reversal pattern because the stock has been moving in a downtrend and is about to find support, reverse and head back up.
Wedge patterns typically take 3-6 months to form, but they can be found in all time frames.
Check out the textbook reversal pattern, the falling wedge, and how it played out on $JD – can you see why knowing this pattern is important if you’re a reversal trader?!
Rising Wedge Patterns
A rising wedge is a bearish pattern. It starts wide at the bottom and gets smaller as the price increases. Finally, the trading range has narrowed, and the price will begin to break down.
Check out the rising wedge reversal pattern looming with $SPY here – notice the red candle at support. The chart pattern provides a good entry at several different points along the pattern.
It’s important to remember that patterns do break down. As a result, sometimes they don’t do what you expect of them. That’s why confirmation is key. When patterns break down, they can be extra bearish or bullish, so watch for the next levels of support or resistance and be prepared.
Using technical analysis along with chart patterns can give you that confirmation. That way, you’re placing the best trade possible.
Remember that even the best traders fail 30-40% of the time. However, they learn to cut their losses quickly and get back in on a reversal pattern or find a new entry hence why chart patterns are important.
Doji Candlesticks
The Doji candlestick is one of the most important Japanese candlestick patterns. And when you see one, you be aware of potential price-action reversals. Typically they form after a bullish or bearish trend. With an extremely small body due to the same opening and closing price and long shadows, they’re hard to miss.
The opening and closing prices are the same. This signals that the market doesn’t know which direction to take. There is indecision between buyers and sellers. It means the prior trend is losing its strength, and no one controls the market. Most often or not, the price is likely to reverse if you see this after a strong upward or downward trend.
Trading Doji Candlesticks
If the previous candles are bullish, you can anticipate the next one will be a bearish reversal. Alternatively, if the previous candles are bearish, the doji will probably form a bullish reversal.
As you can see in the example, there was a strong bullish upward trend. Which means the buyers are in control of the market. After four candles, the buyers could no longer keep pushing the price higher, indecision hit in the form of a doji, the sellers came in, and we saw the wash in price moving down.
It Takes Time
Wouldn’t it be nice if learning how to read candlesticks charts was quick and easy? Well, unfortunately, it isn’t. However, we’ve made it as easy as possible to learn. Regardless, it’s not an exaggeration to say you must study for many hours!
Therefore, our candlestick charts eBook is a tool for that purpose. It’s written in a way that’s simple and easy to understand. Reading our candlestick charts eBook helps equip you as a trader. Did you know that 90% of traders give up and quit? Why is that? They didn’t take the time to study. They didn’t learn to crawl before they walked or ran.
We recommend that you use our ebook in conjunction with our courses. Our ebook and wallpapers will help bring to life what you learn in our courses. We do our best to make the process of how to read candle charts as easy as possible.
Buy and Sell
One of the reasons many new traders fail is because they want a shortcut to becoming a profitable and consistent trader. Following a trading service that tells you what to buy and sell is doing yourself a disservice. That’s why the idea for our candlesticks patterns eBook was born. Here at the Bullish Bears, we’re all about giving back and equipping our community members with the tools to become successful and independent traders.
Sure it would be easy to be like many other trading service companies and call out trades to pump up our positions. However, we love empowering new and seasoned traders with the ability to be their own “Gurus.” Self-reliance is key in this industry because you are responsible for your trading actions!
Think about it. You’re the one making the trading decisions. You’re not reliant on someone telling you what to do. You aren’t waiting on them for a signal to buy and sell.
Take Trading Seriously
Treat trading seriously and not as a hobby if you want to succeed long-term. It’s important to immerse yourself in the trading world to make it as a trader. Treat it like you would a job or start a new career. Go easy on yourself, and don’t get frustrated if it takes a while to learn how to read candle charts. That’s a normal process.
It takes looking at hundreds of charts over several months to understand candlestick charts to make sense. Don’t worry, though. After enough studying and looking at many charts, the patterns will start to jump out at you and make sense.
That’s why it’s important to download our wallpapers so that the patterns will be in your subconscious, and after enough time, they will eventually enter your brain consciously and make sense. Reading candlestick charts begins to make more sense the more that you look at the charts.
It’s like anything in life or starting a new career or profession. It takes time to learn a new skill. When starting a new education or career, it often takes a year or so to get the hang of things.
We’ve invested a lot of time into creating useful candlestick resources to help the patterns become easier to understand. We suggest swapping out our wallpapers every couple of months to keep the patterns fresh in your mind so you’ll also learn other ones.
Japanese Candlestick Charting Techniques
Japanese candlestick charting techniques are essential when day trading stocks that have parabolic moves within the same day. It’s important to understand these patterns so that you can capitalize on these quick moves in price. For example, we often see stocks massively gap up after positive news or vice versa due to negative news. Sometimes, this could be due to a merger or positive results in a cancer trial. More often than not, these spikes happen right out of the gate on the market open and last for about 30 minutes.
Take the stock GlycoMimetics (GLYC), for example. On May 19th, it opened at $12.15, and within 24 minutes, it shot up to $14.64. This was due to news regarding positive clinical trials for treating leukemia.
Notice the doji candle that formed at $14.64; coincidentally, that was the peak of the stock price for the day. Why? Because typically, anything that moves rapidly upward, the market will correct it. However, in this instance, the doji was the signal that a reversal may be taking place.
Sure enough, the next one-minute cancel peaked at $14.45, forming a new lower high. This is where you would enter your short position. You could ride this down as the stock washed to $11.40, finding new lower highs along the way.
Shorting Late Day Fades
Switching gears, let’s look at stocks that fade late in the day. We typically see late-day fades in stocks that slowly grind up throughout the day. And like clockwork, they wash somewhere between 2:00 pm and 4:00 pm.
What is nice about late-day fades is their ease of predictability. Many people can only trade during the afternoon, which means they miss the opening runners.
That’s ok because they know what goes up must come down. So, they quickly scan stocks that moved up, draw their support and resistance lines, and short these stocks if the setups are good.
Let’s look at the ticker ATI which belongs to Allegheny Technologies Incorporated, a metal fabrication company. On May 19th, it opened at $15.11, moved up, consolidated, then had a late-day push up to $16.15. Then you can see the doji forming at around 3:00 pm, followed by the wash.
Dip Buying The Morning Panic Sell Off
Another favorite pattern of traders is buying the dip after a panic sell-off at the open. Sometimes after hours negative news hits, investors get nervous, panic, and then sell off their positions.
Or, the wash on open simply could be due to short sellers covering their positions in a stock that gapped up pre-market. Alternatively, stocks that are good candidates for dip buys are those that are overextended.
When stocks have multiple green days, usually three, they will sell off if the selloff is quick and has a lot of volume, then the probability that a bounce play will occur increases.
Take the stock ZENO above. It was overextended on the 5-day, 5-minute chart and, sure enough, sold off. Then, on the 13th, ZENO had a morning panic and sell-off. Why? Because the chart was overextended.
ZENO washed to $1.40, found support, and then moved to $2.20. This would have been a great move to get in on.
Frequently Asked Questions
The best way to learn candle patterns is to study them by taking a candlesticks course or reading an eBook. Price action is the most important indicator when trading because it’s the real-time culmination of buying and selling between the bulls and the bears. Candlesticks charts and patterns take time to learn.
Candlestick patterns work, but they are not 100% foolproof. Patterns sometimes fail, but they are still the most accurate indicator when trading. Price action is an immediate indicator that is formed by candlesticks. All of the other indicators in trading are lagging and revolve around price action. Candlestick charts are the way traders determine support and resistance levels and show when to enter and exit a trade potentially.
Bull flags are the most reliable candlestick chart pattern for bullish trades and intraday trading. Bear flags are the most reliable when going short. Doji, spinning tops, hammers, and inverted hammers are reliable reversal patterns.
The two major pattern categories are known as reversals and continuations. Reversal patterns signal that the trend is about to reverse after the pattern has completed itself. Continuation patterns signify that the trend will continue once the pattern is complete. Traders use chart patterns for any trading strategy.
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