Master the Types of Trading Candles: Key to Professional Technical Analysis

Why Are Japanese Candles Fundamental?

If you’re exploring technical analysis in financial markets, you need to understand that there are three main approaches: technical, fundamental, and speculative. The first relies entirely on charts and indicators; the second studies economic, political factors, and reports; the third, although less recommended, tries to predict movements without solid fundamentals. Among those practicing technical analysis, mastering Japanese candlestick patterns is almost mandatory, as they form the foundation of modern chart trading.

Japanese candles originated in rice trading in Dojima during Japan’s feudal period, but their application in Western financial markets revolutionized how traders visualize price behavior. They are graphical representations that show four critical data points in each period: open, high, low, and close (OHLC).

Basic Structure: Understanding What Each Candle Communicates

Each candle consists of two visual elements: the body and the wicks. The body represents the range between open and close, while the upper and lower wicks indicate the extremes reached during that period.

The color of the candle is your first clue: generally green or white indicates bullish movement (close above open), while red or black signals bearish (close below open). However, what happened is less important than how it happened.

Let’s take a practical example. A daily candle of EUR/USD might show an open at 1.02704, a high at 1.02839, a low at 1.02680, and a close at 1.02801, recording a gain of 0.10%. But if you only looked at a line chart based on closing prices, you would miss crucial information about intraday volatility represented by those wicks.

The Main Types of Trading Candles Explained

Engulfing Candle: The Change of Guard

This pattern consists of two candles of opposite colors where the second “engulfs” the first completely, surpassing both its open and close. It suggests that market control has shifted hands, warning of possible trend reversals.

Imagine a strong bullish trend represented by a large green candle. Suddenly, a much larger red candle appears, completely engulfing it. Sellers took control with such force that they not only stopped buyers but reversed the direction entirely. When this confluence occurs with other support or resistance levels, it creates solid opportunities.

Doji: Pure Indecision

The Doji candle is unmistakable: almost no body with long wicks on both sides, resembling a cross. This occurs when open and close are nearly identical, despite significant price fluctuations during the period.

What does it tell us? That buyers and sellers were in perfect balance. The price went up, down, moved around, but no one gained control. It’s a neutral signal that requires contextual analysis of previous candles to draw useful conclusions. In Bitcoin, observing Dojis on daily timeframes can indicate important turning points.

Spinning Top: Doji’s cousin with visible body

Very similar to the Doji but with a slightly more pronounced body, the Spinning Top also reflects market uncertainty. The difference lies in a bit more separation between open and close, though without decisive movement.

The length of the wicks in a Spinning Top indicates something fascinating: the longer they are, the greater the volume of transactions and the intensity with which investors tried to move the price in both directions.

Hammer: The Voter Rebound

The Hammer is a candle with a small body and an extremely long wick in one direction (generally upward in a bullish context). Visualize: buyers pushed the price higher during the period, but sellers regained control, forcing a much lower close.

This indicates that after a strong move in one direction, the opposite direction gained strength. In previous bullish markets, a Hammer suggests sellers are gaining ground and a reversal could be near.

Hanging Man: The Hammer with a history

Here, context is everything. Technically, a Hanging Man has the same structure as a Hammer: small body and long wick. The crucial difference: which candles preceded it.

If the Hammer appears after bullish candles, it signals the end of the uptrend. If the Hanging Man appears after bearish candles (with the same visual structure), it indicates the end of the downtrend. The same candle says completely different things depending on its historical context.

Marubozu: Power without interference

The Japanese term “Marubozu” literally means “bald,” referring to candles with absent or minimal wicks. Here, the body is massive, occupying almost the entire range of the period. This communicates something powerful: a direction was completely dominated without significant retracements.

A bullish Marubozu (green) after testing resistance indicates that buyers have full control. A bearish Marubozu (red) after touching support shows sellers in command. The larger the body, the stronger the trend.

Practical Application: From Theory to Trading

Accurate Support and Resistance Identification

The true power of candle trading patterns emerges when you use them to identify critical levels. Consider EUR/USD where traders identify support at 1.036. By analyzing candlestick charts, you can see how the price tests this level three times, wicks extend downward but the close remains above, creating clear visual rejection.

A line chart (based solely on closing prices) might not even mark this support. The wicks reveal the real battle at these levels.

Combining Candles with Other Tools

Professionals never trade based on a single candle pattern. The correct strategy seeks confluences: an Engulfing candle coinciding with a Fibonacci level, a Marubozu touching identified resistance, a Doji at key support. Three aligned signals build conviction. One alone creates illusion.

For example, a gold CFD might show a daily Engulfing candle at 1700 USD. If that level also coincides with a 61.8% Fibonacci retracement and a moving average, the confluence significantly increases the probability.

The Importance of Timeframes

A revolutionary aspect of candle analysis is scalability. A 1-minute candle has exactly the same structure as a 1-month candle: OHLC. But here’s the interesting part: that 1-hour candle is composed of 4 candles of 15 minutes, which in turn contain 3 of 5 minutes each.

When you observe an hourly candle with an extremely long wick upward but a red (bearish) close, you might wonder what happened. Breaking it down into 15-minute segments clarifies the story: the first 15 minutes were bullish, the next continued upward (there’s the high), but in the last two 15-minute periods, the price collapsed, resulting in a red overall close. Buyers initially had control, but sellers recovered with such force that they offset everything.

Wicks in higher timeframes are especially revealing because they contain all that activity multiplied.

Skill Training and Development

The Demo Account Is Your Laboratory

Beginners often make a common mistake: trying to trade before fully understanding what each formation communicates. Before risking real capital, spend weeks or months analyzing on demo accounts. Observe candles across different assets: Forex currencies, cryptocurrencies like Bitcoin, commodities, stocks.

Visual Training Is Crucial

Studying theory is just the beginning, but training your eye is mastery. Look at past charts identifying patterns. Did that Hammer result in a reversal or was it a fake? Did that Doji allow predicting the next move? With consistent practice, after weeks your analysis speed will improve exponentially.

Analysis Without Operational Pressure

Here’s the secret: you can analyze without trading. In fact, professionals constantly analyze even if they only take occasional trades. It’s like a professional footballer who trains 3 hours daily but only plays 90 minutes on weekends. Dedicate hours daily to reviewing charts, seek confluences, take mental notes.

When you finally identify a clear confluence (multiple aligned signals), only then will you open a position. Wait for it to fully develop. You won’t need another trade until you see how the previous one ended.

Summary: Your Path to Mastery

Complete technical analysis combines Japanese candles with fundamental analysis and additional tools. With knowledge of how candle trading patterns work, you already understand the fundamentals. Each Marubozu will tell you about trend strength. Each Doji will warn you about indecision. Each Engulfing will alert you to imminent changes.

The competitive advantage comes from context: understanding what each pattern means, recognizing confluences, trading only in high-probability scenarios. Expert traders can make decisions with just one candle because they have trained for years observing how context unfolds.

Remember: higher timeframes work better than lower ones. A daily Hammer is more reliable than a 15-minute one. Patience in large markets yields more solid results than speed in small markets.

Your next step is to choose an asset that fascinates you, open a demo account, and start training. The charts will reveal their secrets as you dedicate time to them.