Practical guide to interpreting Japanese candles in the crypto market

What you need to know before trading

Candlestick charts represent one of the most accessible tools of technical analysis for identifying entry and exit points in your trades. Developed centuries ago in Japan, these charts allow crypto traders to visualize price behavior over specific periods. When multiple candles align in particular sequences, they reveal patterns that suggest whether the market may rise, fall, or maintain equilibrium.

However, these patterns are never guaranteed signals. They are tools that reflect the battle between buyers and sellers. To use them effectively, you must combine them with volume, technical indicators, and rigorous risk management.

How Candle Representations Work

Imagine monitoring the price of Bitcoin over a period: an hour, a day, or a week. A Japanese candlestick visually translates these price movements.

Each candle contains:

• Main Body: the range between open and close
• Highlights (shadows): lines that mark the maximum and minimum reached

The color indicates direction:

• Green body = closing higher than opening ( bullish movement )
• Red body = close lower than open (downward movement)

This simple structure communicates a lot of information: what happened at the open, what the extremes were, and where it closed. Professional traders read this information instantly to assess whether market control is in the hands of buyers or sellers.

The most reliable bullish patterns

Hammer (Hammer)

It forms at the bottom of a downtrend with a long lower wick at least double the body. It shows that despite strong selling pressure, buyers pushed the price up at close. A green hammer is particularly relevant. This pattern suggests imminent selling exhaustion.

( Inverted Hammer Opposite to the previous one: long upper wick at the bottom of a downtrend. Indicates that the downward movement is slowing down. Sellers have gradually lost dominance, indicating that control could soon transfer to buyers.

) Three white soldiers Three consecutive green candles where each one opens within the previous one and closes higher. The lower wicks are small or nonexistent. This pattern demonstrates sustained buying pressure with no significant interruptions.

Bullish Harami

A long red candle followed by a small green candle completely contained within the body of the previous one. It develops over 2 or more periods. It indicates that the selling momentum is slowing down and a reversal is possible.

Signals of a bearish shift

Hanging man

Bearish equivalent of the hammer. It forms at the end of bullish trends with a small body and an extensive lower wick. It shows that after upward movements, significant selling pressure entered. Buyers only managed to partially recover the price. It is a point of uncertainty where the bullish momentum weakens.

Shooting star

Long upper wick, small body, minimal or absent lower wick. It forms at the peak of bullish trends. Indicates that the market reached highs, but sellers took control and lowered the price. It is especially relevant if accompanied by high volume.

Three black crows

Three consecutive red candles that open within the previous one and close progressively lower. Bearish equivalent of the three white soldiers. Without long upper wicks, it indicates that selling pressure persists without significant resistance.

Bearish Harami

A long green candle followed by a small red candle contained within the previous one. It develops over multiple periods. Typically appears after sustained bullish movements and suggests a reversal as buyers lose momentum.

Dark Cloud Coverage

A red candle that opens above the previous close ###green###, but closes below the midpoint of that candle. It is more relevant if it appears with high volume, suggesting a change in momentum from bullish to bearish.

Patterns that Confirm Continuity

( Three bullish formation method In bullish trends, three small red candles are followed by a bullish continuation. The red wicks do not exceed the previous candle. The continuation is confirmed when a large green candle appears, showing that the bulls have regained control.

) Three Bearish Formation Method Inverse to the previous one. Indicates continuity of bearish trends after a brief pause.

The doji: when there is no decision

It forms when the opening and closing are the same or almost identical. It represents pure indecision between buyers and sellers. They can be classified into:

• Gravestone Doji: bearish reversal with long upper wick
• Long-legged Doji: indecision with balanced wicks above and below
• Dragonfly Doji: possible bullish reversal with long lower wick

In volatile crypto markets, the “spinning top” ###opening and closing near but not exactly### is used interchangeably with doji.

Practical application in your operations

( Step 1: Master the fundamentals Before trading based on patterns, understand how to read them. Analyze historical charts without real risk. Do not enter the market without complete clarity.

) Step 2: Never trust a standalone pattern Combine candlesticks with:

• Moving averages for overall trend
• RSI for momentum
• MACD for confirmation
• Trading volume to validate movements
• Support and resistance levels as limits

Step 3: Analyze multiple timeframes

Do not only observe daily charts. Check what the 4-hour, 1-hour, and 15-minute charts say. The patterns you see in different timeframes can confirm or contradict your analyses.

Step 4: Non-negotiable Risk Management

Set stop-loss below identified support. Define take-profit at previous resistance. Calculate position so that risk does not exceed 1-2% of capital. Do not overtrade waiting for perfect confirmations: the market does not always provide them.

Step 5: Liquidity matters

In crypto markets with low liquidity, patterns can be misleading. Watch the volume: if you see a bullish pattern but low volume, the reversal will be weak.

What you must not forget

Japanese candlesticks reveal market psychology: who controls the price at every moment. But they do not predict the future. They are probabilistic indicators, not deterministic.

Many novice traders see a hammer at the bottom and assume it will go up. The reality: the price could continue to fall if there is no buying volume behind it. That's why a combination of tools is critical.

The correct pattern + market context + risk management = more disciplined trading. Without the three elements, patterns are just pretty observations on a chart.

Dedicate time to study how to read Japanese candlesticks in different contexts. Practice in demo. Observe how the patterns work or fail in real markets. Visual experience builds intuition that books cannot fully teach.

Patterns are only valuable if you understand what they represent: decisions made by thousands of traders buying or selling. Respect that, and the charts will speak to you more clearly.