Japanese Candlesticks: Reading the Battle

In the 1700s, a Japanese rice trader named **Munehisa Homma** realized that while the supply and demand of rice were important, the *emotions* of the traders were even more critical to the price. He developed a system to visualize these emotions, which we now know as Japanese Candlesticks.

A single candlestick is a data-packed summary of a specific period (1 minute, 1 hour, or 1 day). While a simple line chart only shows you where the price ended, a candlestick tells you the story of the fight between the buyers and the sellers. It shows you who started the fight, how high they reached, how low they were pushed, and who eventually won.

1. Anatomy of a Candlestick

Every candle is composed of three parts: The **Real Body**, the **Upper Shadow (Wick)**, and the **Lower Shadow (Tail)**. Together, they represent four price points: **Open, High, Low, and Close (OHLC)**.

2. The Psychology of the Wicks

If the body tells you who won the battle, the wicks tell you about the **rejection**. Wicks are arguably more important than the bodies for a technical analyst.

• Long Upper Wick: Price went high, but sellers pushed it back down. This is a sign of **Bearish Resistance**.
• Long Lower Wick: Price fell low, but buyers stepped in and pushed it back up. This is a sign of **Bullish Support**.
• Small Body, Long Wicks: Both sides fought hard, but no one won. This represents **Indecision** (e.g., a Doji).

3. High-Probability Single Candle Patterns

You don't need to memorize 100 patterns. Master these four "power" candles first:

A. The Hammer (Bullish Reversal)

Appears at the bottom of a downtrend. It has a small body and a very long lower tail (at least 2x the body). It shows that sellers tried to crash the market, but buyers came back with massive force.
Psychology: "The floor has been found."

B. The Shooting Star (Bearish Reversal)

The opposite of a hammer. Appears at the top of an uptrend. It has a long upper wick and a small body. It shows that buyers tried to push to new highs, but failed miserably.
Psychology: "The ceiling has been hit."

C. The Marubozu (Trend Continuation)

A candle with a massive body and **no wicks**. A Green Marubozu means buyers were in control from the first second to the last. It indicates extremely high momentum.
Psychology: "Total dominance."

D. The Doji (The Pause)

The Open and Close are almost exactly the same. It looks like a cross or a plus sign. By itself, it means nothing, but after a long rally, it signals that the trend is tired and might reverse.
Psychology: "Exhaustion."

4. Sentiment Heatmap

How strong is the move? Use this chart to judge the "conviction" of the current candle.

5. Common Mistakes in Reading Candles

Reading candlesticks is easy; reading them *correctly* is hard. Avoid these three traps:

1. Ignoring Context: A Hammer in the middle of a sideways range is useless. It must occur after a significant downtrend to be meaningful.
2. Predicting, Not Waiting: Don't enter a trade the moment you see a Hammer forming. Wait for the candle to **Close**. A Hammer can turn into a Bearish candle in the last 10 seconds of a session.
3. Small Timeframes: A Doji on a 1-minute chart is noise. A Doji on a Daily chart is a powerful signal. Higher timeframes carry more "weight."

Summary of Module 2

Candlesticks are the basic alphabet of technical analysis. Once you can read them, you can start reading "sentences" (patterns).

• The **Real Body** shows the conviction of the winner.
• The **Wicks** show the rejection and the limits of the move.
• **Hammers and Shooting Stars** are your primary reversal signals.
• Always wait for the candle to **Close** before making a decision.

Now that we can read individual candles, we need to zoom out and see where they are going. Are they moving in a line? A zig-zag? In the next module, we master **Trend Analysis**.