Japanese CandlesticksChapter 4

Japanese Candlesticks

Japanese candlestick charting, developed by Japanese rice traders in the 18th century and introduced to the West by Steve Nison in 1991, is the most widely used method of visualizing price action. Each candlestick shows the open, high, low, and close for a given period.

Last updated: 29 July 2026

Prerequisites

This sheet rests on the trends and support/resistance covered in "Trends, support and resistance" (ch. 2, Easy level). Understanding those levels is essential to reading candlesticks correctly, because Murphy is emphatic that a candle taken in isolation is worth nothing — only its context, trend and levels, gives it meaning.

Trends & Supports

Definition

Candlestick charts were invented in the 18th century by Munehisa Homma, a rice merchant from the town of Sakata in Japan. They were introduced to the West by Steve Nison in 1991 (Japanese Candlestick Charting Techniques) and folded into Murphy's Technical Analysis of the Financial Markets from the 1999 edition onward (chapter 12).

Each candle carries four pieces of data for a defined period (1 minute, 1 hour, 1 day, 1 week...):

The real body: the rectangle between the opening and closing price. A bullish body (green or white) means the close is above the open. A bearish body (red or black) means the close is below the open

The shadows (wicks): the thin lines above and below the body, marking the period's high and low

Murphy stresses that candlesticks give a visual account of the balance of power between buyers and sellers over a period. A long bullish body shows buyers in command; a long lower shadow shows that sellers drove price down but that buyers regained control before the close.

Why it matters

Murphy brings candlesticks into his analytical toolkit because they offer an instant reading of market psychology that bar or line charts cannot. A hammer at an identified support does not merely say "price touched this level" — it tells the whole story of the session: sellers attacked violently (the long lower shadow), but buyers absorbed all the pressure and drove price back up (the small body at the top). That narrative content is immeasurably richer than a single data point.

Murphy is equally clear, however, that candlesticks are not a complete trading system. They must always be combined with trend analysis and support/resistance.

Key points

A candlestick signal is the more reliable the closer it appears to a significant support or resistance. Murphy insists: a hammer in the middle of nowhere is worthless, while a hammer on weekly support is a high-probability signal

Confirmation is fundamental. Murphy recommends waiting for the following candle before acting on any candlestick signal. A hammer needs a bullish candle after it to be validated

Candlestick patterns on daily and weekly charts are significantly more reliable than on short timeframes (1-minute, 5-minute). Murphy advises against using candlesticks alone for intraday trading

Multi-candle patterns (engulfing, morning and evening stars) are generally more reliable than single-candle patterns (doji, hammer), because they show a dynamic confirmed across several periods

Volume strengthens a candlestick's reliability: a hammer on above-average volume is more meaningful than one on thin volume

RELIABILITY IN THE ALGORITHMIC ERA: since the rise of high-frequency trading and market-making algorithms, the intraday reliability of candlestick patterns has fallen significantly. Recent quantitative studies (Goo, Chen, Chang & Yeh, 2007, "A study of the profitability of candlestick charting in the Taiwan Stock Market", Journal of Applied Finance; Marshall, Young & Rose, 2006, "Candlestick technical trading strategies: Can they create value for investors?", Journal of Banking & Finance) find that simple candlestick patterns (doji, hammer) no longer carry statistically significant predictive power on short timeframes (1-15 minutes) in the most liquid markets (S&P 500, EUR/USD). The reason: algorithms detect and exploit these patterns within milliseconds, cancelling the edge before human traders can react. In practice, candlestick patterns remain highly reliable on daily and weekly charts, where human decisions outweigh algorithmic noise and HFT does not dominate, and particularly in less liquid markets (small caps, exotic commodities) where the human component still prevails

Concrete example

Examples

On 20 March 2023, the S&P 500 formed a striking hammer around the 3,800 support area, in the middle of the banking panic (the failures of SVB and Signature Bank). The daily candle opened at 3,934, plunged to 3,808 — the long lower shadow testing support — then closed at 3,951, leaving a small bullish body at the top. The next day a green candle confirmed the signal. The rebound that followed carried the index above 4,600 within six months. A hammer at support, inside a primary uptrend, confirmed the following day: this is the textbook case of a high-probability candlestick signal.

Common mistakes

Caution

Using candlesticks with no trend context and no support/resistance levels. An isolated doji says almost nothing; a doji after five consecutive bullish candles at resistance tells a story

Confusing the hammer with the hanging man, which are visually identical but appear in opposite contexts — the hammer after a decline, the hanging man after an advance

Acting on a signal without waiting for the confirming candle. Murphy recommends never entering a position on the signal candle alone

Over-reading candlesticks intraday: patterns are far less reliable on 1- or 5-minute charts, where market noise dominates

Practical note

Murphy

Murphy stresses that candlesticks are at their most effective when combined with classical Western analysis — support, resistance, trendlines, chart patterns. A hammer at major support, plus a trendline, plus a 61.8% Fibonacci retracement, is an extremely powerful confluence signal. This convergence of evidence is, for Murphy, the key to high-quality technical analysis.

📊 Chandeliers Japonais — Anatomie et Patterns

Market impact

Markets

Candlestick patterns are used daily by millions of traders across every market and every timeframe. Engulfing patterns and doji on the major indices draw immediate comment in the financial press and on social trading platforms. Modern trading algorithms build automatic candlestick recognition into their decision models. Signals on weekly and monthly charts carry the most weight, because they reflect the decisions of institutional participants — and, as the key points note, because that is where the patterns have retained their statistical value.

Reference