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The Power of Japanese Candlestick Charts by Fred K. H. Tam
Note: This is the largest chapter in Part I (~40 named patterns across four sub-categories). This guide is organized to mirror the book’s own structure — Single, Double, Triple, and Multiple Candlestick Patterns — so you can study it section by section, the same way the chapter is built.
1. Core Concept & Theoretical Foundation
Primary objective of this chapter: To catalog the full family of Japanese candlestick reversal patterns — formations that signal a trend change is underway — and to give each one a formal, repeatable structure: a Pattern Description, Rules of Recognition, an Interpretation, and a Proper Action (with precise stop-placement rules). This chapter is the book’s core reference catalog, building directly on the single-candle vocabulary from Chapters 2–3.
Foundational theory — Reversal vs. Continuation: Chart patterns fall into two categories:
- Reversal patterns signal that a trend (short or long term) is changing direction.
- Continuation patterns (covered in Chapter 5) signal the market is only pausing — overbought/oversold — before the prior trend resumes. A trader’s job is to distinguish between the two as early as possible and trade in the direction of the eventual breakout.
East vs. West — a numbers argument for candlesticks: The author makes a direct comparative claim: Western charting theory identifies essentially three short-term reversal patterns (key reversal day, two-day key reversal, inside day), while Japanese candlestick theory has more than 50 reversal pattern types, with at least 8 found frequently across all financial markets. The chapter includes a mapping table showing Japanese equivalents for each Western pattern (e.g., “key reversal day” ≈ Bullish/Bearish Engulfing; “inside day” ≈ Bullish/Bearish Harami) — reinforcing the Chapter 1 argument that candlesticks are simply a richer, more granular vocabulary for the same underlying price behavior.
Two conditions that make reversal patterns reliable (stated up front, and implicitly assumed for every pattern below):
- Best after a sharp move. Reversal patterns are most accurate when spotted after a sharp rally or decline (roughly 5–15 price cycles/bars) — i.e., candlestick reversal signals are best suited to catching V-shaped or Spike Tops/Bottoms, not gradual rounding turns.
- Best at extremes. A pattern is more reliable at a low price area (Western oscillators like RSI, Stochastic, Momentum, or Williams %R are oversold, or a prior support level exists) or a high price area (oscillators overbought, or a prior resistance level exists). This is the book’s first explicit preview of the “filtering” approach fully developed in Part II.
Underlying market psychology (the throughline across all ~40 patterns): Every pattern is, at its core, a story about a battle between bulls and bears — who attempted a counterattack, whether it succeeded, and whether the opposing side is now exhausted. The same handful of psychological beats recur throughout the chapter: “counterattack,” “exhaustion,” “indecision,” and “confirmation of failure/success.”
2. Key Terms & Definitions
Universal structural template (applies to every pattern in this chapter)
| Element | Meaning |
|---|---|
| Pattern description | The plain-language “shape” of the formation. |
| Rules of Recognition | The exact, numbered construction criteria a formation must meet. |
| Interpretation | What the pattern implies about bull/bear psychology. |
| Proper action | The specific buy/sell rule, including where confirmation is (or isn’t) required. |
| Confirmation candle | An additional candle (often labeled candle 3, 4, or 5) whose close beyond the pattern’s high/low validates the signal before entry. |
| Buy-stop / Sell-stop | Protective stop orders placed beyond the pattern’s extreme in case the anticipated reversal fails and the prior trend resumes. |
Japanese terminology introduced this chapter
| Term | Meaning |
|---|---|
| Tsutsumi | “Engulfing” — the Japanese name for the Engulfing pattern; Western equivalent is “outside day.” |
| Kirikomi | “A cutback or switchback” — the Japanese name for the Piercing Line. |
| Kabuse | “To get covered/hang over” — the Japanese name for Dark Cloud Cover. |
| Yorikiri | A sumo term (“pushing your opponent out of the ring while holding his belt”) — the Japanese name for Belt-Hold Line. |
| Kenukizoko / Kenukitenjo | Japanese names for Tweezers Bottom / Tweezers Top. |
| Aka sanpei | Japanese name for Three White Soldiers. |
| Sanba garasu | Japanese name for Three Black Crows. |
| Aka sansei shian boshi | Japanese name for the Deliberation (Stalled) pattern. |
| “Stomach is 80% empty / full” | Japanese trading expression equivalent to the Eight-to-Ten New Record Lows/Highs exhaustion signal. |
Full Pattern Index (Bullish ↔ Bearish pairs, as tabulated in the book)
Single Candlestick Patterns
| Bullish | Bearish |
|---|---|
| Spinning Top (after decline) | Spinning Top (after rally) |
| Hammer | Hanging Man |
| Inverted Hammer | Shooting Star |
| Doji at the Bottom | Doji at the Top |
| Bullish Meeting Line | Bearish Meeting Line |
| Bullish Belt-Hold Line | Bearish Belt-Hold Line |
Double Candlestick Patterns
| Bullish | Bearish |
|---|---|
| Bullish Engulfing | Bearish Engulfing |
| Fred Tam’s White Inside Out Up | Fred Tam’s Black Inside Out Down |
| Piercing Line | Dark Cloud Cover |
| Thrusting Line | Incomplete Dark Cloud Cover |
| Bullish Harami | Bearish Harami |
| Bullish Harami Cross | Bearish Harami Cross |
| Homing Pigeon | Bearish Homing Pigeon |
| Tweezers Bottom | Tweezers Top |
Triple Candlestick Patterns
| Bullish | Bearish |
|---|---|
| Doji-Star at the Bottom | Doji-Star at the Top |
| Three-River Morning Doji-Star | Three-River Evening Doji-Star |
| Abandoned Baby Bottom | Abandoned Baby Top |
| Three-River Morning Star | Three-River Evening Star |
| Tri-Star Bottom | Tri-Star Top |
| Breakaway Three-New-Price Bottom | Breakaway Three-New-Price Top |
| Bullish Black Three Gaps | Bearish White Three Gaps |
| Three White Soldiers | Three Black Crows |
| — | Advance Block |
| — | Deliberation |
| — | Upside Gap Two Crows |
Multiple Candlestick Patterns
| Bullish | Bearish |
|---|---|
| Concealing Baby Swallow | — |
| Ladder Bottom | — |
| Tower Bottom | Tower Top |
| Eight-to-Ten New Record Lows | Eight-to-Ten New Record Highs |
(Note the pattern: nearly every bullish formation has a named bearish mirror, except a handful in the triple/multiple categories that the author notes are either rare in their opposite form or simply undocumented in traditional Japanese texts as a pair — e.g., Advance Block, Deliberation, and Upside Gap Two Crows have no standard bullish equivalents; Concealing Baby Swallow and Ladder Bottom have no standard bearish equivalents.)
3. Anatomy, Rules, & Construction Mechanics
(Given the volume of patterns, this section groups them by family and gives the core recognition rule for each. Where two patterns are exact mirror images, only the bullish version’s mechanics are detailed — the bearish version is a colour/direction flip.)
A. Single Candlestick Patterns (pp. 70–87)
- Spinning Top: Small real body (white or black) with upper and lower shadows longer than the body. Neutral in consolidation; a bottom signal after a decline, a top signal after a rally. Special transformations: a Spinning Top that gaps away from the prior candle becomes a Star; combined with the candle before it, it can become an Evening Star, Morning Star, Harami, or Homing Pigeon depending on colour and gap direction.
- Hammer / Hanging Man / Inverted Hammer / Shooting Star: Formal “Rules of Recognition” restated from Chapter 3 (small body, shadow ≥2x body, minimal opposite shadow, colour unimportant) — now paired with explicit 3-candle confirmation diagrams and stop-placement rules (see Section 4).
- Doji at the Bottom / Top: A doji following a long candle in the direction of the trend. A doji nested within the prior candle’s real body is a Harami Cross; a doji that gaps away from the prior real body is a Doji-Star.
- Bullish/Bearish Meeting Line: A long candle followed by an opposite-coloured candle that gaps against the trend on the open but rallies/declines to close at the exact same price as the first candle’s close. Distinguished from the Piercing Line/Dark Cloud Cover by not penetrating into the first candle’s real body at all — a weaker signal.
- Bullish/Bearish Belt-Hold Line (“Opening Bozu”): A candle that opens at its low (bullish) or high (bearish) with no shadow on that end, then closes strongly in the opposite direction against the prevailing trend.
B. Double Candlestick Patterns (pp. 90–119)
- Bullish/Bearish Engulfing: Second day’s real body completely engulfs the first day’s opposite-coloured real body (shadows don’t matter). Rated the most bullish/bearish of all two-candle reversal patterns.
- Fred Tam’s White Inside Out Up / Black Inside Out Down (the author’s own named pattern): A variation on the Engulfing pattern — the second day’s real body opens within the first day’s real body (not gapping beyond it) but still closes beyond the first day’s open, partially engulfing it. Interpreted as nearly as strong as a full Engulfing pattern.
- Piercing Line / Dark Cloud Cover: Second day’s real body penetrates at or beyond the midpoint of the first day’s opposite-coloured real body. This midpoint threshold is the defining rule.
- Thrusting Line / Incomplete Dark Cloud Cover: The “failed” or weaker version of the above — second day’s close penetrates back into the first candle’s body but does not reach the midpoint. Explicitly weaker/less reliable than Piercing Line/Dark Cloud Cover.
- Bullish/Bearish Harami: A long candle followed by a small opposite-coloured candle whose real body sits entirely inside the first candle’s real body. Western equivalent: “inside day.”
- Bullish/Bearish Harami Cross: Same as Harami, but the second candle is specifically a doji nested inside the first candle’s real body — considered a stronger indecision signal than an ordinary Harami.
- Homing Pigeon / Bearish Homing Pigeon: Like a Harami, but both candles share the same colour (e.g., two black candles in a downtrend, second’s small body nested in the first’s). The bearish version (two same-coloured white candles after a rally) is explicitly noted as the author’s own addition — not found in traditional Japanese texts, and described as rare.
- Tweezers Bottom / Top: Two (or more) candles with matching lows (Bottom) or matching highs (Top) — the shape/colour of the candles is irrelevant; only the matching price level matters.
C. Triple Candlestick Patterns (pp. 119–156)
- Doji-Star at the Bottom/Top: A long candle followed by a doji that gaps away from it. A warning sign requiring a third confirming candle.
- Three-River Morning/Evening Doji-Star: What a Doji-Star becomes when the third candle does not leave an island gap (its shadow overlaps the doji’s shadow).
- Abandoned Baby Bottom/Top: What a Doji-Star becomes when the third candle’s shadow does not overlap the doji’s shadow at all, leaving a true gap “island” on both sides of the doji — a rare, dramatic pattern (Western equivalent: “island reversal”).
- Three-River Morning/Evening Star: Same three-day logic as the Doji-Star family, but the middle candle is a small-bodied Spinning Top rather than a strict doji.
- Tri-Star Bottom/Top: Three consecutive doji candles, with the middle one gapping away from both neighbors. Described as very rare and indicative of extreme market exhaustion.
- Breakaway Three-New-Price Bottom/Top: A 5-day pattern — a down-gap (or up-gap) followed by 3 small candles each making progressively lower lows (or higher highs), reversed on day 5 by a candle that closes back beyond the third gap.
- Bullish Black Three Gaps / Bearish White Three Gaps: Four same-coloured candles gapping consecutively away from each other in a trend, followed by a 5th opposite-coloured candle that reverses and closes the third gap — read as a sign of trend exhaustion after “three gaps.”
- Three White Soldiers / Three Black Crows: Three consecutive same-coloured candles, each closing progressively higher (or lower), each closing near its own high (or low).
- Advance Block (bearish only): A derivative of Three White Soldiers where the 2nd and 3rd candles show weakening closes and longer upper shadows — a warning sign hidden inside an apparently bullish 3-candle run.
- Deliberation / Stalled Pattern (bearish only): Another Three-White-Soldiers derivative — two strong white candles followed by a third candle with a small real body (Spinning Top), signalling bulls are “deliberating,” losing conviction.
- Upside Gap Two Crows (bearish only): A long white candle followed by two black candles that gap above it — the second black candle closes back into (or below the midpoint of) the first white candle’s body.
D. Multiple Candlestick Patterns (pp. 156–167)
- Concealing Baby Swallow (bullish only): Four black candles in a downtrend — two Black Marubozu days, then a Black Inverted Hammer, then a candle that gaps up but falls back to fully engulf the prior day, viewed as a “selling climax.”
- Ladder Bottom (bullish only): Similar concept to Concealing Baby Swallow — 4 long black (preferably Marubozu) candles followed by a 5th white reversal candle; distinguished from Concealing Baby Swallow mainly by the shape of candles 3–4.
- Tower Bottom / Tower Top: A variable-length pattern (3–6 candles) — a long candle (or candles) in the trend direction (“left tower”), a period of small-bodied consolidation candles, then a long candle in the opposite direction (“right tower”). Named for the visual “towers” formed on both ends.
- Eight-to-Ten New Record Lows / Highs: A pattern based purely on counting — 8 to 12 consecutive candles each making a new low (or high) versus the candle immediately before it. Interpreted through the Japanese exhaustion metaphor “the stomach is 80% empty/full.”
4. Practical Trading Application
The single most repeated mechanical rule in this chapter — the 3-candle confirmation structure: For the majority of patterns, the author uses a consistent numbering convention (candle 1, 2, 3…) where:
- Buy signal: the confirmation candle must close above the highest high of the pattern’s prior candles.
- Sell signal: the confirmation candle must close below the lowest low of the pattern’s prior candles.
- Protective stop in case of failure: place a sell-stop below the lowest low (for a bullish setup) or a buy-stop above the highest high (for a bearish setup) of the pattern’s candles, in case the prior trend resumes instead of reversing.
Patterns that explicitly require NO confirmation (aggressive-trader exceptions):
- Bullish/Bearish Engulfing and Fred Tam’s White Inside Out Up / Black Inside Out Down — the author states these are strong enough to act on immediately for the aggressive trader, though a bullish/bearish confirmation candle is still “suggested” for the conservative trader.
- Bullish Black Three Gaps / Bearish White Three Gaps — no confirmation required once the 5th candle fills/closes the third gap.
- Three River Morning/Evening Star & Doji-Star — confirmation is conditionally skipped if candle 3 already closes beyond candles 1 and 2; otherwise wait for a 4th confirming candle.
Midpoint-based thresholds (a distinct sub-rule family):
- Piercing Line / Dark Cloud Cover require the second candle to close at or beyond the midpoint of the first candle’s real body.
- Thrusting Line / Incomplete Dark Cloud Cover are explicitly the failed version — same setup, but the close does not reach the midpoint, making them weaker signals than their Piercing Line/Dark Cloud Cover counterparts.
Location-based reliability (repeated for essentially every pattern): Every single pattern in this chapter is explicitly framed as being far more reliable when it appears after a sharp move and/or at a price extreme confirmed by an oscillator (RSI, Stochastic, Momentum, Williams %R) or a prior support/resistance level — this is the direct practical extension of the “best time to rely on reversal patterns” principle from Section 1 of this guide.
Risk management via stop-tightening (unique to Eight-to-Ten New Record Lows/Highs): As the count of consecutive new lows/highs builds past 8, the author instructs traders to progressively tighten stops (raise buy-stops as new lows accumulate; lower sell-stops as new highs accumulate) in anticipation of an imminent reversal — a rare example in this chapter of a dynamic, count-based risk rule rather than a static stop level.
Take-profit guidance (unique to Advance Block / Deliberation): Unlike most patterns which frame the “proper action” purely as new entries, these two bearish patterns are explicitly framed partly as a profit-taking signal for existing bulls — “sell and take profits on the third candle,” reflecting their role as early warnings inside an otherwise bullish run rather than clean new short setups.
5. Active Recall Quiz
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According to the chapter, roughly how many reversal pattern types does Japanese candlestick theory recognize compared to Western charting theory’s three short-term patterns — and what two Western/Japanese pattern pairs does the author explicitly map to each other (e.g., “key reversal day” ≈ ?)?
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Explain the structural difference between a Piercing Line and a Thrusting Line. Both involve a second candle penetrating back into the first candle’s real body — what single measurable threshold separates the “success” pattern from the “failure” pattern?
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A Harami, a Harami Cross, and a Homing Pigeon all involve a small second candle nested inside a larger first candle’s real body. What is the one structural difference that separates each of these three patterns from the other two?
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What is the defining difference between a Doji-Star, a Three-River Morning/Evening Doji-Star, and an Abandoned Baby pattern — all of which begin with a long candle followed by a gapping doji? (Hint: it depends on what the third candle does relative to the doji’s shadow.)
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For most 3-candle reversal patterns in this chapter, what specific price level must the confirmation candle close beyond to trigger a valid buy or sell signal, and where should the corresponding protective stop (buy-stop or sell-stop) be placed?