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Learn forex candlestick patterns

Learn forex candlestick patternsBest 5 Forex Candlestick Patterns for Day Trading. Forex candlestick patterns are crucial for the success of your price action technical analysis. Along with chart patterns, traders constantly use candlestick patterns for day trading to open and close different trades. This is so because every Forex candle pattern contains a tradable potential. For this reason, I will dedicate the following material to the best 5 candle patterns Forex indicators and the way they should be traded when spotted on the chart. What are the Forex Candlestick Patterns? Forex candlestick patterns are special on-chart formations created by one or few Japanese candlesticks. There are many different candlestick pattern indicators known in Forex, and each of them has specific meaning and tradable potential. Forex traders constantly use candlestick chart patterns for day trading to foretell potential price moves on the chart. Forex candlesticks help them guess where the price will go and they buy or sell currency pairs based on what the pattern is telling them. Therefore, you should also spare time to examine the best candlestick patterns for intraday trading if you want to be a successful Forex trader. Type of Candlestick Patterns for Day Trading. There are two types of Forex candlestick patterns for day trading – continuation and reversal candle patterns. Let’s now briefly go through each of these two kinds. Continuation Forex Candle Patterns.

Continuation Forex candle patterns are the ones that come after a price move and have the potential to continue the price action in the same direction. The truth is that continuation candle patterns are not very popular in Forex trading. The reason for this is that they are not that many. In comparison to that, reversal candlestick patterns are dominating the Forex charts. Reversal Forex Candle Patterns. The reversal Forex candle patterns are the ones that come after a price move and have the potential to reverse the price action. Compared to continuation candle patterns, the reversal candle pattern indicators are the majority of the candle patterns you will meet on the Japanese candlestick charts. Best 5 Candlestick Patterns Explained with Examples. In this relation, you should not be surprised that the best 5 candlestick patterns for day trading are reversal patterns. 5 of the most profitable Forex candlestick indicators are: The Doji Family Tweezer Tops Tweezer Bottoms The Hammer Family Three Inside Ups Three Inside Downs Evening Star Morning Star. Notice that I have separated these into “families” or in their bullish and bearish versions since they refer to the same thing but upside down. Let’s now explain each of these with examples. Doji Candle Patterns.

The Doji candle family consists of single candle formations where the price action opens and closes at the same price. Every Doji candlestick symbolizes the equalization of the bearish and the bullish forces. This means that the current price trend is getting exhausted and it is likely to be reversed. The Doji Forex pattern could appear after bullish moves as well as after bearish moves. Despite that, the function of the pattern stays the same – to reverse the price action. Since the Doji candle closes at the same level where it opened, the candle looks like a dash. Yes, but this is not the only Doji candle pattern known in Forex trading. There are other Doji candlesticks too. Below you will find the most popular Doji candlestick pattern types. The confirmation of all of the Doji patterns comes when with the finish of a candle that closes in the direction that is opposite to the trend. This candle is the first indication that the reversal is beginning. Tweezer Tops and Tweezer Bottoms. The Tweezer Tops is a double candlestick pattern Forex indicator with reversal functions. The pattern comes at the end of bullish trends and signalizes about the beginning of a fresh bearish move.

The first candle of the Tweezer Top candlestick formation is usually the last of the previous bullish trend. The second candle of the Tweezer Top pattern should have an upper shadow that starts from the top of the previous shadow. At the same time, the upper shadows of the two candles should be approximately the same size. The Tweezer Tops has its opposite equivalent that is called Tweezer Bottoms. The Tweezer Bottoms Forex pattern has absolutely opposite structure. The pattern comes after price drops and signalizes upcoming bullish moves. The first candle of the Tweezer Bottom is usually the last candle of the previous bullish trend. The second candle of the Tweezer Bottom pattern should have a lower shadow that starts from the bottom of the previous shadow. At the same time, the lower shadows of the two candles should be approximately the same size. The confirmation of the Tweezer Candlesticks comes with the candle that manages to close beyond the opposite side of the pattern. This candle is a strong indication that the trend is reversing.

The Hammer candlestick pattern is a single candle pattern that has three variations depending on the trend they take part in. Every Forex candlestick that belongs to the Hammer family has a small body and a big upper or smaller shadow. At the same time, the other shadow is either missing or very small. You will guess right if you are wondering if the name of the Hammer candle family comes from the structure of the candles. The candles in the Hammer family are four, and they all have reversal character. Let me meet you with these candles now: I have shown the bullish and the bearish version of each candle. Notice that it doesn’t matter which of the two candles you will receive. The meaning is the same. Hammer Candlestick Chart Pattern. The first candle on the sketch is the Hammer candlestick chart pattern. The candle emerges during bearish trends and signalizes that a bullish move is probably on its way. The Hammer candle has a small body, a long lower shadow and a very small or no upper shadow. Traders use the Hammer candlestick to open long trades.

Inverted Hammer Candlestick Pattern. The Inverted Hammer candle has absolutely the same functions as the Hammer candle, but it is upside down. The Inverted Hammer has a small body, a big upper shadow, and a small or no lower shadow. Same as the Hammer candle, the Inverted Hammer candlestick comes after bearish moves and signalizes that a fresh bullish move might be emerging. Traders use the Inverted Hammer pattern to open long trades. Hanging Man Candle Pattern. The Hanging Man candlestick is absolutely the same as the Hammer candlestick pattern. It has a small body, a long lower shadow and a very small or no upper shadow. However, the Hanging Man Forex pattern occurs after bullish trends and signalizes that the trend is reversing. In this relation, the Hanging Man candle pattern is used by traders to open short trades.

Shooting Star Candlestick Pattern. The Shooting Star candle pattern has the same structure as the Inverted Hammer candle. It has a small body, a long upper shadow and a tiny or no lower shadow. However, the Shooting Star Forex candle comes after bullish trends and signalizes that the bulls are exhausted. As a result, a reversal and a fresh price decrease usually appear afterward. In this relation, Shooting Star candlestick chart pattern acts as a signal to short Forex pairs. The confirmation of the Hammer, Inverted Hammer, the Shooting Star and the Hanging Man comes with the candle which closes in the direction opposite to the trend. This candle is likely to be the first of an eventual emerging trend. Three Inside Up and Three Inside Down Candlestick Patterns. The Three Inside Up is another reversal candle pattern indicator that comes after bearish trends and foretells fresh bullish moves. It is a triple Forex candlestick pattern that starts with a bearish candle. The pattern continues with a bullish candle, which is fully engulfed by the fist candle, and which closes somewhere in the middle of the first candle. The pattern ends with a third candle, which is bullish and breaks the top of the first candle. The first candle of the Three Inside Up candle pattern is usually the last candle of the previous bearish trend. The Three Inside Up has its opposite equivalent – the Three Inside Down candlestick pattern.

The Three Inside Down is a mirror image of the of the Three Inside Up. It comes after bullish trends and usually begins fresh bearish moves. The Three Inside Down candlestick pattern starts with a bullish candle, which is usually the last of the previous bullish trend. The pattern continues with a second candle – a bearish one that is fully engulfed by the first candle and closes somewhere in the middle of the first candle. The pattern then continues with a third candle, which is bearish and goes below the beginning of the first candle. The confirmation of the Three Inside Up and the Three Inside Down candlestick patterns comes with the third candle that closes beyond the beginning of the first candle of the pattern. Morning Star Candle and Evening Star Candle Pattern. The Morning Star candle pattern is another three bar formation that has reversal functions. The Morning Star candlestick chart pattern comes after bullish trends and signalizes eventual price reversal. The pattern starts with a bullish candle that is long, and it is usually the last candle of the previous bullish trend. Then it continues with a very small candle that could sometimes even be a Doji star, and it is possible that this candle sometimes gaps up. The third candle of the pattern is bearish and goes below the middle point of the first candle, and it could also gap down from the second candle. The opposite equivalent to the Morning Star Forex figure is called Evening Star candlestick pattern. The Evening Star Forex figure is a mirror version of the Morning Star that comes after bearish trends and signalizes their reversal. The Evening Star candle pattern starts with a bearish candle that is long, and it is usually the last candle of the previous bearish trend.

Then it continues with a very small candle that could sometimes even be a Doji star, and it is possible that this candle sometimes gaps down. The third candle of the pattern is bullish and goes above the middle point of the first candle of the pattern. It could also gap up from the second candle. The confirmation of the Morning Star and the Evening Star candlestick reversal patterns comes with the end of the third candle. If the pattern emerges meeting the requirements of the three candles then you can trade in the respective direction. Best Forex Candlestick Patterns Cheat Sheet. I have created a simple candlestick pattern cheat sheet for your convenience. It contains all the sketches shown above. You can use these Forex candlestick patterns for day trading by simply peeking at the cheat sheet to confirm the patterns. Save the image on your PC, or simply print it for your convenience. Real Examples of Candle Pattern Indicators. Now that you are familiar with the structure of the best candlestick patterns for intraday trading, I suggest that we go through coupe chart examples of how these work in trading. The first example on the chart shows the Three Inside Up and the Three Inside Down chart pattern indicators in action. See that after each of these two patterns the price action creates a turning point and the price reverses the previous trend. You should open a short trade at the Three Inside Down pattern and a long trade at the Three Inside Up Pattern.

You should place your Stop Loss orders at the opposite side of the patterns as shown in the image. This is a Tweezer Bottoms Forex candle pattern. See that the lower shadows of the two candles start and end approximately at the same level, which confirms the validity of the pattern. As a result, the price action reverses, which triggers a long trade. At the same time, you should put a stop loss order below the lowest point of the pattern. Now let’s go through the Morning Star candle pattern and the Hanging Man candlestick. Both patterns have the ability to end a bullish trend and to start a fresh bearish move. You should approach both patterns with a short trade, and you should sell upon their confirmation placing Stop Loss orders above their high. As you see, in both cases the price decreases after the confirmation of the pattern.

Lastly, we will discuss a Doji candlestick pattern that comes after a bearish trend. Our Doji candlestick analysis shows that the price ends the bearish move and starts a fresh bullish move. You should trade in bullish direction here placing a Stop Loss order below the lowest point of the Doji star candle. Stop Loss Orders on Forex Candle Patterns. You should always use a Stop Loss order when trading Forex candle patterns. As you have probably seen on the trading images above, the best place for your stops on candle trades is at the opposite side of the patterns. If you are trading a bullish candlestick pattern, place your Stop Loss order below the formation. If you are trading a bearish candlestick pattern, then you should place your Stop Loss order above the candle figure on the chart. Take Profit Orders and Targets on Forex Candlesticks. The rule of thumb says that you should trade every candle pattern for a minimum price move equal to the size of the pattern measured from the tip of the upper shadow to the tip of the lower shadow. In some cases, the price action will continue further than that.

Therefore, use the basic price action rules to determine further exit points on the chart. If you spot another candle pattern during you trade that suggests the end of the trend, you should simply exit your trade and collect your profit. Forex candlestick patterns are crucial for the price action technical analysis of currency pairs. The candlestick pattern indicators form on the Japanese candlestick charts that visualize the price action of Forex pairs. There are two main types of candle patterns Forex indicators: Continuation candle patterns – not very popular in Forex trading Reversal candle patterns – widely used to profit on the Forex market The best Forex candlestick patterns for day trading have reversal character. These are: The Doji Candlestick Patterns – Doji, Long Legged Doji, Dragonfly Doji, Gravestone Doji, and Four Price Doji Tweezer Tops and Tweezer Bottoms The Hammer Candle Pattern Family: Hammer, Inverted Hammer, Shooting Star, and Hanging Man Three Inside Up and Three Inside Down Evening Star and Morning Star Candle Patterns You should place your Stop Loss orders at the opposite side of the candle pattern you are trading. Stay in each candle trade for a minimum price move equal to the size of the pattern. Extend your targets by applying price action rules. GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer.

He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university. Basic Japanese Candlestick Patterns. Japanese candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops . The color of the real body is not very important. The pattern indicates the indecision between the buyers and sellers. The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand. Neither buyers nor sellers could gain the upper hand, and the result was a standoff. If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur. If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur. Sounds like some kind of voodoo magic, huh? “I will cast the evil spell of the Marubozu on you!” Fortunately, that’s not what it means. Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as its open or close.

Check out the two types of Marubozus in the picture below. A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price . A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low . This is a very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal. Doji candlesticks have the same open and close price or at least their bodies are extremely short. A doji should have a very small body that appears as a thin line. Prices move above and below the open price during the session, but close at or very near the open price. Neither buyers nor sellers were able to gain control and the result was essentially a draw.

There are FOUR special types of Doji candlesticks. The length of the upper and lower shadows can vary and the resulting forex candlestick looks like a cross, inverted cross or plus sign. The word “Doji” refers to both the singular and plural form. When a Doji forms on your chart, pay special attention to the preceding candlesticks. If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening. In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down. If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weak. In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap. While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal. In the next following sections, we will take a look at specific Japanese candlestick pattern and what they are telling us. Hopefully, by the end of this lesson on candlesticks, you will know how to recognize different types of forex candlestick patterns and make sound trading decisions based on them. 21 easy Candlestick patterns ( and what they mean ) Candlestick patterns – 21 easy patterns. learning just a few key candlestick patterns WILL improve your ability to recognize trading opportunities. and, enter better trades! The Japanese have been using these patterns for centuries, to trade rice of all things!

so, there is a rich history to the art of candlestick trading. candlestick patterns are an integral part of technical analysis , Candlestick patterns emerge because human actions and reactions are patterned and constantly replicate and are captured in the formation of the candles. by recognising these patterns and applying the the lessons that the patterns teach, can and does yield results in your trading! CANDLESTICK PATTERNS TRADING STRATEGIES. And isn’t that the aim of trading? Now I know what your thinking! e. DON’T SHOW ME ANOTHER ‘ESSENTIAL’ LIST THAT I GOTTA MEMORIZE! Don’t think of this as a list to memorize. Think of this as a guide that you jump in and out of , whenever you need to jog your memory! For the most part Candlestick patterns are about spotting market turns , If you can spot a turn, then you can profit from it. The value of candlestick patterns to spot trading opportunities is a thorny topic among the trading community, but there have been statistical studies on the accuracy of technical analysis and the results are pretty convincing. I have broken down the patterns into 3 categories: Equal open and close candles. ( known as doji candles ) Short body candles. Long body candles.

Within these categories are both bullish reversal and bearish reversal patterns . When you think you see a familiar candlestick pattern in your charts, You can double check the pattern in this guide and make an informed choice on what to do next. Equal open and close, Doji patterns. The basic doji candlestick pattern is when a candle’s open and close are almost equal. The shadows can vary in length. So the candlestick looks like an inverted cross, a simple cross, or plus sign. The doji conveys an even struggle between the forces of the market, both side pushing with no net gain is achieved. The doji can be both a reversal pattern and a continuation pattern. Abandoned Baby: Reversal pattern. This candlestick pattern looks like it sounds, the parents have walked off and left the baby behind! This is a reversal pattern which can occur at the end of a run in prices. It is pretty rare to find, but it is pretty reliable when it does happen. It happens over three candles, the middle candle is a doji which has gapped away from the previous candle. The final candle gaps back the opposite direction. The gaps leave a clear distance between the shadow of the doji candle and both shadows of the first and third candle, leaving it abandoned.

This is another turning point candlestick pattern which most accurate on a daily chart. Occurring at both a bullish and bearish reversals, it consists of two candles the first candle brings the market to the high or low. The next candle is a doji which lies inside the range of the real body of the previous candle. The dragonfly normally appears at reversals. The open and close of the candle are at or near the high of the day. The shadow can vary in length, but is usually quite long. The Dragonfly doji is quite a powerful reversal indicator and does point to large moves ahead. This is another three candlestick pattern . It is normally associated with a bullish reversal. The first candle is a clear downtrend with a long body. The next day opens lower but trades in a very narrow price range.

The last day reverses prices higher and should close at or above the midpoint of the first. This candlestick pattern is the opposite of the morning star. Again, a three day pattern and is associated with a bearish reversal. The first candle is an uptrend with a long body. The next day opens higher but trades in a very narrow price range. And the last day reverses lower and should close at or below the midpoint of the first candle. Also known as the reverse dragonfly, simply because it is flipped over! The candlestick pattern shadow can be any length but the open and close are at or near the low of the day. It can be a bearish reversal pattern, but is more often found within the downtrend, signalling that the downtrend is set to continue. Long shadows are on of the more reliable candlestick patterns. Candles with a long top shadow and short lower shadow show us that buyers dominate the market, these can lead to or continue a bull run in prices. On the other end. Candles with a long lower shadow and short upper shadow show us that sellers dominate the market and these candles can lead to or continue a bear run in prices. Similar to the doji version, except the middle candle has a short body.

It is a three day pattern and is associated with a bearish reversal. The first candle is an uptrend with a long body. The next day opens higher but trades with a short real body. And the last day reverses lower and should close at or below the midpoint of the first candle. Again, this pattern is similar to the doji version except the middle candle has a short body. A three day pattern and is associated with a bullish reversal. The first candle is an downtrend with a long body. The next day opens lower but trades with a short real body. And the last day reverses higher and should close at or above the midpoint of the first candle. This candle is one of those dual meaning candlestick patterns. It can be a bullish reversal pattern, happening near the low of a trend. But it can also occur during the downtrend. The hammer candle forms when a the price moves lower after the open, and then rallies to close significantly higher than the low. The candlestick ends up looking like a like a square hammer with a long handle. The hammer candle happens at the start or during a decline.

This is a bullish reversal pattern. The inverted hammer candle forms when a the price moves higher after the open, it then declines to close significantly lower than the low. Again, these candlestick patterns end up looking like a like a hammer with a long handle. The hammer candle happens at the end of a decline. This candle is an indication of a market ready to rally! Showing a bullish impulse. It forms when the price drops after opening to form a long shadow, then price rallies to close at the highs of the candle. The real body of the candle forms the head, and the long shadow forms the guy’s ‘hanging legs’! Nobody knows how a spinning top will fall once it stops spinning! And as such the spinning top candle indicates indecision in the market. After the candle closes the market will tend to move away from the spinning top quite rapidly. So it is part of the trend following group of candlestick patterns. The candle forms with a short real body and an equal upper and lower shadow. This is one of the particularly reliable bearish candlestick patterns.

It is signalling that a top is in place and a trader should close any long positions or get ready to short the market. The market gaps higher on opening, and then rallies to a high. Prices will then decline to close only slightly above the open. The form of the candle looks as if a star is shooting down towards the ground. Upside Gap with Two Crows: This is a bearish pattern that happens over 3 daily candles. The first candle is a long green candle, the second candle happens with an upward gap open with a small real body. The final candle is a long red candle which engulfs the second candle, but the close of the day remains above the open of the first day. This one is technically part of the family of bearish candlestick patterns, but, it usually indicates a corrective reversal within an uptrend, therefore it is hard to trade but can be used more as an indication the the trend is set to continue. Long body candlestick patterns. Dark cloud cover candlestick patterns indicate an incoming bearish reversal. A two candle pattern, the first candle is a long green bullish candle. The next candle opens higher but reverses and declines, the candle then closes below the center of the first candle. This is on of the strong reversal candlestick patterns. There is both a bearish and bullish engulfing pattern. The bearish engulfing candle happens at the end of an uptrend, and the bullish at the end of the downtrend.

The first candle has a small real body, the reversal candle is long, ideally with short shadows, the real body of the second candle fully engulfs the first candle. The strength of the reversal can be gauged based on how many of the previous candles that the engulfing candle swallows up! The more ‘swallowed candles’, the more powerful the following reversal move will tend to be. This is another of the two candle bullish reversal candlestick patterns. The first candle is long and red bringing the market lower. The next candle opens at new lows but rallies to close at a point which ‘pierces through the centreline of the previous candle. Candlestick Sandwich: The candlestick sandwich is also a bullish reversal pattern over three days action. The pattern forms with two red candles surrounding one green candle in the middle, creating a sandwich! The closing prices of both red candles must be very close, this action creates a support base to trade off. Three green Soldiers: This candlestick pattern creates a stairway for higher prices. It is a bullish reversal pattern formed with three candles. The three candles are green, each consecutive candle opens within the real body of the previous candle. The close of each day brings the market to new highs, signalling an uptrend is about to take off. Look, you reached the end! Like I said at the start, use this article as a ‘go to guide’ when you see some candlestick pattern price action that could be forming a reversal in the market you trade! This guide should be a help in spotting those candle patterns as they form and, and then you can trade on what the pattern suggests will happen next. If you liked reading about candlestick patterns and want to learn more about technical analysis, why not check out our guide to day trading strategies!

If you liked this article, give it a share! Good luck in your trading! Warning! This E-Book improve your trading dramatically. 9 Powerful Forex Trading Strategies. 42 pages E-Book teaching you the most successful Trading Strategies. Strategies include Momentum and Role Reversal, Heikin-Ashi, RSI and Moving Average Crossover, Candlesticks and more. This E-Book contains step-by-step instructions, examples to teach you how to trade profitably. Forex Training Group. If you are a fan of trading with naked charts, without the use of crowded indicators that can cloud your judgement, then this material will definitely appeal to you. In this article, we are going to talk about trading price action using candlestick analysis. I will go through some of the most important candlestick patterns and will explain to you their potential.

What are the Japanese Candlesticks? Japanese candlesticks is a visual form for displaying charts invented in the 18 th century by a Japanese rice trader named Munehisa Homma. They differ from bar charts and line charts, because they give more information and can be more easily read. Let’s take a look at the image below: This simple sketch points out all the information a Japanese candlestick will give you. The two candles displayed are a bullish (green) and a bearish (red) candle. Each candle shows the price at which the candle (the time frame) was opened, the price at which the candle was closed, the highest and the lowest price reached. Note that the bearish candles (red) move downwards, so “close” and “open” places are switched. Now look how Japanese candlesticks looks on a price chart. Much better than the bar or line chart, don’t you think? How to use Japanese candlesticks? A Japanese candlestick chart provides the trader with crucial information about price action at any given point in time. Traders often confirm their signals with Japanese candlestick patterns, improving the odds of success on a trade. Trading price action using candlestick analysis alone is a very common trading technique. Yet, candlestick trading tends to be the most powerful when confirmed with additional indicators or when combined with Support and Resistance zones. Candlestick patterns in Forex are specific on-chart candle formations, which often lead to certain events. If recognized on time and traded properly, they can assist in providing high probability setups.

Forex candlestick patterns are classified within two types – candlestick continuation patterns and candlestick reversal patterns. We will now go through the most common reversal and continuation patterns and we will discuss their potential. Single Candlestick Patterns. Doji (reversal indecision) Doji is a very easy to recognize candlestick. We have a Doji whenever the price closes at the exact same level where it has opened. Thus, the Doji candle looks like a dash with a wick. Note that sometimes there are cases when the price doesn’t move at all from the opening. In these cases the Doji candle is simply a dash with no wicks. Take a look at this image: The Doji candle has a reversal character when it is formed after a prolonged move. The reason for this is that during a bullish (or bearish) market, the occurrence of a Doji candle indicates that the bulls are losing powers and the bears start acting with the same force.

Thus, the candle closes wherever it was opened. Just remember: when you get a Doji on the chart after a prolonged move, there is a chance that the price will reverse its direction. Spinning Tops (undefined) This candle could be bearish and bullish. It has a very small body and longer upper and lower candle wick, which have approximately the same size. Have a look at the image below: The Spinning Tops have undefined character. The reason for this is that this candle indicates that buyers and sellers are fighting hard against each other, but none of them could gain dominance. Nevertheless, if we get this candle on the chart during a downtrend, this means that the sellers are losing steam, even though buyers cannot prevail. Marubozu (continuation) This is another easy to recognize candle. The Marubozu candlestick has a body and no candle wick as shown below: The Marubozu candle is a trend continuation pattern. Since it has no wicks, this means that if the candle is bullish, the uptrend is so strong that the price in the candle is increasing and never reaches below the opening of the bar. Hammer and Hanging Man (reversal) The Hammer candle and the Hanging Man candle have small bodies, small upper wick and long lower wick. These two candles look absolutely the same.

Here they are: These two candles are classified as reversal patterns. The difference between them, though, is that the hammer indicates the reversal of a bearish trend, while the hanging man points to the reversal of a bullish trend. Inverted Hammer and Shooting Star (reversal) The Inverted Hammer and the Shooting Star are the mirror images of the Hammer and the Hanging Man. They have small bodies, small lower candle wick and long upper wick as shown below: The Inverted Hammer and the Shooting Star both exhibit reversal behavior, where the Inverted Hammer refers to the reversal of a bearish trend, while the Shooting Star indicates the end of a bullish tendency. Double Candlestick Patterns. Bullish and Bearish Engulfing (reversal) The Bullish Engulfing is a double bar candlestick formation, where after a bearish candle we get a bigger bullish candle. Respectively, the Bearish Engulfing consists of a bullish candle, followed by a bigger bearish candle. Have a look at this image: The two Engulfing candle patterns indicate trend reversal. In both the Bullish and Bearish Engulfing pattern formation the second candle engulfs the body of the first. The Bullish Engulfing indicates the reversal of a bearish trend and the Bearish Engulfing points the reversal of a bullish trend. Tweezer Tops and Bottoms (reversal) The Tweezer Tops consist of a bullish candle, followed by a bearish candle, where both candles have small bodies and no lower candle wick. The two candles have approximately the same parameters. At the same time, the Tweezer Bottoms consist of a bearish candle, followed by a bullish candle. Both candles have small bodies and no upper candle wick as shown in the image below: As we said, the two candles of the Tweezers have approximately the same size. Both candlestick patterns have reversal character. The difference between these two formations is that the Tweezer Tops signal a potential reversal of a bullish trend into a bearish, while the Tweezer Bottoms act the opposite way – they could be found at the end of a bearish trend, warning of a bullish reversal.

Triple Candlestick Patterns. Morning Star and Evening Star (reversal) The Morning Star candlestick pattern consists of a bearish candle followed by a small bearish or bullish candle, followed by a bullish candle which is larger than half of the first candle. The Evening Star candle pattern is the opposite of the Morning Star pattern. It starts with a bullish candle, followed by a tiny bearish or bullish candle, followed by a bearish candle which is bigger than half of the first candle. The image below will illustrate the two formations: Both of these candlestick groups have reversal character, where the Evening Star indicates the end of a bullish trend and the Moring Star points to the end of a bearish trend. Three Soldiers (reversal) The Three Soldiers candlestick pattern could be bearish or bullish. The Three Bullish Soldiers consists of three bullish candles in a row: A smaller bullish candle A bigger bullish candle, which closes near its highest point An even bigger bullish candle, which has almost no candle wick. At the same time, the confirmed Three Bearish Soldiers should have the following characteristics: A smaller bearish candle A bigger bearish candle, which closes near its lowest point An even bigger bearish candle, which has almost no candle wick. The image below displays a valid Three Bullish Soldiers and Three Bearish Soldiers: The Three Soldiers candlestick pattern has a reversal character. The Three Bullish Soldiers candlestick pattern can end a bearish trends and can bring about a new bullish movement. At the same time the Three Bearish Soldiers could be found at the end of bullish tendencies, signaling an upcoming bearish move. Candlestick Chart Analysis. Now that we have gone through some of the more reliable candlestick patterns in Forex trading, we can now see how some of these patterns look on a price chart and how we can use them as part of a price action trading strategy! Have a look at the chart below: This is the daily chart of the EURUSD for the period Jul 21 – Oct 8, 2015. Our candlestick chart analysis shows three successful bearish chart patterns.

The first one is an evening star. As we already mentioned, the Evening Star candlestick chart pattern has a bearish character. This is exactly what happens on our chart. We get four bearish candles which corresponds to a drop in price of 126 pips. The second pattern we get from our candlestick analysis is the Hanging Man candle at the end of a bullish trend. After the appearance of the Hanging Man candle, the price of the euro decreased versus the dollar about 387 pips for three days! The third candlestick pattern on our chart is another Evening Star. At the end of the bullish trend, the Evening Star pattern followed thru with a drop of 40 pips for one day. Let’s now go through another chart example illustrating other Japanese candlestick patterns: This is the 4-hour chart of the USDJPY for the period Aug 28 – Sep 28, 2015. As you see, this chart image is pretty rich with Japanese candlestick patterns. We first start with a Doji candle after a strong price decrease. We get the Doji reversal pattern and we record an increase of 97 Pips. The next candlestick pattern we get is the Three Bullish Soldiers, which appears after a slight price retracement. After the Three Soldiers reversal pattern the USD price increases about 86 pips versus the Yen. The third candle pattern on the chart is the Spinning Top, which as we said has undefined character.

This means that after a Spinning Top candle, the price might either increase or decrease, depending on the context of price action at the time. In our case, the price reverses its direction on the following bar, which also forms a Morning Star pattern, and we observe an increase of 138 pips. The price increase after the Spinning Top is immediately followed by another Doji reversal pattern. As a result of that, we get a rapid drop of 182 pips. The last candlestick pattern on the chart is a single Hammer candlestick after a bearish trend. We confirm our Hammer and the price of the dollar increases about 163 pips. Let’s now go to the USDCHF, where we will mainly discuss the bullish and bearish Engulfing Pattern: So, above we have the 4-hour chart of the USDCHF for Jul 22 – Aug 21, 2014. We start with a small Doji candle after a trend correction. The result we get after the Doji is a rapid price increase of 62 pips. Then after a period of price consolidation, we get a Bearish Engulfing. A single candle drop of 39 pips appears on the chart right after the Engulfing! Not long after, we get another Bearish Engulfing, which comes after a correction in a bearish trend. The price of the USD decreases with 50 pips for about 12 hours after this Bearish Engulfing. 10 days later, we spot a Bullish Engulfing on the chart, which comes after a bearish trend. This is the most profitable price move on this chart, which leads to an increase of 100 pips for three days.

This bullish trend finishes with the last chart pattern on the image – a third Bearish Engulfing. This again results in a price reaction to the downside. The overall result from these five price movements is equal to 264 pips. Let’s analyze another Forex chart using candlestick patterns! This is the 4-hour chart of the Aussie (AUDUSD) for the period Sep 17 – Oct 19, 2015. We start with a Bearish Engulfing after a price increase. We confirm the pattern and we observe a steady price decrease equal to 284 pips for 6 days. Now that’s a strong reaction! The bearish trend ends with a morning star, which points to an eventual reversal. The reversal of the trend follows in more of a consolidation phase. The increase in price from the morning star is equal to 46 pips.

The price decreases to the same level and we get another reversal pattern – a Bullish Engulfing! A strong bullish trend emerges after the Bullish Engulfing pattern. We could have traded the first increase of 110 pips until we get a Doji reversal candle, which resulted in a 66 pip correction. Soon afterward we see another Bullish Engulfing formation. The price records dramatic increases on strong momentum. Furthermore, after a short corrective movement, the bullish trend gets confirmed by the Three Bullish Soldiers candle pattern, which is another confirmation that the bulls definitely dominate! We stay in the market until we get the Bearish Engulfing at the end of the trend. The overall price increase equals 384 pips. After the Bearish Engulfing we get a decrease of 160 pips. Then, after a new increase, we get the Hanging Man candlestick pattern, which is followed by a new price decrease of 80 pips. The total price action in this example equals about 1,000 pips for 1 month, More than enough opportunity to make high probability trade setups using candlestick patterns. As you can see, trading Forex with Japanese candlestick patterns could be very profitable. Japanese candlesticks are the preferred way to display Forex charts, because of the depth of information it provides. Although we discussed 13 successful candlestick pattern trades, there can be many fake signals that show up as well.

Therefore, it is always good to match your candlestick pattern signal with an additional trading tool. This could be a moving average, a volume indicator, a momentum oscillator or Support and Resistance levels based on previous swings. Fibonacci Retracement levels are another good trading tool to confirm candlestick patterns. Try to use uncorrelated technical confluence when trading candlestick signals in order to eliminate as many false signals as possible. When adding an additional layer of confirmation to your candlestick trading strategy, you might even increase your candle pattern success rate to more than 60-65 %. Forex Training Group. Learning to read candlestick charts is a great starting point for any technical trader who wants to gain a deeper understanding of how to read forex charts in general. As you may already know, Candlestick charts were invented and developed in the 18th century. The earliest reference to a Candlestick chart being used in financial markets was found in Sakata, Japan, where a rice merchant named Munehisa Homma used something similar to a modern Candlestick patterns to trade in the Ojima rice market in the Osaka region. Although bar charts and line charts were quite popular among Western traders, Japanese Candlestick charts and additional patterns were introduced to the Western financial markets in the early 1990’s, by a Chartered Market Technician (CMT) named Steve Nison. The popularity of Candlestick charts has soared among Western market analysts over the last few decades because of its highly accurate predictive features. Candlestick charts can play a crucial role in better understanding price action and order flow in the financial markets.

Reading a Forex Chart with Candlesticks. Before you can read a Candlestick chart, you must understand the basic structure of a single candle. Each Candlestick accounts for a specified time period; it could be 1 minute, 60 minute, Daily, Weekly exc. Regardless of the time period, a Candlestick represents four distinct values on a chart. The opening price at the beginning of the time period The closing price at the end of the time period The highest price during the time period The lowest price during the time period. As you can see in figure 1, when you read a candle, depending on the opening and closing prices, it will provide you information on whether the session ended bullish or bearish. When the closing price is higher than the opening price, it is called a Bullish Candlestick. By contrast, when the closing price is lower than the opening price, it is known as a Bearish Candlestick. And the upper and lower shadows of the Candlestick represent the highest and lowest price during the time period. Pros and Cons of Using Candlestick Charts Compared to Line and Bar Charts. Compared to Western line charts, both Bar and Candlestick charts offer more data to analyze. Although the same four values are also found in Western-style bar charts, the bar chart uses horizontal lines on the sides of a vertical line to project the opening and closing prices.

But, a series of Candlesticks on a chart can help traders identify the character of price action more definitively, which helps in the decision-making process. With Candlesticks, it is much easier to interpret the price action during the time period because a Bullish Candlestick shows a full body with a pre designated color and a Bearish Candlestick a full body with a different pre designated color. As a result, many professional traders have moved to using Candlestick charts over bar charts because they recognize the simple and effective visual appeal of candlesticks. However, while Candlestick charts make it much easier to interpret price action, it lacks the smoothness of the line chart, especially, when the market opens with a large gap. Hence, professional traders often end up using a short time period moving average to get the “feel” of a smooth trend, or lack of trend, in the market. So, it can be a good idea to add a moving average to the chart while using Candlestick charts. Different Types of Candlestick Patterns Convey Different Messages. Each Candlestick represents an Open, High, Low, and Close value. The location of the opening price, how high or low price reached during the candle session, and where the price closed at the end of the time period are all factors in understanding candlestick charts. Over the years, Japanese traders had developed various Candlestick patterns based on historical price movements. Every trader should invest their time and learn these patterns as it will provide a deeper knowledge and understanding of reading forex charts in general.

Candlestick patterns can help you interpret the price action of a market and make forecasts about the immediate directional movements of the asset price. While there many different patterns, we will discuss some of the most popular Candlestick patterns that can help in reading a price chart like a professional trader. A candlestick reading can provide us with information on the three market sentiments: bullishness, bearishness, and a neutral or tentative market condition. Below are some candle formations that can help us gauge market sentiment: Figure 2: Various Types of Simple Candlestick Formations. Referring to the above illustration, A bullish Candlestick like the Big White Candle indicates bullish trend continuation, while a bearish Candlestick like the Big Black Candle indicates bearish trend continuation. On the other hand, a Doji Candlestick represents a neutral or tentative market condition. So when you are reading candlestick charts, you need to keep in mind which Candlestick patterns indicate additional bullishness and which ones indicate further bearishness, as well as which ones indicate a rather neutral market condition and act accordingly. The list of simple Bullish Candlestick Patterns include Big White Candle, Hammer, Inverted Hammer, and so forth. By contrast, the list of simple Bearish Candlestick Patterns includes Big Black Candle, Gravestone Doji, Hanging Man, Inverted Black Hammer, etc. If you are chart reading and find a bullish candlestick, you may consider placing a buy order. On the other hand, if you find a bearish candlestick, you may choose to place a sell order.

However, while reading Candlesticks if you find a tentative pattern like the Doji, it might be a good idea to take a step back or look for opportunities elsewhere. When you are reading a Candlestick price chart, one of the most important things to consider is the location of the Candlestick formation. For example, a Gravestone Doji appearing at the top of an uptrend can indicate a trend reversal. However, if the same pattern appeared during a longstanding downtrend, it may not necessarily mean bearish trend continuation. We will further discuss the importance of location of Candlestick patterns in some example trades later. In the next section we will discuss some complex candlestick patterns. Let’s take a look at the illustration below: Figure 3: Examples of Some of the More Complex Candlestick Patterns. Once you have mastered the identification of simple Candlestick patterns, you can move on to trading more complex Candlestick patterns like the Bullish and Bearish 3-Method Formations. The main difference between simple and complex Candlestick patterns is the number of Candlesticks required to form the patterns. While a simple Candlestick pattern, like the Hammer, requires a single Candlestick, the more complex Candlestick patterns usually require two or more Candlesticks to form. For example, the Bullish Harami requires two Candlesticks, the Three White Soldiers pattern requires three Candlesticks, and the Bullish 3 Method formation requires 4 candles. Once again, remember that regardless of the complexity, the location of all these simple and complex Candlestick patterns is one the most vital aspects of reading forex charts while using Candlesticks. Candlestick Chart Reading Like a Pro. By now, you should have a good idea about what a Candlestick is and how to read simple and complex Candlestick patterns. So, let us now try to read trading charts to see how we can trade using these patterns. Figure 4: Forex Chart Reading Using a Simple Engulfing Bullish Candlestick Pattern.

In this example in figure 4 of the GBPJPY daily chart, we can see that the GBPJPY price was bouncing around a strong support level but failed to break below it. On the third try, the GBPJPY did penetrate the support level, but the market swiftly reversed and formed an Engulfing Bullish Candlestick pattern that signaled further bullishness in the market. At this point, some beginner traders may recognize the bullish setup and immediately enter a buy order. However, professional traders are not only waiting for Candlestick patterns to form around key pivot zones, like this support level in figure 4, but they will also wait for the proper confirmation to enter the trade. The next day, the GBPJPY price penetrated above the high of this Engulfing Bullish Candlestick, which confirmed that there would be additional bullishness in the market over the next few days. Professional traders wait for this confirmation because they understand the concept of order flow and self-fulfilling prophecy. You see, most large banks and hedge funds also watch key market levels and price action around critical levels. Once the Engulfing Bullish Candlestick formed around this crucial support level, it prompted a significant number of pending buy orders just above the high of this Engulfing Bullish Candlestick. Once the price penetrated above the high, it triggered those orders, which added the additional bullish momentum in the market. Hence, waiting for the price to penetrate above the Candlestick pattern can help you increase the odds of winning on the trade. As you can see in figure 4, once the buy order confirmation came, it did trigger a large uptrend move over the next few days. As we briefly discussed earlier, the location of the Engulfing Bullish Candlestick for this particular trade was the most important factor. First, it formed around a major pivot zone, where the GBPJPY Bears had failed to break the support area in the previous two attempts.

When you apply Candlestick patterns with additional technical confluence, it provides for a powerful combination of factors that can help increase your odds of winning. And this is exactly what professional traders try to do. If the same Engulfing Bullish Candlestick pattern appeared at the top of a longstanding uptrend, it would have also signaled additional bullishness in the market, but that signal would be much less powerful. Since the market was already in an uptrend, it may not have had the legs to push the price much higher. However, on this instance, the market was already trading in a range for several days. As you may know, when the market consolidates for a while, it is basically setting up to breakout in one direction or the other. The formation of this bullish Candlestick pattern provided a signal as to of which way the market was about to break. If you knew how to read a simple Candlestick pattern like the Engulfing Bullish pattern, you could have entered this trade at the right time and earned a handsome profit with this high reward to risk ratio setup. Figure 5: Three White Soldiers Candlestick Trend Reversal Pattern. In figure 5, we can see two different Candlestick patterns triggering two different trades. On the first occasion, the Engulfing Bearish Candlestick pattern appears during a downtrend that provides traders with a trend continuation signal. On the second occasion, a Three White Soldiers Candlestick pattern emerges at the bottom of the downtrend, which triggers a new bullish trend.

In the first trade, the AUDUSD was already moving to the downside. Once the Engulfing Bearish Candlestick broke below the support level, it opened up the possibility of a trend continuation. The next day, AUDUSD price penetrated below the low of the Engulfing Bearish Candlestick and confirmed the trade, which triggers the sell order. It is strongly recommended that beginning traders stick to using Engulfing Bearish or Bullish patterns to confirm a trend reversal, as those tend to be higher probability trades. However, this particular example in figure 5 demonstrates that if you know how to use the confluence of support and resistance levels along with Candlestick patterns, these can be used to trigger trend continuation signals as well. In the second trade, the Three White Soldiers Candlestick pattern emerged near the bottom of this downtrend. At this point, professional traders for preparing for the market to reverse the prevailing downtrend. The prudent course of action would be to wait for the market to confirm this signal, which means that unless the price broke above the high of this Three White Soldiers Candlestick pattern, you would not have entered the trade. Combining Technical Analysis Indicators with Candlestick Patterns.

Candlestick chart reading is largely based on the principle of technical analysis, which assumes that regardless of the underlying fundamental or economic conditions, the current market price reflects “all known information” regarding the asset. Hence, the reason why an asset is moving in a certain direction is often not necessarily important to technical traders. Instead, they are more interested in interpreting what the price action is doing at the current moment and how they can take advantage of that. Furthermore, technicians know that the underlying reasons for market fluctuations over time can be many, and often the market does not always act “rational.” Candlestick chart reading can be most useful during these volatile periods of irrational market behavior. Traders can apply overbought and oversold technical indicators like Stochastics or Relative Strength Index (RSI) to find out when such irrational market conditions may be present. For example, by using oscillating technical indicators, a trader will first wait for a signal that the market has moved into an overbought or oversold condition. At that point, they would look for a reversal signal of the prevailing trend. Many times, this reversal signal will come in the form of a candlestick formation. Formation of a simple or complex Candlestick pattern during such market condition confirms and verifies the impending contrarian price action for the trader. Placing their order in the market using this combination of technical factors can significantly improve the accuracy of their trades. Once you learn how to correctly read Candlestick patterns and combine this skill as part of a broader trading strategy, then you will likely improve the consistency of your market entries and your overall performance as a trader. By now, you should be able to see the value of investing your time to learn how to read a Candlestick chart, and how to interpret the various simple and complex Candlestick patterns that we discussed. So before you start trading with Candlestick patterns, it is important to understand why and how these patterns work.

Once you master the basics of Candlestick chart reading, it can help you integrate this unique knowledge into your existing trading strategy and lead to better accuracy and improve your trading performance in the long run. Take Your Trading to the Next Level, Accelerate Your Learning Curve with my Free Forex Training Program.



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