Forex candlestick patterns
- 1 Forex Candlestick Patterns: Formations
- 2 What are candlestick patterns in Forex?
- 3 The Most Important Candlestick Patterns
- 4 Trading Forex based on candlestick patterns
- 5 Summary of Forex Candlestick Patterns
- 6 Forex candlestick patterns FAQ
The candlestick patterns (Cknown also as candlestick chart or candlesticks) Forex are a popular tool for analyzing price charts and confirming existing trading setups.
They have been used for hundreds of years by Japanese rice traders and came to the West through books of Steve Nison.
A form of technical analysis, Japanese candlestick charts are a versatile tool that can be merged with any other technical tool and will help improve any technician's market analysis.
They can be used for speculation and hedging, for futures, stocks or any other applied technical analysis. Experienced technicians will discover how joining Japanese candlesticks with other technical tools can create a powerful synergy of techniques; hobbyists will discover how effective candlestick charts are as a standalone charting method.
In this article, we are going to cover what candlestick patterns are. Forex , how they are formed, and how to trade them.
Forex Candlestick Patterns: Formations
before us enter in candlestick patterns, it is important to understand how Forex candles are formed.
Forex candlesticks, or candlestick chart, are OHLC charts, which means that each candlestick shows the opening, high, low and closing price of a trading period.
This is represented by the following image:
The solid body of a candlestick shows the opening and closing prices of a trading period, while the upper and lower wicks of the candlestick represent the high and low prices of that trading period.
What are candlestick patterns in Forex?
Forex candlestick patterns are specific candlestick patterns that can signal a continuation of the underlying trend or a trend reversal.
These patterns can be single candlestick patterns, meaning they are formed by a single candlestick, or multiple candlestick patterns that are formed by two or more candlesticks.
Forex candlestick formations really represent the psychology and sentiment of the market.
They represent pure price action and show the struggle between buyers and sellers in a graphically appealing format.
While Forex candlestick patterns are a great way to confirm an existing trading setup, traders should be cautious when trading candlestick patterns only as there can be a significant number of false signals.
The Most Important Candlestick Patterns
Bullish and bearish engulfment patterns
Bullish and bearish engulfing patterns are one of the best Forex candlestick patterns to confirm a trade setup.
A bullish engulfing pattern forms when the body of a green candlestick completely surrounds the previous red candle, signaling strong buying momentum that breaks above the height of the previous candle.
High and low engulfing patterns are reversal patterns that include two candlesticks.
A bullish engulfing pattern is shown in the following chart:
Similar to bullish patterns, bearish patterns form when a large bearish candle completely envelops the body of the previous bullish candle, signaling a big sell impulse that goes beyond the low of the previous candle.
A comprehensive bearish pattern is shown in the following chart:
Hanged man and hammer
The hammer and hangman patterns are also reversal patterns that form at the top and bottom of uptrends and downtrends.
A hammer pattern forms at the bottom of a downtrend, with a small solid body and a long bottom wick, signaling that buyers had enough power to push the price back close to the opening price, hence the long bottom wick. .
A hammer pattern is shown in the image below:
A hangman pattern is similar to a hammer pattern, the only difference is that it forms at the top of an uptrend.
In this case, a hangman pattern shows that selling pressure is building — represented by the long bottom wick — despite the uptrend.
A hanged man pattern is shown in the image below:
Three inner patterns up and three inner patterns down
Three up patterns and three down patterns are triple candlestick patterns, which means they are made up of three candlesticks.
A three candlestick up pattern starts with a bearish candle, followed by a bullish candle that forms on the first candle, and followed by a third bullish candle that closes well above the height of the first candle.
A three-up pattern is shown in the image below:
Similarly, a three-down pattern starts with a bullish candle, followed by a bearish candle that falls inside the first candle, followed by a second bearish candle that closes well below the lowest point of the first candle.
A three inside down candlestick pattern is shown in the following image.
Doji candlestick pattern
The final candlestick pattern that we are going to cover, and also one of the most important candlestick patterns on the Forex chart, is the doji pattern. The doji pattern is a specific candlestick pattern formed by a single candle, with its opening and closing prices at or close to the same level.
A doji pattern signals market indecision. Neither the buyers nor the sellers have been able to push the price away from the opening price, signaling that a price reversal may be in the offing.
A doji pattern is shown in the image below:
As you can see, a doji candlestick pattern can form during an uptrend and downtrend.
Trading Forex based on candlestick patterns
Candlestick patterns are a great tool used by many Forex traders to confirm a trade setup.
They should not be used to trade on their own as they can produce a large number of false signals along the way.
That is why you need an already established trading setup, based on tools such as chart patterns, channels or Fibo levels, which are only confirmed with a candlestick pattern such as an engulfing pattern or a hangman pattern.
Forex candlestick strategy
As we said earlier, the best candlestick strategy for trading is to use candlestick patterns for trade setup confirmations.
Let's take a look at the screenshots, which show how to use candlestick patterns for trading day trade Forex the right way.
- Trading bullish streamers with engulfing candlestick pattern
The image above shows a bullish pennant pattern, which is confirmed by a bullish engulfing candlestick pattern.
Once the engulfing pattern forms, a trade can enter in the direction of the pennant breakout.
- Double bottom trading with engulfing and hanged patterns
The following image shows a common double-top pattern, followed by an indent signaled by a hangman pattern.
Once the pullback is complete, a bullish engulfing pattern confirms the opening of a trade in the direction of the breakout.
Remember that these are just two examples of how to use candlestick patterns. You can combine them with all kinds of chart patterns and trading strategies.
Summary of Forex Candlestick Patterns
Candlestick patterns are a great tool for trade confirmations.
They represent the psychology of the market and the psychology of buyers and sellers who struggle to make the price go up and down.
As such, candlestick patterns should not be used to trade on their own, but only to confirm existing trade setups.
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