There are many types of indicators and tools on the market, but the candlestick pattern is still a tool to understand and predict market behavior. From small fluctuations to large fluctuations, each candlestick on the chart contains a story about the competition between buying and selling. In this article, Forex Trading will help you learn more deeply about the meaning and how to trade effectively with this model. Follow now.
The term ” Candlestick pattern ” and what traders need to know
Candlestick patterns or candlestick charts are important technical analysis tools that help track price trends. Traders use it to decide the right time to buy and sell. Candlestick charts are popular with many traders. Below is the necessary information about this model.
What is the conceptual definition of “Candlestick pattern “?
Candlestick pattern is a part of technical analysis in financial markets, used to evaluate price trends. Each candle represents the opening price, closing price, and high and low price for a specific period of time. Different models provide information about the market and forecasts of further price action.
What is the role and significance of Forex technical analysis?
A candlestick pattern is formed by combining the opening price, closing price, high and low of a certain trading period (usually 1 day, 4 hours, or 1 hour). The role and meaning of this model is as follows:
- Helps traders determine the direction of the market in the short and medium term. For example, a series of bullish candles with long bodies and short shadows indicates an ongoing uptrend. While a series of bearish candles with short bodies and long shadows show a downtrend.
- Candlestick pattern helps identify potential price reversal points. For example, the “Hanging Man” and “Shooting Star” patterns are often considered warning signs that an uptrend may be coming to an end. While the “Hammer” and “Bullish Engulfing” patterns can indicate that the downtrend may be about to reverse.
- Different models have different meanings. For example, bullish patterns are often considered bullish signals. While bearish patterns are often considered bearish signals.
See more: Master the Forex “game” with Price action
How will candlestick patterns work?
In Forex trading, candlesticks work by analyzing the shape and position of the candles on the chart. Traders can predict potential trends and reversal points in the market. Traders use them to evaluate price trends and predict further price action. When analyzing, traders can recognize patterns such as reversals, trend continuations, or divergences in supply and demand. From there, make trading decisions such as buying or selling. These models provide the basis for traders’ forecasting and trading decisions in the forex market.
An illustrative example of a candlestick chart in Forex technical analysis
Here are some examples of how candlestick patterns work in Forex:
- Bullish reversal patterns: Bullish reversal patterns often appear at the end of a downtrend. And shows that the trend may be about to reverse to an uptrend. For example, the “Hammer” pattern has a short candle body at the bottom and a long shadow at the bottom. This shows that buyers are starting to dominate after the price drops.
- Bearish reversal patterns: Bearish reversal patterns often appear at the end of an uptrend. And shows that the trend may be about to reverse to a downtrend. For example, the “Shooting Star” pattern has a short candle body at the top and a long shadow at the top. Shows that the sellers are starting to dominate after the price increase.
- Continuation Patterns: Continuation patterns show that the current trend is likely to continue. For example, the “Bullish Engulfing” pattern has a bullish candle that completely covers the previous bearish candle. Shows that buyers are in strong control.
- Neutral Patterns: Neutral patterns do not provide clear signals about the future direction of the market. For example, the “Doji” pattern has a very short body or nobody. This is a sign of market hesitation.
Analyze structural components
This model helps analyze market sentiment according to increasing and decreasing volatility. This information helps predict market trends. Let’s learn about the basic structural components of this model below.
Candle shadows in candlestick charts
Candle shadows show the highest and lowest prices during a specific time. The shadow is thinner than the body and is used to mark high/low price positions as well as price trends.
Opening price
The opening price is the first price you see for a specific time frame. There are candles for every minute, hour, day, week, month and year. If the price increases, the green candle has an opening price near the bottom, if it decreases, the red candle has an opening price near the top. There are also white and black candles, instead of green and red. Although many exchanges prefer blue and red, some still use white and black.
Closing price
In candlestick charts, the closing price is the last price of a certain time frame. This is the price at which the candle body trades before the next candle forms. This depends on the time frame, from every minute to every year. The body of the candle represents the price range from the opening price to the closing price.
- On a candlestick chart, the closing price is represented by the peak (green or white candle)
- Or the bottom (red or black candle) of the candle body.
Highest price and lowest price
The high price appears at the top of the shadow, indicating the highest level in time. If there is no upper shadow, it is the closing/opening price.
The low price is at the bottom of the shadow below the body. There is no lower shadow if open/closed is the lowest level.
Learn about popular candlestick patterns in Forex today
Traders use candlesticks to analyze price trends. Candles can be every minute, hour, day, week, month or year. Let’s learn about popular models in Forex today.
Bullish reversal candlestick pattern
The market often turns from bearish to bullish, this is a bullish reversal candle. Some bullish reversal candlestick charts are below:
Hammer candlestick pattern
The Hammer pattern is an important bullish reversal pattern in Forex technical analysis. Usually appears at the end of a downtrend and is seen as a potential signal for a reversal to an uptrend.
Hammer models include:
- Hammer candle: The candle has a short candle body (usually smaller than 50% of the previous candle’s body) and a long candle shadow below, usually 2-3 times larger than the candle body.
- Confirming candle: The next bullish candle has a longer body than the Hammer candle and closes above the high of the Hammer candle.
How to trade: When the Hammer pattern appears, traders can consider the following trading strategies:
- Buy: Buy when the price closes above the highest level of the Hammer candle.
- Set stop loss order: Place stop loss order below the lowest level of the Hammer candle.
- Risk management: Use risk management tools such as stop-loss orders and set a reasonable risk/reward ratio.
Bullish Engulfing candlestick chart increases
The Bullish Engulfing pattern often appears at the end of a downtrend and is seen as a potential signal for a reversal to an uptrend.
Includes two candles:
- First candle: Bearish candle with a short candle body (could be a Doji candle).
- Second candle: The bullish candle has a longer candle body than the first candle and completely covers the candle body and shadow of the first candle.
How to trade: When the Bullish Engulfing pattern appears, traders can consider the following trading strategies:
- Buy: Buy when the price closes above the high of the second candle.
- Set stop loss order: Place stop loss order below the low of the first candle.
- Risk management: Use risk management tools such as stop-loss orders and set a reasonable risk/reward ratio.
Bearish reversal candlestick pattern
The bearish reversal pattern will appear at the end of an uptrend. And is considered a potential signal for a reversal to a downtrend. Here are some common bearish reversal candles in Forex:
Bearish Engulfing bearish candle
The Bearish Engulfing pattern often appears at the end of an uptrend and is seen as a potential signal for a reversal to a downtrend.
This bearish Bearish Engulfing pattern includes:
- Candle 1: Bullish candle of any size.
- Candle 2: The bearish candle has a longer candle body than candle 1 and completely covers the candle body and shadow of candle 1.
How to trade: Similar to bullish Bearish Engulfing, when encountering bearish Bearish Engulfing, traders can consider the following trading strategies:
- Sell: Sell when the price closes below the lowest level of candlestick 2.
- Set stop loss order: Place stop loss order above the high of candle 1.
- Risk management: Use risk management tools such as stop-loss orders and set a reasonable risk/reward ratio.
Evening star reversal candlestick pattern
The Evening Star reversal pattern often appears at the end of an uptrend and is seen as a potential warning sign for a reversal to a downtrend.
The Evening Star model includes:
- Candle 1: Bullish candle with a long candle body (usually the largest bullish candle in the pattern).
- Candle 2: Candle can be bullish or bearish, but usually has a smaller candle body than candle 1.
- Candle 3: Bearish candle has a long candle body (usually nearly as long or longer than candle 1) and closes completely inside the price range of candle 1.
How to trade: When the Evening Star pattern appears, traders can consider the following trading strategies:
- Sell: Sell when the price closes below the low of candlestick 3.
- Set stop loss order: Place stop loss order above the high of candlestick 2.
- Risk management: Use risk management tools such as stop-loss orders and set a reasonable risk/reward ratio.
Other candlestick patterns
In addition to the popular patterns above, the forex market also has many other candlestick patterns. Eg:
- Dark Cloud Cover pattern: Appears after an uptrend, starting with a strong bullish candle. And then there is a bearish candle whose body covers a large part of the previous candle. It is a sign of a bearish reversal.
- Marubozu pattern: The characteristic is that both the top and bottom of the candle body are very thin. Marubozu symbolizes strength in the current trend, with no significant fluctuations between the opening and closing prices.
- Doji pattern: Doji candlestick appears when the opening price and closing price are almost the same or the candle body is very small. This is often a signal of stagnation or uncertainty in the market.
- Harami pattern: Consists of a large candle followed by a small candle completely inside the body of the large candle. Harami indicates a decline in the strength of a trend or a reversal signal.
How to trade effectively with candlestick patterns
Here are some different ways to use candles in a trading strategy:
- Identifying trend reversals: By analyzing candlestick formations. Traders can detect whether the price trend is about to change direction or not.
- Confirming support and resistance levels: Traders can understand the psychology of the market trend towards those price levels.
- Determine entry and exit points: Traders can decide when to enter or exit a trade. It depends on whether the pattern represents a continuation or a reversal of the trend.
- Combination with other indicators: By combining with other indicators such as moving averages.
- Time Frame Analysis: By looking at patterns occurring in different time frames. Traders easily identify potential short-term and long-term trends.
- Use some support tools like EA Forex: This is a computer program designed to automatically carry out transactions in the foreign exchange (forex) market. EAs operate based on pre-programmed rules and conditions, helping users make trades automatically and without manual intervention.
Principles to keep in mind when trading with candlestick charts
Here are some principles to keep in mind when trading with candlestick charts:
- Do not rely solely on: Candles are just a supporting tool, not a perfect signal. Therefore, you should not rely solely on candlestick patterns to make trading decisions.
- Consider other factors: In addition to candles, you need to consider other factors such as market news, economic events, and market sentiment.
- Use candlestick charts appropriately: There are many different types of candlestick charts, each with its advantages and disadvantages. Choose the candlestick chart type that suits your trading style.
- Recheck the signal: Before placing a trade, recheck the signal using other technical analysis tools.
- Always learn and improve: The Forex market is always changing, so you need to always learn and improve your trading skills.
See more: Discover Exness – The world’s leading Broker
Instructions on how to read candlestick charts simply and accurately
Charts are popular technical analysis tools in the Forex market. Helps traders easily grasp market psychology and make wise trading decisions. The common goal of Forex traders is to make a profit. To achieve this, you need to know how to read candlestick charts.
Each candlestick on a candlestick chart carries information about price action over a certain period.
- Red/black candle: Shows the dominance of the “Bear” side, the price is down compared to the opening price.
- Green/white candlestick: Shows the dominance of the “Bull” side, the price increased compared to the opening price.
Time frame is an important factor when analyzing candlestick charts.
- Short time frame (1 minute – 30 minutes): Easy to encounter market noise and intraday fluctuations.
- Long time frame (hourly, daily, weekly, monthly): Helps identify trends more accurately and effectively using Japanese candlestick charting techniques.
By analyzing candlestick patterns combined with appropriate time frames. Forex traders can make predictions about market trends and choose effective trading strategies.
Conclude
In short, the Candlestick pattern is used to analyze and represent prices in the foreign exchange market. This model helps record and display information on price charts, reflecting how assets are traded. This is one of the most popular and widely applied methods. Don’t forget to follow Forex Trading to update the latest information on how to trade in this currency market.
Frequently asked questions
Which candlestick pattern has the highest reliability?
No candlestick chart is 100% reliable. The reliability of this model depends on many factors. For example: in combination with other models, trading volume, and general market trends.
How to distinguish real and fake candles?
A false candlestick pattern is a pattern that does not lead to a reversal as expected. To distinguish between real and fake models, it is necessary to combine them with other factors. For example, trading volume, general market trends, and economic news.
Which candlestick chart should be used for short-term and long-term trading?
For short-term trading, short time frames (1 minute, 5 minutes, 15 minutes) should be used. For long-term trading, long time frames (1 hour, 4 hours, days) should be used.