Catch the trend with candlestick patterns in Forex

Candlestick patterns are considered a “powerful assistant” for Price Action traders. They are popular in the Forex market thanks to their simplicity but still high efficiency. In this article, Forex Trading will explore with you what Forex candlestick patterns are, candlestick charts, how many types of candlestick patterns there are, and which patterns are most commonly and effectively used by traders in trading. Let’s see!

Introducing candlestick patterns

Let’s learn in detail about its definition and role:

Candlestick pattern concept

A candlestick pattern is a collection of single candlesticks that represent price fluctuations, reflecting psychology and supply and demand in the market. In particular, technical analysis and price action traders love these models. First used in Japan since the early 16th century, candlestick patterns in forex are often called Japanese candlestick patterns.

Basic Japanese candles

A basic Japanese candle consists of two main components: the candle body and the candlestick (also known as the candle wick). The candle body shows the opening and closing prices. The candle wick is the line connecting the opening (or closing) price to the highest or lowest level the price reached. The color of the candle indicates whether the price during that period increased or decreased. From there, forex candlestick patterns, consisting of two or more Japanese candlesticks, provide different trading signals to traders.

Candlestick chart

If you’re tracking an asset, like a stock or cryptocurrency, over a certain period – maybe a week, a day, or an hour. Candlestick charts are a visual way to represent this price data.

A candle consists of the candle body and two thin lines, often called wicks or shadows. The candle body represents the price range between the open and close during that period, while the candle wick or candle shadow shows the highest and lowest prices reached during the same period.

The green candle body indicates rising prices during that period. Conversely, a red candle body shows that the price has decreased during that period.

The role of candlestick patterns in technical analysis

Candlestick patterns play an important role in technical analysis. It provides investors and traders with valuable information about market sentiment and potential price trends. Here are some of the main roles of candlestick patterns:

• Identify trends: Candlestick patterns can help investors identify potential price trends in the market. For example, candlestick reversal patterns can indicate the end of a current trend and the beginning of a new one.
• Measuring trend strength: The length of candle shadows and candle bodies can provide information about the strength of the current trend. Long candle shadows indicate market indecision, while long candle bodies indicate a strong trend.
• Identify buy/sell points: Some candlestick patterns are considered potential buy or sell signals. For example, the Hammer candlestick pattern is often considered a potential buy signal. While the Hanging Man candlestick pattern is often considered a potential sell signal.
• Confirmation of other signals: Candlestick patterns can be used to confirm other signals. Such as trend lines or technical indicators.

Classification of candlestick patterns

Candlestick patterns are divided into 3 types, each type will be detailed in the following sections:

Bullish candlestick patterns

Firstly, bullish candlestick patterns will include the following types:

Hammer

This is a candle with a long lower wick and appears at the bottom of a downtrend, where the lower wick is at least twice as long as the body.

The hammer pattern shows that despite strong selling pressure, buyers pushed the price back up near the opening level. The hammer pattern can be red or green, however, a green hammer candle can indicate a stronger bullish reaction.

Reverse hammer

This model resembles a hammer but has a long wick above the body instead of below. Similar to the hammer pattern, the upper wick should be at least twice as long as the body.

The inverted hammer pattern appears at the bottom of a downtrend and can signal a potential reversal to the upside. The long upper wick shows that the price has stopped its sustained downtrend, even though sellers tried to push the price back down at the open. Therefore, the inverted hammer pattern could indicate that buyers are about to take control of the market.

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Three white soldiers

The “Three White Soldiers” candlestick pattern consists of three consecutive green candles, each candle opens within the body of the previous candle and closes beyond the height of the previous candle. Ideally, the candle does not have a long lower wick, indicating strong buying pressure. Candle size and wick length help evaluate the possibility of trend continuation or retracement.

Reversal candle cluster

Reversal candlestick clusters are divided into two types: bullish and bearish reversal candlestick clusters

A cluster of bullish reversal candlesticks

Bullish candlestick patterns signal a transition from a downtrend to an uptrend. Traders can take advantage of this reversal point to enter buy orders. Here are some popular bullish reversal patterns:

• Doji reversal candlestick

Dragonfly Doji candlestick is one of the popular bullish reversal candlesticks, often appearing at the end of a downtrend. The candle’s body is absent, with wide open arms, a long upper shadow, and a short lower shadow.

• Reversal candle engulfs the bulls

The Bullish Engulfing candlestick appears at the end of a downtrend, showing the control of buyers and a strong uptrend. The first candle is bearish, and the second candle is bullish, larger, and completely covers the first candle.

• 3-peak model

The triple top pattern represents a reversal from an uptrend to a downtrend, with three consecutive highs. The third peak is often higher than the first two peaks, when the price cannot surpass this peak, indicating a possible reversal.

• Morning Star Candle

The Morning Star reversal candlestick pattern includes 3 candles: candle 1 is a long red bearish candle, a small 2-body candle (Doji, Hammer, or Spinning Top), and candle 3 is a green bullish candle.

• Abandoned baby

Bullish Abandoned Baby is a reversal pattern consisting of 3 candles: candles 1 and 3 are large, and candle 2 is small, creating an “abandoned baby” image. This pattern usually appears at the end of a bullish cycle, often accompanied by a gap.

Bearish reversal candlestick patterns

In contrast to bullish candlestick patterns, bearish candlestick reversal patterns predict the end of a bullish trend and the formation of a bearish trend. Some bearish candlestick reversal patterns include:

• Gravestone Doji (gravestone doji)

Gravestone Doji, also known as gravestone doji, is one of the most popular Japanese candlestick reversal patterns and is widely used by the majority of traders. When Gravestone Doji appears, it often signals a market reversal from bullish to bearish.

1. This pattern is a single candlestick.
2. There is no candle body.
3. The candle shadow is quite long.

• Shooting Star

It is one of the popular reversal candlestick patterns in the Forex trading market. The shape is similar to the Doji candlestick, but the main difference is that the Shooting Star has:

1. Small candle body.
2. The upper candle shadow is about 2.3 times longer than the candle body.
3. The lower shadow of the candle almost does not appear.
4. The color can be blue or red.

• Evening Star (Evening Star Candle)

The Evening Star candlestick is also a triple bearish reversal candlestick pattern.

1. Candle 1 is a bullish candle with a long body.
2. Candle 2 is a small candle, with a short body, like a star.
3. Candle 3 is a bearish candle with a large body, the closing price is within the range of the first candle.

Candlestick pattern continues

• Three-Step Bullish Model

In an uptrend, this price model appears when there are three consecutive red candles with small bodies, which are continued by the maintenance of the uptrend. This pattern is often clearly shown when small red candles are within the range of the previous candle.

Confirmation of the continuation of the uptrend is usually represented by a green candle with a large candle body. This shows that buyers are regaining dominance in the trend.

• Three-Step Discount Model

In contrast to the bullish pattern, in this pattern, three consecutive bearish candles indicate the maintenance of a downtrend.

See more: Analyze & forecast trend effective candlestick pattern

How to read candlestick charts in technical analysis

Candlestick patterns appear by arranging multiple candles in a specific sequence. Each candlestick pattern has its interpretation. Some models can provide information about the balance between buyers and sellers. While other patterns can indicate a reversal, continuation, or indecision in the market.

Most importantly, candlestick patterns are not necessarily just buy or sell signals. Instead, they are tools to help identify current market trends and spot potential opportunities. It is important to consider candlestick patterns in their context.

Candlestick patterns can be applied in a variety of different contexts, from the general market environment to technical patterns on the chart. They can be combined with other technical analysis indicators such as Trend Lines, Relative Strength Index, Ichimoku Clouds, Stochastic RSI, or Parabolic SAR indicators. Furthermore, they can also be used in conjunction with support and resistance levels to increase the accuracy of market predictions.

Apply candlestick patterns to trading

Candlestick patterns play an essential role in technical analysis, providing traders with valuable information about market sentiment and potential price trends. Effective application of candlestick patterns includes three main elements: determining market trends, determining entry points, trading order points, and risk management.

Identify market trends

• Reversal candlestick pattern: Appears at the end of the trend, signaling a possible reversal.

Bullish Engulfing: The bullish candle completely covers the previous bearish candle.

Hammer: Bearish candle with a short body and long lower shadow, indicating potential buying pressure.

• Trend continuation candlestick pattern: Confirms the current trend.

Engulfing Bearish: The bearish candle completely covers the previous bullish candle.

Hanging Man: Bullish candle with a short body and long upper shadow, indicating potential selling pressure.

Determine entry/exit points for trading orders

• Entry point:

But when a bullish candlestick reversal pattern appears in a downtrend.

Sell ​​when a bearish candlestick reversal pattern appears in an uptrend.

• Command point:

Set the stop loss below the bottom of the buy candlestick pattern or above the top of the sell candlestick pattern.

Use important support/resistance levels.

Take profit when the desired profit rate is achieved.

Risk management

• Use stop-loss orders to limit losses when a trade goes wrong.
• Apply strict capital management principles, and do not risk too much in one transaction.
• Combine other technical indicators to confirm candlestick signals.
• Stay up to date with market news and macroeconomic factors that affect prices.

Conclude

Candlestick patterns provide important signals that help you identify market trends and make more accurate trading decisions. By mastering patterns such as Dragonfly Doji, Bullish Engulfing, Triple Top, etc., you will have powerful tools to enhance your trading efficiency. So Forex Trading has compiled basic information about Japanese candlestick patterns and candlestick charts and their characteristics. Join now the learning community about candlestick patterns, exchange experiences and constantly improve your trading skills!

FAQs

What to note when using candlestick patterns?

1. Candlestick patterns are only a support tool and need to be combined with overall analysis.
2. The effectiveness of candlestick patterns depends on many factors.
3. Needs careful research and flexible application.

Can Candlestick Patterns Predict Important Points in the Market?

Sure. Some candlestick patterns are designed to predict exactly this – identifying changes in trend direction. However, no model guarantees a 100% success rate.

Is There a Difference Between Candlestick Charts and Bar Charts?

Sure – candlestick charts and bar charts have differences, but there are also similarities. Both present the same amount of price data. However, most traders agree that reading candlestick charts is easier.