In Forex trading, investors often use types of candlestick patterns Japanese candlestick pattern such as Doji candlestick patterns, Piercing Pattern, Hammer, etc. These types of candlesticks show price fluctuations, as well as give Trading signals for traders. In this article, let’s join Forex Trading to learn about the structural characteristics and how to read candlestick patterns.
Answers Japanese candlestick pattern for beginner traders
Candlestick patterns were created in the 18th century. To date, candlestick patterns have become an extremely popular technical analysis tool, bringing high profits and limiting risks for investors.
What is the Japanese candlestick pattern?
Japanese candlestick pattern is also known as the candlestick chart. This is a technical tool used to indicate market price fluctuations of a certain asset during a specific trading session. The first person to discover candlestick charts was a Japanese trader named Munehisa Homma. Homma used this model to evaluate and analyze rice prices, as well as factors affecting market prices.
What does the Japanese candlestick pattern consist of?
The structure of candlestick charts includes two main components: Candle shadows (candle whiskers) and candle bodies.
- Candle shadows are thin lines located above and below the candle body. Candle shadows represent the highest and lowest prices during a particular trading session.
- The candle body is usually blue or red. The body of the candle represents the range of price fluctuations from opening to closing. Observing the color of the candle body, traders can know whether the price is increasing or decreasing. The length of the candle represents the fluctuation between the opening and closing prices.
See more: Master the Forex “game” with Price action
Analyze popular Japanese candlestick pattern in Forex
In this article, we will focus on understanding some bullish/bearish candlestick patterns and reversal candlestick patterns in the Forex market.
Doji candlestick pattern
The Dragonfly Doji candlestick chart can be considered the most popular among the bullish reversal candlestick patterns. This chart appears at the end of a downtrend, shaped like a dragonfly spreading its wings. The candle body is quite short or absent, the lower wick is long, and the upper wick is short or absent.
Dragonfly Doji predicts that in the early stages of the trading session, sellers will prevail and prices will drop sharply. However, when the price hits the lowest level, the buyers will prevail and push the price back up. The closing price is the highest price of that trading session .
The opposite of this pattern is Gravestone Doji – a bearish reversal candlestick chart. Gravestone Doji has no candle body and lower wick, the upper wick is very long. At this time, the buyer is still dominating the market, prices are continuously increasing. But when prices reach their peak, the market will reverse sharply and sellers will gradually dominate.
Bullish Engulfing candlestick pattern
The structure of the Bullish Engulfing chart consists of two candles. In which, the first candle is a bearish candle and the second candle is an bullish candle. After the price tends to decrease sharply, a green candle larger in size than the previous candle will be formed. This signals that the market is about to enter a reversal period.
The first candle shows that the sellers are dominant so the closing price is lower than the opening price. However, strong buying pressure pushed the closing price higher than the initial price. The buyer gradually takes control.
In addition to the Bullish Engulfing model, traders can also apply the what is a head and shoulders pattern to identify market price trends. This is a very strong reversal price chart. By observing the head and shoulders pattern, you can determine appropriate price ranges and set take profit and stop loss orders.
Strong reversal candlestick pattern – Piercing Pattern
The structure of the Piercing Pattern consists of two candlesticks. The first candle is a bearish candle, and the second candle is a bullish candle and has at least half the length of the previous candle. There is a certain gap between the opening price of a bullish candle and the closing price of a bearish candle.
If the buyers are dominant over the sellers, a green candle will appear as soon as the price drops sharply. This is a sign of a clear trend reversal in the market.
Analysis of the Morning Star bullish candlestick pattern
Japanese candlestick pattern Morning Star is quite special. The structure of this model includes three candles. The first candle is a strong bearish candle, the second candle has a similar shape to the Doji candle, and the third candle is a bullish candle.
On the first candle, the sellers dominate the market so the price drops sharply. As prices get lower and lower, buyers gradually hesitate, and the second candlestick is formed. After that, the buyers gradually took over and pushed the closing price higher. This is the moment when the third candlestick forms. The market shows signs of reversal and traders can place trading orders right now.
To gain high profits, besides the Morning Star chart, investors can also apply cup handles. This model includes a cup body and a handle. For the cup-with-handle model, the market price has an increase equal to the depth of the bottom (from 20 – 35%). By identifying support and resistance levels, traders can place appropriate and highly effective trading orders.
Analysis of Japanese candlestick pattern Hammer
Hammer candles are among the strong bullish reversal candlestick patterns. The Hammer candlestick chart has a similar shape to the Doji candlestick. The candle body is quite small and has a long lower wick and a short upper wick.
This pattern is formed after a downtrend. This signals that buyers are gradually regaining their advantage and pushing prices up. The Hammer candlestick is most effective when the downtrend is shown by three consecutive red candles, and then one bullish candle.
Bearish Engulfing candlestick patterns
In contrast to the Bullish Engulfing pattern, Bearish Engulfing is a bearish reversal candlestick pattern. Bearish Engulfing appears at the end of an uptrend, consisting of two candles. In which, the first candle is a bullish candle and the second candle is a bearish candle.
This candlestick chart is a sign that the market price is slowing down and trending downward. In particular, the larger the size of the second candle, the stronger the candle’s reversal potential.
Evening Star – Reversal candlestick patterns
Evening Star is a bearish reversal candlestick chart, opposite to Morning Star. The structure of the Evening Star chart includes three candles. The first candle is green and has a long body. The second candle is smaller in size and shaped similar to a star. The third candle is red and has a large body. The closing price on the market falls within the range of the first candle.
When observing this pattern, traders need to note the gap between the first and second candles. The clearer the gap, the stronger the candle’s reversal rate.
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2 extremely accurate ways to read Japanese candlestick pattern that you may not know
To read Japanese candlestick charts, traders can rely on the color of the candle body and candle shadow.
Based on the color of the Japanese candlestick body
Observing the color of the Japanese candlestick body, you can determine the market’s trend and behavior:
- If the body is long and green, it means the buyers are controlling the market. This signals an upward trend in price.
- On the contrary, if the body is long and red, it means the sellers are dominant. At this time, the market price entered a downtrend.
Read candlestick patterns based on candle shadows
When reading candlestick charts through the color of candle shadows, you need to note:
- If there is no candle shadow, it means that the sellers and buyers are hesitant. Market prices do not fluctuate.
- Short upper and lower shadows signal that the market has not changed much, the price is still following the trend at the present time.
- Long upper and lower shadows indicate that the price is being pushed beyond the open/close. Maybe the buyers are pushing prices up and are being held back by the sellers, or vice versa.
- If the upper shadow is long and the lower shadow is short, this is a sign that although the buyers are dominant, they are being strongly influenced by the sellers and restraining the price increase. This leads to a decline in market prices.
- The upper shadow is short and the lower shadow is long, signaling that the sellers are dominant. However, the buyer had a very strong impact and pushed the price up at the end of the trading session.
Conclude
It can be seen that the Japanese candlestick pattern is very diverse and widely used in Forex. Depending on the purpose and trading strategy, investors consider choosing the appropriate model. Hopefully, the above article has provided traders with a lot of useful knowledge. To update the latest articles about the foreign exchange market, don’t forget to visit Forex Trading!
FAQs
Below are frequently asked questions about Japanese candlestick charts in trading.
What are the limitations of Japanese candles?
Candlestick charts cannot show all trends in the market. If you only consider prices in a short time frame, the Japanese candlestick pattern can give noisy and misleading signals.
What should you keep in mind when using the reversal candlestick pattern?
For candlestick reversal charts, investors need to clearly determine the candle shape before placing buy/sell orders. Additionally, you should also enter a stop loss order above or below the chart. To take profits, traders can apply the R:R rule.
Besides candlestick reversal charts, what other types of candlestick patterns are there?
Popular candlestick patterns include:
- Single candle (strong candle, indecisive candle, standard candle,…).
- Double candlestick (bullish engulfing candle, bearish engulfing candle).
- Three candlestick patterns (Evening Star, Morning Star,…).
