What traders need to know about candlestick patterns in Forex trading

Introduction: Why Candlestick Patterns Matter

If you want to become a successful trader in the Forex industry, reading and understanding candlestick patterns deeply is an essential foundational skill. This tool appears on every trading platform and is a fundamental basis that many traders use to make buy and sell decisions. Many traders can generate significant profits simply by analyzing candlesticks alone.

What Are Candlesticks?

Candlestick charts are tools that display price movement data over a specified period. Each candlestick shows the opening price, closing price, highest price, and lowest price during that period.

Candlestick patterns have the following characteristics:

• The body (body) of the candlestick shows the range between the opening and closing prices.
• The wick (wick) indicates the highest and lowest prices.
• A white (Bullish) candlestick indicates the closing price is higher than the opening price.
• A black (Bearish) candlestick indicates the closing price is lower than the opening price.

They can be used across all timeframes, from 15 minutes, hourly, to weekly.

Why Are Candlestick Patterns Important?

Indicate market sentiment: Candlestick patterns help you see the mood and buying-selling pressure of traders through the shape of the candlestick and wicks. This cannot be obtained from line charts or standard bar charts.

Easy to understand: Candlestick patterns have clear formations and can predict trend directions well. When combined with other tools such as trend lines, support-resistance levels, the analytical capability increases significantly.

Proven results: Candlestick patterns originated in Japan over 200 years ago. Japanese rice traders used this technique to analyze rice prices in Osaka markets, becoming legendary and remaining relevant to this day.

Basic Types of Candlestick Patterns

Doji

Candles where the open and close prices are the same or very close, signaling a balance between buying and selling forces. It may indicate a trend reversal point.

There are 4 types of Doji:

• Standard Doji: Shows equal buying and selling pressure.
• Gravestone Doji: Long upper wick indicates buying pressure was suppressed by selling.
• Dragonfly Doji: Long lower wick indicates selling pressure was lifted by buying.
• Four Price Doji: Very small wicks, indicating uncertainty.

Marubozu

Candles with no wicks, the entire candle body covers the whole candle.

• White: Full buying pressure during the period.
• Black: Full selling pressure during the period.

Spinning Top

Candles with small bodies but long wicks on both sides, showing hesitation between buying and selling forces. It may signal a trend reversal.

Single Candlestick Patterns: Reversal Signals

Hammer & Hanging Man

Hammer (in a downtrend): May signal a reversal, small body with a long lower wick.

Hanging Man (in an uptrend): May signal a reversal, small body with a long lower wick.

Inverted Hammer & Shooting Star

Inverted Hammer (in a downtrend): Buying pressure tries to push prices higher, possibly indicating a reversal.

Shooting Star (in an uptrend): Selling pressure tries to push prices lower, possibly indicating a reversal.

Two-Candlestick Patterns

Bullish Engulfing & Bearish Engulfing

Bullish Engulfing: A black candle followed by a larger white candle, signaling a reversal from downtrend to uptrend.

Bearish Engulfing: A white candle followed by a larger black candle, signaling a reversal from uptrend to downtrend.

Tweezer Tops & Tweezer Bottoms

Tweezer Tops: An up candle followed by a down candle with equal high wicks, possibly indicating a switch from up to down.

Tweezer Bottoms: A down candle followed by an up candle with equal low wicks, possibly indicating a switch from down to up.

Three-Candlestick Patterns

Evening Star & Morning Star

Morning Star (from downtrend to uptrend):

• First candle: continues downward
• Second candle: Doji or small candle
• Third candle: large upward movement

Evening Star (from uptrend to downtrend):

• First candle: continues upward
• Second candle: Doji or small candle
• Third candle: large downward movement

Three White Soldiers & Three Black Crows

Three White Soldiers: Three consecutive large white candles, a strong buy signal.

Three Black Crows: Three consecutive large black candles, a strong sell signal.

Three Inside Up & Three Inside Down

Three Inside Up: Large down candle + small candle + upward close above the first candle, bullish signal.

Three Inside Down: Large up candle + small candle + downward close below the first candle, bearish signal.

Summary: Why Are Candlestick Patterns Valuable?

Candlestick patterns are the main language of market communication, allowing traders to understand the psychology of buyers and sellers and their driving forces.

• White candle: Buyers dominate.
• Black candle: Sellers dominate.
• Long wicks: Intensity of the battle between forces.
• Short wicks: Agreement between buyers and sellers.

Candlestick patterns are categorized as:

• One candle: Doji, Marubozu, Spinning Top, Hammer, Shooting Star
• Two candles: Engulfing, Tweezer
• Three candles: Morning/Evening Star, Soldiers/Crows, Three Inside

Most importantly, remember that candlestick patterns are not 100% certain signals. Always wait for confirmation from subsequent candles and consider other factors such as support/resistance levels, news, and overall market conditions.

Trading involves risk. Manage risk systematically and avoid investing money you cannot afford to lose.