8 Popular Forex Candlestick Patterns

Japanese candlesticks, including forex candlestick patterns, are a type of chart analysis used by traders to identify potential trading opportunities based on historical price data. Used in conjunction with other forms of technical and fundamental analysis, Japanese candlesticks can provide valuable insight into potential reversals, breakouts, and continuations in the market.

Japanese candlesticks were first invented in Japan in the 18th century and have been used in the West to analyze financial markets for over a century. In particular, it is widely used in forex trading. Predict future price movements based on past price movements. Forex candlestick patterns are relatively visual compared to other forms of technical analysis and provide information about the opening, high, low and closing price of the financial instrument you are trying to trade. Forex candlesticks provide insight into the market's short-term price action, making them a valuable tool for day trading strategies.

What are forex trading candlesticks?

In a typical Japanese candlestick chart, each candlestick represents the opening, high, low and closing price of a particular period. For example, in the EUR/USD daily candlestick chart, the core or shadow at the top of the candlestick indicates the highest level achieved on that day, while the core or shadow at the bottom of the candlestick indicates the lowest level for that day. . Achieved price on the day.

Candlestick formation requires opening, high, low and closing prices for a specific period. For example, a trader needs the daily open, high, low, and close prices to generate daily candlesticks. This applies to both weekly and monthly candlesticks. You have to wait until the end of the session for the candlestick to be successfully evaluated.

how to read candlesticks in forex trading

The candle's body shows the difference between the day's opening and closing prices. Candlesticks are commonly coloured, so you can easily see if the candlestick is bullish or bearish. The body of the candlestick is hollow, and the area above and below the body is called the shadow. Coloured candlesticks (usually shown in black or red) indicate closing prices lower than opening prices, and transparent-bodied candlesticks (usually also in white or green) indicate closing prices higher than opening prices than the opening price for the current day.

forex candlestick strategy

Forex candlestick reversal patterns help traders spot trend reversals, breakouts, and continuations when monitoring currency pairs. This signals the trader to change positions, go short or add a stop loss to avoid losing principal. Technical analysis is used to determine uptrends and downtrends within the Forex market by drawing support lines on candlestick charts.

Best forex candlestick patterns

There are over 40 recognized forex candlestick chart patterns in total. Below is a list of eight of the best candlestick patterns in forex trading:

Marubozu

BLACK MARUBOZU

The black marubozu is an important candlestick pattern that provides valuable insight into selling pressure. A black marubozu is a rectangular candlestick with little or no shadow on the top or bottom. These show the selling pressure in the market and show that the bears were in control from the day's open to close. The Marubozu trading strategy is particularly valuable at critical support and resistance levels, which could indicate that the potential price level is about to be reached.

WHITE MARUBOZU

The white marubozu is similar to the black marubozu, but indicates that buying pressure dominates the price. These rectangular blocks have little or no shadow on the top or bottom. A white bald head almost always indicates a continuation of an uptrend, but in a downtrend, it can indicate a potential trend reversal.

Doji

A Doji or cross usually consists of a single candlestick and indicates that the opening and closing prices of the candlestick are virtually the same. Doji candlesticks resemble a cross, an inverted cross, or a plus sign. In technical analysis, Doji usually represents neutrality, meaning the trend is likely to continue. Doji's shadow or core is an important indicator of market sentiment. For example, a long shadow at the top of a candle means that investors have tried and failed to push the price higher, while a long shadow at the bottom indicates selling pressure.

Engulfing pattern (bullish/bearish)

A candlestick winding pattern (bullish/bearish market) indicates a potential trend reversal and is characterized by a large candle that stretches (literally wraps) the preceding candle up or down. The bigger the candlestick, the more meaningful it is to the analyst. An entangled black candle represents a potential bearish reversal during an uptrend, while an entangled white candle can suggest an imminent bullish reversal in a downtrend.

Hammer

Hammers are a common bullish reversal pattern and indicate a likely uptrend. As the name suggests, a hammer candlestick has a short body and a shade or wick at the bottom that is twice as long as he is. When the high and close prices are the same, it indicates the formation of a bullish candlestick pattern. This means that the bears are trying to push the price down, and the buying pressure of the bulls has pushed the price up and eventually levelled off. is expensive. A hammer candlestick pattern in which the open is equal to the high is considered not bullish but still indicates a possible bullish trend.

Shooting star

When viewed from above, the shooting star looks like an upside-down hammer, signalling an imminent bearish reversal. A shooting star candlestick is formed when the day's low, open, and close are close together, and the day's high is at least twice the length of the candlestick's body. A shooting star is considered more important if the low and close prices are equal. This is because it shows that the bulls tried to push the price higher but were overwhelmed by the bears and eventually closed the trade at a level similar to the closing price. The shooting star candlestick chart pattern can sometimes look like a tombstone child.

Three-line strike

A three-line strike pattern refers to three white candlesticks appearing on the daily chart for three consecutive days, indicating that the price has closed at his three-day high simultaneously. A three-line strike usually occurs at the end of a downtrend so that it can indicate a possible reversal.

Three black crows

A popular reversal forex indicator in an uptrend, the Three-Black Crows, is shown by his three consecutive candlesticks on the daily chart where the closing price is lower than the day's opening price. These consist of three consecutive long black candlesticks, indicating a lack of buying confidence in a market where the bears have successfully pushed the price down.

Evening star

An evening star candlestick pattern usually occurs at the top of an uptrend and signals an imminent trend reversal. Evening Stars consist of three candlesticks, the first of which clearly has a large green or white body, indicating that the trade has closed above the opening price. The second candle opens higher after the gap. This means there is still buying pressure in the market. The second candle in the Evening Star pattern is usually small, and the price ends lower than the opening price. The third and final Evenstar candle opens lower after the gap, meaning selling pressure has reversed gains from day one's opening levels.

Understanding Forex Candlestick Patterns

Candlestick patterns, when used in conjunction with other forms of analysis, can be useful indicators of potential trend reversals and price breakouts in the market, helping you build stronger and more effective forex trading strategies.

So what are the risks of trading the Forex Candlestick Patterns strategy? You are always exposed to market risks when trading in the financial markets. Traders should always be aware of the potential risks of algorithmic trading when trading according to patterns and research. It uses the information at the speed of light and can always change things up with data that may not be available to traders. Therefore, it is important to consider risk management before starting to trade. As with any trading system, before you start trading, you should know where you want to come from and where you want to profit. Also, forex traders are advised to consider stop loss as leveraged trading can maximize not only profit but also loss.

Source: CMC Markets UK