This is based on historical price data and trends. When used in conjunction with other forms of technical and fundamental analysis, forex candlestick patterns can offer valuable insight into possible trend reversals, breakouts and continuations in the forex market.
Japanese candlesticks were first invented in Japan in the 18th century and have been used in the western world as a method of analysing the financial markets for well over a century. In particular, they are commonly used for forex trading. They rely on past price action to forecast future price movements. Forex candlestick patterns are fairly visual compared to other forms of technical analysis and offer information on open, high, low and close prices for the financial instrument you wish to trade.
Forex candlesticks are especially useful in offering insight into the short-term price movements of the markets, making them a valuable tool for forex day trading strategies. In a typical Japanese candlestick chart , each candlestick represents the open, high, low and close prices of a given time period for a currency pair. The formation of a candlestick requires the open, high, low and close prices of a specific period. For example, a trader would need the daily, open, high, low and close price to generate a daily candlestick.
This would be the same for either a weekly or monthly candlestick. For the candlestick to be successfully evaluated, you would need to wait for the closing price of a session. The body of the candlestick indicates the difference between the opening and closing prices for the day. Candlesticks are generally coloured, as it makes it easier to see whether the candlestick is bullish or bearish. The body of the candlestick is hollow, and the areas above and below the body are called shadows.
Candlestick reversal patterns in forex can help traders to identify trend reversals, breakouts and continuations when monitoring currency pairs. This provides signals for traders to modify their positions, short sell or add extra stop-losses in order to avoid capital loss. Technical analysis is used to determine uptrends and downtrends within the FX market, by drawing support lines on candlestick graphs. There are over 40 recognised forex candlestick chart patterns in total.
Below is a list of eight of the best candlestick patterns to spot in forex trading:. Black marubozus are significant candlestick patterns that give valuable insight into selling pressure. Black marubozus are rectangular candlesticks with little or no shadow at the top or bottom. These indicate selling pressure in a market and show that bears were calling the shots from the opening bell until the closing bell on the day.
A marubozu trading strategy is especially valuable for significant support and resistance levels and may indicate that a potential price level is about to be hit. White marubozus are similar to their black counterparts, but they indicate that prices are being controlled by buying pressure.
These are rectangular blocks with very little or virtually no shadows at the top or bottom. White marubozus most commonly indicate continuation in an uptrend, while in a downtrend they can indicate that a potential trend reversal could occur. Doji, or crosses, are usually made up of a single candlestick and they show that the opening and closing price of a candlestick is virtually the same.
In technical analysis, dojis usually represent neutrality, meaning that the trend is likely to continue. The shadows or wicks on a doji are an important indicator of market sentiment. For example, if the shadow at the top of the candlestick is long, it means that investors tried to push the price higher, but failed, while a longer shadow at the bottom indicates the presence of selling pressure.
The larger the size of the engulfing candlestick, the more significant it is to analysts. A black engulfing candlestick represents a potential bearish reversal during an uptrend, while a white engulfing candlestick could indicate that a bullish reversal is about to occur in a downtrend. A common bullish reversal pattern, hammers indicate that an uptrend is likely to occur. As the name suggests, hammer candlesticks have a short body, with a shadow or wick that is twice as long at the bottom.
When the high and close are the same, it indicates the formation of a bullish candlestick pattern, meaning that while bears tried to push prices lower, buying pressure from the bulls pushed up prices, with prices eventually closing at the same level as the day's high. Hammers candlestick patterns where the open is the same as the high are considered less bullish, but indicate a possible bullish trend nevertheless. Shooting stars look a lot like inverted hammers from above and indicate that a bearish reversal is about to occur.
Shooting star candlesticks are created when the low, open and close of the day are close to each other, with the day's high located high above, forming at least twice the length of the body of the candlestick. When the low and closing prices are the same, a shooting star is considered more significant as it indicates that bulls tried to push prices higher but were overpowered by the bears, and prices eventually closed at a similar level to where they opened.
Shooting star candlestick chart patterns can sometimes look like a gravestone doji. Three-line strikes usually occur at the end of a downtrend and may, therefore, indicate that a reversal might be in order. Three-black crows are a common reversal forex indicator in an uptrend and are indicated by three black consecutive candlesticks on a daily chart where the closing prices were lower than the opening price of the day.
Formed of three consecutive black candlesticks with long bodies, these indicate the lack of buying conviction in the market, which allowed bears to successfully push prices lower. Evening star candlestick patterns usually occur at the top of an uptrend and signify that a trend reversal is about to occur. Evening stars consist of three candlesticks, with the first candlestick having a significantly large green or white body, indicating that prices closed higher than the opening level.
The second candlestick opens higher after a gap, meaning that there is continued buying pressure in the market. The second candlestick in an evening star pattern is usually small, with prices closing lower than the opening level.
The third and final evening star candlestick opens lower after a gap and signifies that selling pressure reversed gains from the first day's opening levels. When used in conjunction with other forms of analysis, candlestick patterns can be a useful indicator of potential trend reversals and price breakouts in the market, helping you to build a stronger and more effective forex trading strategy. So, what are the risks of trading with a forex candlestick patterns strategy?
When trading the financial markets, you are constantly exposed to market risk. As a result, many professional traders have moved to using Candlestick charts over bar charts because they recognize the simple and effective visual appeal of candlesticks. However, while Candlestick charts make it much easier to interpret price action, it lacks the smoothness of the line chart, especially, when the market opens with a large gap.
So, it can be a good idea to add a moving average to the chart while using Candlestick charts. The location of the opening price, how high or low price reached during the candle session, and where the price closed at the end of the time period are all factors in understanding candlestick charts. Over the years, Japanese traders had developed various Candlestick patterns based on historical price movements. Every trader should invest their time and learn these patterns as it will provide a deeper knowledge and understanding of reading forex charts in general.
Candlestick patterns can help you interpret the price action of a market and make forecasts about the immediate directional movements of the asset price. While there many different patterns, we will discuss some of the most popular Candlestick patterns that can help in reading a price chart like a professional trader. A candlestick reading can provide us with information on the three market sentiments: bullishness, bearishness, and a neutral or tentative market condition.
Below are some candle formations that can help us gauge market sentiment :. Referring to the above illustration, A bullish Candlestick like the Big White Candle indicates bullish trend continuation, while a bearish Candlestick like the Big Black Candle indicates bearish trend continuation. On the other hand, a Doji Candlestick represents a neutral or tentative market condition.
So when you are reading candlestick charts, you need to keep in mind which Candlestick patterns indicate additional bullishness and which ones indicate further bearishness, as well as which ones indicate a rather neutral market condition and act accordingly. If you are chart reading and find a bullish candlestick, you may consider placing a buy order. On the other hand, if you find a bearish candlestick, you may choose to place a sell order.
However, while reading Candlesticks if you find a tentative pattern like the Doji, it might be a good idea to take a step back or look for opportunities elsewhere. When you are reading a Candlestick price chart, one of the most important things to consider is the location of the Candlestick formation.
For example, a Gravestone Doji appearing at the top of an uptrend can indicate a trend reversal. However, if the same pattern appeared during a longstanding downtrend, it may not necessarily mean bearish trend continuation. We will further discuss the importance of location of Candlestick patterns in some example trades later.
In the next section we will discuss some complex candlestick patterns. Once you have mastered the identification of simple Candlestick patterns, you can move on to trading more complex Candlestick patterns like the Bullish and Bearish 3-Method Formations. The main difference between simple and complex Candlestick patterns is the number of Candlesticks required to form the patterns.
While a simple Candlestick pattern, like the Hammer, requires a single Candlestick, the more complex Candlestick patterns usually require two or more Candlesticks to form. For example, the Bullish Harami requires two Candlesticks, the Three White Soldiers pattern requires three Candlesticks, and the Bullish 3 Method formation requires 4 candles. Once again, remember that regardless of the complexity, the location of all these simple and complex Candlestick patterns is one the most vital aspects of reading forex charts while using Candlesticks.
By now, you should have a good idea about what a Candlestick is and how to read simple and complex Candlestick patterns. So, let us now try to read trading charts to see how we can trade using these patterns. On the third try, the GBPJPY did penetrate the support level, but the market swiftly reversed and formed an Engulfing Bullish Candlestick pattern that signaled further bullishness in the market.
At this point, some beginner traders may recognize the bullish setup and immediately enter a buy order. However, professional traders are not only waiting for Candlestick patterns to form around key pivot zones, like this support level in figure 4, but they will also wait for the proper confirmation to enter the trade. The next day, the GBPJPY price penetrated above the high of this Engulfing Bullish Candlestick, which confirmed that there would be additional bullishness in the market over the next few days.
Professional traders wait for this confirmation because they understand the concept of order flow and self-fulfilling prophecy. You see, most large banks and hedge funds also watch key market levels and price action around critical levels. Once the Engulfing Bullish Candlestick formed around this crucial support level, it prompted a significant number of pending buy orders just above the high of this Engulfing Bullish Candlestick.
Once the price penetrated above the high, it triggered those orders, which added the additional bullish momentum in the market. Hence, waiting for the price to penetrate above the Candlestick pattern can help you increase the odds of winning on the trade. As you can see in figure 4, once the buy order confirmation came, it did trigger a large uptrend move over the next few days.
As we briefly discussed earlier, the location of the Engulfing Bullish Candlestick for this particular trade was the most important factor. When you apply Candlestick patterns with additional technical confluence , it provides for a powerful combination of factors that can help increase your odds of winning.
And this is exactly what professional traders try to do. If the same Engulfing Bullish Candlestick pattern appeared at the top of a longstanding uptrend, it would have also signaled additional bullishness in the market, but that signal would be much less powerful. Since the market was already in an uptrend, it may not have had the legs to push the price much higher. However, on this instance, the market was already trading in a range for several days.
Bearish candlestick patterns in Forex are the direct opposites of their bullish counterparts. They suggest a continuation of a major downtrend or the beginning of a new downtrend. The only common neutral candlestick pattern is the Doji. The Doji forms when the market is undecided whether to go up or down. In the end, what forms is a candlestick with a small body and short wicks above and below the body. Because of the way a candlestick is formed, the opening price of a new time period is often close to the closing price of the previous time period.
This makes Forex charts look like a continuous flow of candlesticks in trends moving up and down. Trade opportunities abound in these charts. A common anomaly in the charts is when there is a gap in Forex prices. But even in this case, there are trading opportunities for those who know how to interpret them. All these candlestick patterns have been there long before the MT4 trading platform made its way into our lives.
And till this day, they continue to do a great job of predicting potential price movements. However, just as it is with many other Forex trading tools or concepts, Forex candlestick patterns are not meant to be used in isolation. You may have to combine them with some other Forex trading tools to get the most out of them. By the way, if you easily get tired of staring at Forex charts, what you need is this chart overlay indicator that gives your MT4 a fresh, modern look.
The indicator also makes your chart look more compact and easier to analyze. This candlestick could either be bullish or bearish. What marks it out as a bullish candlestick pattern is its small body sitting on a long wick. Bullish Engulfing Made up of two candlesticks — a bearish followed by a bullish one. It is called bullish engulfing because the size of the bullish candle completely engulfs the bearish one preceding it. Bullish Railroad Made up of two candlesticks of almost equal sizes — a bearish followed by a bullish.
When they follow each other, it is often a sign that the market is taking a sharp turn towards the uptrend. Bullish Marubozu A long bullish candlestick with no wicks or negligible wicks that suggests an uptrend continuation. Morning Star Made up of three candlesticks. The first candlestick is bearish. The second one is a small candle with a negligible body and very little wicks. The third one is a bullish candlestick that suggests a turnaround in the market bias.
Three White Soldiers Made up of three bullish candlesticks with little or no wicks. This often suggests a bullish continuation. Three Inside Up Harami Made up of three candlesticks — a bearish followed by two bullish ones. The first bullish candlestick after the bearish one is small compared to the previous bearish candlestick. But the next bullish candlestick engulfs the bearish one suggesting the market is making a strong move towards the uptrend. Bullish Tweezers Tweezers are almost similar to exhaustion candlesticks, except that bullish tweezers come in twos and often have shorter wicks.
What marks it out as a bearish candlestick pattern is a small body underneath a long wick. Bearish Engulfing Made up of two candlesticks — a bullish followed by a bearish one. It is called bearish engulfing because the size of the bearish candle completely engulfs the bullish one preceding it. Bearish Railroad Made up of two candlesticks of almost equal sizes — a bullish followed by a bearish.
The second candlestick opens higher after a gap, meaning that there is continued buying pressure in the market. The second candlestick in an evening star pattern is usually small, with prices closing lower than the opening level. The third and final evening star candlestick opens lower after a gap and signifies that selling pressure reversed gains from the first day's opening levels.
When used in conjunction with other forms of analysis, candlestick patterns can be a useful indicator of potential trend reversals and price breakouts in the market, helping you to build a stronger and more effective forex trading strategy. So, what are the risks of trading with a forex candlestick patterns strategy? When trading the financial markets, you are constantly exposed to market risk.
While trading following patterns and studies, traders should always be aware of the potential risk of algorithmic trading. This uses information at the speed of light and can alter the landscape at any time using data that might not be available to the trader. Therefore, it is important that you consider risk management prior to entering any trades. Similar to other systems of trading, you will need to have an idea of where to stop out and where to take profits before you enter a trade.
We also recommend that forex traders take stop-loss orders into consideration, as trading with leverage can maximise profits, but can equally maximises losses. Seamlessly open and close trades, track your progress and set up alerts.
Our award-winning trading platform , Next Generation, comes with a wide range of Japanese candlestick patterns that traders are able to draw on, customise and use to improve their trading strategy within the forex market. Take a look at our new charting features here. Drawing tools, technical indicators and price projection tools are also available for traders on-the-go with our mobile trading app.
This applies to both Android and iOS users, so you can start perfecting your forex candlestick pattern strategy straight away. See why serious traders choose CMC. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Personal Institutional Group Pro. United Kingdom. Start trading. What is ethereum? What are the risks? Cryptocurrency trading examples What are cryptocurrencies? The advance of cryptos. How do I fund my account? How do I place a trade? Do you offer a demo account? How can I switch accounts? CFD login. Personal Institutional Group. Log in. Home Learn Trading guides Forex candlestick patterns. Forex candlestick patterns Forex candlestick patterns are a form of charting analysis used by forex traders to identify potential trading opportunities.
See inside our platform. Get tight spreads, no hidden fees and access to 11, instruments. Start trading Includes free demo account. Quick link to content:. What is a candlestick in forex trading? How to read candlesticks in forex trading The body of the candlestick indicates the difference between the opening and closing prices for the day. Forex candlestick patterns strategy Candlestick reversal patterns in forex can help traders to identify trend reversals, breakouts and continuations when monitoring currency pairs.
Best forex candlestick patterns There are over 40 recognised forex candlestick chart patterns in total. Start with a live account Start with a demo. Shooting star. Three-line strike. Three black crows. Evening star. Understanding forex candlestick patterns When used in conjunction with other forms of analysis, candlestick patterns can be a useful indicator of potential trend reversals and price breakouts in the market, helping you to build a stronger and more effective forex trading strategy.
Powerful trading on the go. Open a demo account Learn more. How to use candlesticks in forex trading Our award-winning trading platform , Next Generation, comes with a wide range of Japanese candlestick patterns that traders are able to draw on, customise and use to improve their trading strategy within the forex market.
Forex candlestick patterns are. Forex candlesticks provide a range of information about currency price movements, helping to inform trading strategies · Trading forex using. Japanese candlesticks can be used for any time frame, whether it be one day, one hour, minutes .whatever you want! They are used to describe the price.