How to Read Forex Candlestick Patterns

Mar 26, 2020

In technical trading, the essence of Forex candlestick patterns is a pivotal element in the trader's toolset. An in-depth understanding of these patterns gives the trader an insight into potential market trends and helps them make decisions from those deductions.

Traders can discover trading opportunities with the aid of candlestick patterns. A trader who knows the Forex basic candlestick patterns and rules can foretell the future direction of price movement. A trader's ability to catch the maximum price trend is contingent on how early they enter the market. The skill of knowing the right time to enter the market is very crucial. Understanding the Forex candlestick patterns can help traders know just the right time to strike.

In this article, we shall discuss what candlestick patterns are and the top 8 forms all traders should know to strengthen their market strategies.


What are candlestick patterns?

Munehisa Homma, a Japanese rice trader, developed the concept of candlestick patterns in the 18th century. Today, in the Forex market, candlestick patterns serve as a technical analysis tool that Forex traders employ to chart and interpret the price movement of assets.

Leading chart pattern expert, Thomas Bulkowski wrote in his book Encyclopedia of Candlestick Charts, that there are a total of 103 candlestick patterns or formations.

Forex traders continually use candlestick chart patterns for day trading to predict possible price movements on the chart.

These Forex candlestick patterns can signal bullish or bearish movements.

While numerous candlestick patterns help indicate opportunities and identify continuation patterns or market indecision within a market, others give insight into the balance in buying and selling requirements.

Each candlestick has three features namely;

  • The color: If the candle is green, it implies the closing price is higher than the opening price. But, a red candlestick shows that the opening price is higher than the closing price;
  • The Wick: This indicates the low and high prices for the candle;
  • The body: Symbolizes the differences between the opening and closing prices.


Top 8 Candlestick Patterns Every Trader Should Know

1. The Doji Candlestick Pattern

The candlestick pattern falls under the Forex reversal candlestick patterns. They are easy to recognize and happens to be the most popular patterns. The Doji is a single pattern that occurs when the opening and the closing price during a period remain equivalent. It is without a body. You have the Doji candlestick when the market is quiet and without volatility.

2. The Shooting Star Candlestick Pattern

The shooting star is a bearish candlestick with a little or no lower wick, a long upper wick, and a small body. The Shooting Star pattern indicates the end of a bullish trend and usually appears after an uptrend. The Inverted Hammer candle and the Shooting Star has the same structure.

3. The Three Line Strike

There is a total of four candles in this pattern. The Three Line Strike is a bullish reversal pattern. It appears after a downtrend. This pattern indicates that the continuation of a current trend is likely. But that is not always true because when the candlestick pattern is slightly reliable, it will symbolize a reversal of the uptrend.

The bullish Three Line Strike comprises three bullish candles that close progressively above then followed by a fourth candle.

4. Inside Bars

The Inside Bars (break or reversal) candlestick pattern is a powerful and easy to spot candlestick pattern. This pattern symbolizes reduced volatility in the markets. The Inside Bars Forex trading strategy comprises two bars with a smaller inside bar, which is within the high to low range of the prior bar (The mother bar). Consequently, the "high" is lower than the previous bar's high, and the "low" is higher than the former bar's low. A trader should not trade in the course of the trend as it is not always reliable. It is true because essential levels of resistance or support can indicate a reversal.

5. Evening Star

The Evening Star is a bearish reversal candlestick pattern that begins with a white bar bearing an uptrend to a new high. The Evening Star pattern is made up of three candles and is equivalent to the bullish Morning Star candlestick pattern. Experts believe this pattern predicts lower prices with over 70% accuracy rate. The Evening Star pattern symbolizes the reversal of an uptrend and is particularly powerful when the third candlestick eradicates the gains of the first candle.

6. Three Black Crows

The Three Black Crows is a bearish reversal candlestick pattern that appears after a bullish trend. It comprises three sequential bearish candles and symbolizes that market sentiment has reversed. In the Three Black Crows pattern, each bar opens within the body of the preceding candlestick, hinting bullishness. But, as each bar closes lower, the bearishness is obvious.

7. Three White Soldiers

The Three White Soldiers pattern consists of three consecutive long white or green candles with small wicks. This pattern is a powerful bullish signal that appears after a downtrend and confers a uniform advance of buying influence. The threads open and close progressively higher than the previous day.

8. Hammer and Hanging Man candlesticks

The Hammar and the Hanging Man candlestick patterns are identical irrespective of the color. Both candlestick patterns appear with long lower threads, which is about twice the body of the candles. The difference between the two remains that the Hammer pattern is a bullish signal that comes after a market decline. But, the Hanging Man is a bearish signal that appears at the end of a bull run.

If you like this strategy, you might also be interested in this The Bollinger Bands – Trading with Bollinger Bands Strategies

Conclusion

Understanding the concept of candlestick patterns is crucial to profitable trading. Whatever trading means you opt for - raw price action or some other means of recognizing promising structures, the knowledge of candlestick patterns we enlisted will surely enhance your trading. However, as vital as these patterns can be, it is safe to keep in mind that they are not 100% reliable. The Forex trading world is broad and full of opportunities. Get as much information as possible to trade not just safely but also profitably. Good

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NSBroker Analytics Team

Expert Traders From NSBroker specialize in forex trading and have been successfully helping people profit from the markets for the past 9 years. Our traders consistently blog about the state in which the markets are at. Learn how to profit via forex trading with NsBroker.