Understanding Candlestick Patterns in Forex

candlestick-chart-forex

How to Trade Forex Using Candlestick Patterns

If you are looking for a good trading strategy, then you can definitely try candlestick pattern which is one of the best trading strategy, to succeed.

Candlestick Pattern- An Introduction:

A candlestick pattern of trading is nothing but a chart pattern that shows price movement in a perfect way. Though there are line and bar charts that are used in trading, a candlestick chart depicts trade as it is. Candlestick chart was first introduced in Japan, which is also called Japanese Candlestick chart. The specialty of the candlestick chart is that each candle shows one day’s trade. So, if you take up a month’s trade you will find 30 candlesticks formation, which is referred to as “Candlestick Pattern”. It is a combination of both the Bar and Line chart.

Understanding Candlestick:

From the beside diagram, you can visualize the open and close of the market price; this is often referred to as the real body. According to the convenience of the trader, these chart colors can be changed.

Each candlestick represents Open, High, Low and Close values. The very main purpose of using this candlestick pattern is to understand the location of opening price how low (or) how high the price reaches and at the close of the period where the price reaches is what all about the candlestick chart.

 

candlestick-chart-discription

How to study the Candlestick Chart Pattern (OHLC Pattern):

To get the full knowledge of trading, the study of the candlestick pattern is essential; the following points are very important:

OPEN:
Open indicates the first price that is traded during the formation of the candle. The candle is indicated by either the bottom or top of the body. From the diagram above we would say that if the market is high the candle’s body is shaded white and if the market comes down the candle would be colored black.

HIGH:
The high is the highest trade that is carried on during the candlestick formation, and it is indicated by the top tail and is referred to as “Top tail”. Suppose, if the market starts at the highest price then there will be no top tail formation.

LOW:
The low is the lowest trade that is carried on during the candlestick formation, and it is indicated by the bottom tail and it is referred to as “Lower Tail”.  And if the market opens at the lowest point, then there will be no lower tail formation.

CLOSE:
Close is the last price traded in the during the candlestick formation. It is indicated by either top (or) bottom of the candle’s body. The uptrend candle is colored white and the downtrend candle is colored black. These candles are based on the closing price.
If you are interested in trading; the first best investment would be spending some valuable time in learning candlestick chart, which will give you the deeper knowledge of the trading and price movements in the market.

Types of Candlestick Pattern

There are numerous candlestick patterns, which form according to the price change in the market, and each formation of the candle has some name given according to its shape. Here is an overview of the most popularly used patterns.

Bullish Candle:

A bullish candle is formed when there is a significant increase in price with a longer body.The body of the candle can stretch as much as it can, which says that there is a growth in the market.

candlestick-chart-bullish-candle

Bearish Candle:

A bearish candle is formed when there is a decrease in the market. Longer the body the more chances of a price decrease.

 

bear-candle-forex-candlestick-chart

Long Lower Shadow:

These candles represent the bullish market. The lower shadow must be the length of the body, that’s how the long lower shadow is identified.

 

long-lower-shadow-candlestick-pattern

Long Upper Shadow:

These candles represent the bearish market. In this candle, the upper shadow must be the size of the body.

candlestick-pattern-long-upper-shadow

Hammer:

Hammer, is a bullish signal. In this candle, the down shadow must be twice the length of the real body. These hammers have little shadow up or no shadow at all. When a hammer occurs it is usually called as “Hanging man”.

hammer-or-hanging-man-candlestick

Shooting Star:

Shooting star occurs during or after the uptrend. These candles have a long upper shadow with little body and have no (or) little shadow down.

candlestick-pattern-shooting-star

Harami:

Harami is two candles formation. Under this pattern the smaller candle forms prior to the larger body of the candle.

 

harami-two-candle-formation-pattern

Doji:

Doji is a pattern, in which the market open and closes at the same time. There are different types of doji patterns depending upon the opening and closing of the market.

The Doji patterns include:
  • Long-Legged Doji: This long-legged doji comprises of long upper and long down shadow, and the price in the middle.
  • Dragonfly Doji: The dragonfly pattern signifies downtrend; it has long lower shadow and has no upper shadow.
  • Gravestone Doji: The gravestone doji signifies uptrend; it has long upper shadow and have no down shadow.
  • Four Price Doji: This form of pattern indicates a very quiet market. It shows just a line which indicates indecision. In this pattern, the open, close, highs and the lows are all the same for the trader.

 different-types-of-doji-candlesticks

Engulfing Candle:

The engulfing candlestick pattern shows both uptrend and downtrend i.e. when the market is bullish the pattern formed is with the long white body with the small black real body, in a downtrend. The bearish pattern is formed by a long black real body with the small white body near the dark body, in an uptrend.

 

engulfing-candle-pattern

Spinning Tops:

Spinning tops are the patterns where small real bodies are formed. These patterns have much longer shadows than the bodies. It points both bullish and bearish trend.

These are the basics of the candlesticks patterns that shows the market changes as and then when they appear. Apart from the above candle pattern there are some of the major candlesticks patterns, from which the trader can analyze how the market will move and how the market will hit on the price.

 

 

spinning-tops-candlestick-pattern

The Marubozu:

The marubozu pattern of candlestick is easy to understand. Morubozu means “bald” in the Japanese language. Hence as the word tells; the pattern has no upper or lower shadow in the candle only the body appears.
A white morubozu is a long white body without any shade, which indicates a bullish market.
A black morubozu is a long black body; which indicates a bearish trend.

 

 

marubozu-candlestick- pattern

Paper Umbrella:

Paper umbrella is a pattern is the chart pattern which comes with the long lower shadow. This type of candlestick pattern denotes strong signs of reversals.

paper-umbrella-candlestick-pattern

THE FIVE IMPORTANT CANDLESTICK PATTERNS:

  • Evening Star
  • Two black gapping
  • Three black crows
  • Three line strike
  • Abandoned baby.

The above five points mentioned is an assumption of trade patterns, which tells the nooks and corns of the market; which also identifies how reversals occur after the uptrend or downtrend in the market. Let us see it in a detailed manner:

Evening Star:

 

evening-star-candlestick-pattern

 

The bearish pattern of evening star will appear after a tall white candle that indicates uptrend. In the next candle, because of the gap in the market, which leads to failure in bringing about fresh (or) new buyers, there arises a decline in the market with the black body, which is referred to as an evening star pattern. The next candle formation after the evening star is the confirmation of a bearish market with lower lows.

Two Black gapping:

 

two- black- gapping- candlestick- pattern

 

The two black gapping candlestick patterns will show only after an uptrend. Between the two candles, there is a gap which indicates lower lows. This pattern predicts; there will be a decline in the market.

Three Black Crows:

 

three- black- crows -candlestick-pattern

The three black crows in the bearish trend indicate that there will be lower lows ever before. If three black crows are formed; the market would close lower.

Three Line strike:

 

three- line- strike-candle-pattern

The three line strike strategy shows, there would be a three-line strike in the bullish market, which carves out three black candles in a downtrend. The next candle opens low initially and then reverses to an uptrend. The candle extends higher than it opened in that series. The opening candle marks lower than the fourth candle.

Abandoned Baby:

 

abandoned-baby-candlestick-pattern

This pattern is formed after continues downtrend with lower lows. The market gaps still lower, due to the failure of new (or) fresh sellers a doji candlestick pattern is formed. This predicts that the loss will be recovered and continue with higher highs with uptrend market.

Identifying the correct Candlestick:

There are three ways in which a trader can detect the correct way of trading in the candlestick chart pattern; they include by Size, Shape, and Location.

  • Size of the Candlestick: The size plays an important role. When the size of the candle increases, the market trend will shoot up and when the sizes of the candles decline, which indicates the market trend is going down.

  • The shape of the Candlestick: The shape of the candlestick pattern also determines the patterns generated by each candle. From the smallest of the pattern to the biggest candlestick pattern will tell us how the market would be going to go.

  • Location of the Candlestick: The location of the candles will determine the possible trading signals. For example: if you find a shooting star candle formation after the uptrend; then it is clear from this that market would go bearish in the next trade. A piercing line formation after the downtrend will indicate the next formation of the candle would be in an uptrend leaving the market to huge profits.

CONCLUSION:

Candlestick chart pattern is the most used chart pattern which is used mostly in Forex trading, which will help you better trade. Though many reversals occur at times on trading, if you get the statistics and strategies clear you can master the candlestick. There are demo accounts available where you can download and try how the pattern works. The candlestick pattern will not hit on the basic trading rules, but it will provide you with another view of getting to know the price change in the market.