HLP Report | Beyond 2015
Forex Candlestick Patterns: Top 10 Patterns and How to Use Them
Candlesticks are one of the most important means of displaying relevant information about a trading instrument's price movement on financial markets such as the foreign exchange market.
They also happen to be one of the most popular tools used in the technical analysis used among traders because they flawlessly represent relevant data graphically for the traders to interpret.
And interpreting price movements using forex candlestick patterns is very easy since these movements are easier to read and interpret on a candlestick chart as compared to other chart patterns.
For example, candlestick charts provide more information than a line chart for open positions, close positions, highs, lows, etc. It is also relatively easier to draw comparisons between price actions and patterns on candlestick charts.
Before we learn more about forex candlestick patterns, let us revisit the candlestick itself. In a nutshell, the candlestick has three essential characteristics which are as follows:
- Body: Used to represent the open/close range.
- Wick: Used to represent intra-day high/low.
- Colour: Used to represent the direction of the market. (Green/White for an increase, Red/Black for decrease)
Now let us take a look at the various forex candlestick patterns that you may end up using in the future.
Shooting Star Pattern
The shooting star candlestick pattern is one of the many bearish reversal candlestick patterns that you will encounter on your daily trading activities.
This pattern mainly consists of a wick, which can be at least half the candle's length. It usually represents the notion that the sellers are overtaking the buyers on the market.
Forex traders usually decide on going short just after this pattern is closed to utilize this pattern effectively. Subsequently, a stop loss is placed right above the shooting star candle.
Afterward, the traders look for a price or a support level that they believe carries a favorable risk to reward ratio for their trades.
Hanging Man Pattern
The Hanging Man forex candlestick pattern usually represents the notion that the trading day has experienced a substantial number of sell-offs. However, the price was still pushed up by buyers on the market.
When faced with this pattern, forex traders can immediately deduce that the market's control is no longer in the hands of the bullish forces.
Using this pattern, you can also make adjusted calculations to determine the best entry and exit points for yourself.
The hammer pattern is also a bearish reversal signal, which also happens to be the opposite of the shooting star pattern.
It essentially indicates that the market's bullish forces are starting to push back on the bearish forces, which help traders make appropriate decisions.
Traders are also known to use this particular candle formation while they are in a long trade. They are taking profits at a decent risk to reward ratio by placing stop losses just below the candle.
Evening Star Pattern
Just as the name suggests, the Evening Star is closely related to the Morning Star pattern. Still, it is only associated with bearish signals.
This candlestick pattern has three candlesticks in its graphical representation. It looks like a small candle squished between two other candles, which red and green, respectively.
The Evening Star candlestick pattern is quite rare, but when they do crop up. Traders see them as a signal of uptrend reversals as they are highly reliable in technical analysis.
Morning Star Pattern
The Morning Star candlestick pattern is the opposite of the Evening Star candlestick pattern. This pattern is associated with bullish signals rather than bearish ones.
Similar to the Evening Star, the Morning Star pattern also consists of three candlesticks. One tall black candlestick, one tall white candlestick, and the third candle with long wicks and a short body can either be black or white.
Traders treat this particular candlestick as a sign of a bullish trend reversing into a bearish one so that they can go for a bullish position and ride that trend until they see the next reversal forming up.
Bearish Engulfing Pattern
You may observe the Bearish Engulfing pattern forming when the end of the upward trend in the market is drawing its end, and it often signals the lower value of market prices that are yet to be observed.
Visually, the pattern is an upward candlestick, either white or green, and then a large red or black candle next to it, which seems to be going down and engulfing the smaller candle going up.
Traders associate this pattern with the notion that sellers are overthrowing the buyers and successfully bringing the price down.
The safest way of using this candlestick is to wait for the second pattern to close. Once it does, the strategy dictates to action on the next candle.
Traders may choose to enter a short position and place a stop loss just above the pattern's height and sell an extended position as soon as the pattern is confirmed.
Three Black Crows Pattern
The Black Crows pattern is also one of those forex candlestick patterns that consist of three candles in its formation. It usually forms at the end of a bullish trend.
It is of three long red candles that have very short or difficult to spot wicks. It forms bears are thriving in overtaking the bulls after three back-to-back trading sessions.
In case the candles are larger, traders can take it as a signal. The bears have gone too far and launched the currency to oversold levels.
As a forex trader, you will discover that this pattern is incredibly helpful in determining whether the trend reversal that you are chasing has any risks of retracements or not.
Three White Soldiers Pattern
The Three White Soldiers pattern is said to be the bullish counterpart of the Three Black Crows. It ascertains the reversals of ongoing downtrends in the market.
Visually, the pattern consists of three long candlesticks inside the preceding candle with a close the other candle in hight.
Candlesticks in the Three White Soldier pattern are not supposed to have too long shadows. They are always seen opening-up inside the body of the preceding candle before them.
Whenever this pattern pops up on the price charts, traders immediately prepare for a significant currency price change.
In terms of graphical data, if the chart shows a closing candle with either a very small or non-existent shadow, it means that the prices are still at the top of that particular sessions' range due to the efforts put in by the bulls.
Dark Cloud Cover Pattern
This forex candlestick pattern is treated as an indication of bearish reversals whenever it's spotted on the price charts.
It consists of only two candlesticks, red and green ones. The red candlestick will be the one to open up just above the preceding green body and close just above its middle point.
As we mentioned before, the Dark Cloud pattern looks like a bearish reversal, which essentially means that bears have overcome the trading session in which this pattern forms.
This results in the prices pushed lower than they were before the reversal took place. Additionally, suppose the trader is looking for additional confirmation regarding this pattern. In that case, they can wait for the price to go lower as it approaches the third candle.
Three Inside-Up & Down Pattern
This is the triple candlestick pattern as its formation is dependant upon the appearance of three candlesticks.
You may notice that this pattern usually starts via a bearish candlestick, which is then almost always followed up by a bullish one, which also happens to be taking form inside the initial candlestick.
Both these candlesticks are then followed by a third one, which looms over the first one in terms of height.
This is the Three Inside-Up pattern.
The Three Inside-Down pattern is similar in some cases. However, it starts with a bullish candlestick instead of a bearish one.
The bullish candlestick is then followed by another candlestick, which happens to be a bearish one as it closes itself just below the initial bullish candlestick's low.
These patterns are highly short term, which means that they might now always come with a wind that changes market trends, unlike the other patterns mentioned on this list.
Due to this reason, traders tend to look at this candlestick pattern as just the signal that there might be a change in the short-term price direction in the trading session in which it formed.
Also, see how you can trade the rising and falling wedge pattern here.
By now, you must have noticed that forex candlestick patterns are an excellent tool for confirming trades as their appearance gives the trader useful insight into the mind of the market and see where which new direction it will be going in.
Familiarize yourself with the patterns. They will prove to be very useful in your technical analysis of the financial market.
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