If you’ve been in financial markets for some time, you’ve probably heard of forex candlestick patterns. Indeed, they are a useful technical tool for many traders, shedding light on the direction in which the market is moving and its sentiment.
In order to successfully trade candlestick patterns, you should familiarize yourself with them very well. They might appear complicated, but with the right amount of practice and imagination, you’ll be able to see and take advantage of these patterns in no time.
So, if you’re looking to get started on forex candlestick patterns and learn what they are and how you can benefit from them, you should read this comprehensive guide. Not only will you learn the basics of forex candlesticks, but you’ll also find 14 of the most used candlestick patterns in 2024.
What Are Forex Candlestick Patterns?
Forex candlestick patterns are a visual representation of price changes in the market. They are more detailed than traditional bars, providing information within specific timeframes. Although they are usually used to represent a trading day each, one can also use them in shorter or longer timeframes (i.e. hourly or weekly). They provide valuable insights into the market, helping traders decide the potential direction in which the price is going to move.
The Anatomy of Candlestick Patterns in Forex
Each forex candlestick represents 4 vital price levels:
- The opening price of the timeframe
- The closing price of the timeframe
- The highest price of the timeframe
- The lowest price of the timeframe
The space between the open and close prices creates the candle’s body, which can be bullish or bearish. Moreover, candles have 2 shadows or wicks, representing the space between open, close, high, and low prices, depending on the candle type.
Bullish vs Bearish Forex Candlestick Patterns
In their most basic form, forex candlesticks represent the battle between buyers (bulls) and sellers (bears) for dominance. If the bulls can push the prices up during the trading day (in a way that the closing price is higher than the opening price), then the candlestick is bullish. Likewise, if bears can push the price so low that the candle closes below where it opened, then you have a bearish candlestick.
Bullish forex candlesticks are usually green or white, while bearish candles are red or black. In this article, however, bullish candlesticks are highlighted with orange and bearish candles are navy blue.
Bullish forex candlesticks are usually green or white, while bearish candles are red or black. In this article, however, bullish candlesticks are highlighted with orange and bearish candles are navy blue.
Important Forex Candlestick Patterns to Know
Learning what forex candlesticks are and what they represent is the easy part of candlestick trading. The tricky part is learning and distinguishing different forex candlestick patterns and using them correctly. That is why this section of the article will give you a comprehensive guide on 14 of the most important forex candlestick patterns you need to know. While this guide attempts to provide a simplified version of these candlestick patterns and what they mean, it’s best to do your research and learn them by heart before making trading decisions based on them.
1. Engulfing Candlestick Pattern
The engulfing forex candlestick pattern is one of the most widely used patterns in the market. It’s a two-candle pattern, with the second candle “engulfing” the first one, as the name suggests. This pattern usually shows a price reversal. However, it can indicate continuation after a pullback as well.
There are two types of forex engulfing candlestick patterns: bullish and bearish. The bullish engulfing pattern happens when there is first a small red (navy blue) candle, followed by a green (orange) one that engulfes it. What we mean here by “engulfed” is that the second candle should open below the close of the previous one and close above its open price. Also, there should be minimal or no shadow overlaps. When you see a bullish engulfing pattern, it means that buyers are gaining their power and that prices are likely to go up.
There is also a bearish forex engulfing pattern, which indicates the rising power of bears and the potential decrease in prices. It forms when there is a small green (orange) candle that’s engulfed by its following large red (navy blue) candle. The open price of the red candle should be above the closing price of the green one, and the engulfing candle’s closing price should be below the engulfed candle’s open price.
2. Hammer Candlestick Pattern
The forex hammer candlestick pattern is a bullish signal, indicating the market prices are going to go up. It is a visual representation of buyers gaining their power back and dominating sellers. This forex candlestick pattern is in its strongest form when it appears at the end of a downtrend, signaling a reversal.
The hammer candlestick pattern consists of a semi-long body, a long lower shadow that’s at least twice the size of the body, and a minimal (or no) upper shadow. It can be both red (navy blue) and green (orange) in color, showing that despite the sellers’ attempt to push the prices further down, the bulls entered the market and didn’t let that happen.
There is also an inverted hammer candlestick pattern, which is the upside-down version of a hammer. So it’s got a long upper shadow that’s at least twice the size of its long body, along with little to no lower shadow.
3. Doji Candlestick Pattern
The doji forex candlestick pattern has roughly the same open and close prices, which is why it’s called doji. The term “doji” is the Japanese word for “the same thing.” Doji candlesticks don’t have a body and show equilibrium in pressures from the buyers and sellers.
When a doji candle forms, traders tend to take it as a signal for market indecision. These patterns necessitate caution while trading because they don’t indicate if the market is going to move in one direction or another.
There are different types of doji candlestick patterns. What makes them vary is the difference in the length of their upper and lower shadows. For example, a classic doji candlestick’s upper and lower shadows are roughly the same length. This is while the lower shadow of a dragonfly doji candle is longer than its upper shadow. There is also the gravestone doji, which is like an upside-down dragonfly doji.
4. Shooting Star Candlestick Pattern
The shooting star forex candlestick pattern is the bearish equivalent of an inverted hammer candlestick. They are most powerful when formed at the end of a long uptrend. Traders usually take the shooting star forex candlestick pattern as a signal for a downward price reversal.
The shooting star candlestick pattern has a short body and a long upper shadow. Keep in mind that the upper shadow must be at least twice the size of the body for the candle to be considered a shooting star. There could also be a lower shadow, but it should be super small.
The formation of a shooting star forex candlestick pattern starts with the bulls in power. They drive the prices higher and higher until they encounter resistance. So, the shooting star candle opens at a lower price level first, and then the bull’s power drives the price to the candle’s high. However, they face resistance, so the price drops, closing the candle at a lower level that’s still higher than the open price. This candle suggests that the bears are starting to regain their power.
5. Hanging Man Candlestick Pattern
Much like the shooting star pattern, the hanging man forex candlestick pattern is the bearish version of the hammer candle. This pattern also forms at the end of long uptrends, indicating a potential downward reversal in the near future.
The only difference between the shooting star pattern and the hanging man candlestick pattern is that the shooting star candle is bullish while the hanging man candle is bearish. Of course, you shouldn’t confuse the bullish and bearish nature of these candles with what they signal. When you say that these two candlesticks are bearish versions of the hammer and inverted hammer patterns, you mean that they signal a potential bearish reversal rather than a bullish one.
6. Morning Star Candlestick Pattern
The morning star forex candlestick pattern consists of three candles. It shows the formation of buying pressure in the market and is the strongest at the end of long downtrends. This is why it’s called the morning star, as it indicates a rise in prices, just like the morning star indicates sunrise.
So, we established that the morning star is a three-candle pattern. The first candle of this pattern is bearish with small shadows. Then there’s the second candle, which could be a bearish or bullish doji or pinbar (keep reading) candlestick. It should, however, have small shadows and form at the lower end of the first candle. Lastly, we have the third candle, which is bullish and the same size or bigger than the first candle. Also, it should be closed above the first candle’s middle threshold.
The morning star forex candlestick pattern provides a buying signal for traders, as it shows that the price might begin to increase.
7. Evening Star Candlestick Pattern
The evening star forex candlestick pattern is the upside-down version of the morning star. It’s the strongest when forming at the end of a long uptrend, signaling that prices might begin to drop.
The anatomy of an evening star candlestick pattern also has 3 candles. The first candle is a long, bullish one with minimal upper and lower shadows. The middle candle can be bullish or bearish doji or pinbar (keep reading) candlestick, but it must also have small shadows and form at the top end of the first candle. Lastly, there is the third, bearish candle, which should either be the same length as the first candle or longer. Also, it should be closed above the first candle’s middle threshold. Contrary to the morning star, the evening star pattern gives a selling signal to traders.
8. Pin Bar Candlestick Pattern
The pin bar forex candlestick pattern is one of the most widely used patterns in the market, and for good reason. It’s more accurate (well, as accurate as candlestick patterns can get) than other patterns, and its accuracy is only enhanced when it forms near support and resistance levels, trendlines, and moving averages.
As for the anatomy of the candlestick, you should first determine if it’s a bullish or bearish pin bar candlestick pattern. A bullish pin bar has a small body and a long lower shadow. The length of the candle’s tail should be at least two-thirds of the entire candle. It also has a small upper shadow. This forex candlestick pattern is most effective near a support level, where bears are pushing down the price, but the support prevents the price from declining further and pushes it up until it closes the candle above the open price.
There is also the bearish pin bar candlestick pattern, which has a small body and a long upper shadow. Much like the bullish pin bar’s lower shadow, the upper shadow of the bearish pin bar should be at least two-thirds of the candle’s length. It forms near resistance levels, preventing the bullish pressure from further increasing the price and making it drop to close the candle below the open price. The pattern is a strong selling signal for traders.
9. Three White Soldiers Candlestick Pattern
The three white soldiers forex candlestick pattern is what the name suggests. It consists of three consecutive white (green or orange, in this article) candles. It’s a reversal candlestick pattern that signals an upward reversal following a long-existing downtrend.
For this candlestick pattern to be more valid, it’s best that each candle opens at a price level close to the previous candle’s closing price. As mentioned before, this candlestick pattern is a bullish signal that encourages traders to go long.
10. Three Black Crows Candlestick Pattern
The three black crows forex candlestick pattern is the upside-down version of the three white soldiers bullish reversal pattern. As a result, it’s a bearish reversal pattern that is more valid when it forms at higher price levels reached by a continuous uptrend.
Again, this pattern has three bearish candlesticks in a row, with each one opening near the previous candle’s close. Since this pattern suggests that prices might decline soon, it provides an opportunity for traders to go short.
11. Dark Cloud Cover Candlestick Pattern
Next on our forex candlestick patterns cheat sheet is the dark cloud cover. This two-candle pattern is also a signal for a bearish reversal, indicating that the good days of bulls’ control are coming to an end.
The structure of this pattern consists of a long bullish candle that first shows how the bulls are in charge, driving the prices up. However, the next candle is a bearish one that opens above the previous candle’s close. It indicates how bears are entering the market and gradually increasing the selling pressure until the candle closes below the midpoint of its predecessor.
12. Harami Candlestick Pattern
The harami forex candlestick pattern is inspired by, well, obviously, the Japanese word “harami.” This word translates into “pregnant” in English. The candlestick pattern consists of two candles, with the second one “inside” the first one, like a pregnant woman’s belly.
There are two types of harami patterns, bullish and bearish, and they’re both reversal patterns. The bullish harami starts with a long bearish candle, followed by a green (orange) candle. The second candle’s body should be smaller than the first’s and fit completely inside of it. This pattern forms at the end of a downtrend that’s been running for a while.
Next, we have the bearish harami pattern, which is exactly the same as the bullish one. The only difference is that the first candle in a bearish harami pattern is green (orange), and the next one’s red (navy blue). Also, the pattern provides a bearish signal at the end of long uptrends.
13. Marubozu Candlestick Pattern
The name of the marubozu forex candlestick pattern comes from Japanese culture yet again, meaning “bald head.” The pattern is a bullish or bearish signal of continuation after a market pullback.
The bullish marubozu is a long green (orange) candlestick with no upper or lower shadows, suggesting that the bulls had control of the market from start to finish. As a result, this forex candlestick pattern is a strong signal of bullish sentiment.
At the same time, the bearish marubozu candlestick is a long red (navy blue) candle with no upper or lower wicks. Again, it shows that bears were fully in charge throughout the trading day, making the candle open at its high and close at its low.
14. Tweezer Top and Bottom Candlestick Pattern
Last on our forex candlestick patterns cheat sheet, there’s the tweezer pattern, which signals a short-term reversal. Like many of the other patterns we went over, the tweezer pattern also has a bullish and bearish version.
A bullish tweezer pattern is called a tweezer bottom, which consists of two candlesticks of either color that share the same low. It forms at the end of a downtrend and highlights how, despite the bears’ attempts to drive the price further down, the bulls entered the market and created a “support level” at the candles’ lows.
Similarly, the bearish tweezer pattern, or the tweezer top, forms at the end of an uptrend and has two candles of either color that share the same high. While the bulls are trying to push the price higher and higher, the bears enter the market and create a “resistance level” at the high of these two candles.
Tips for Trading With Forex Candlestick Patterns
Now that you’re more familiar with the basics of candlestick patterns in forex, you must be excited to get to use them. However, success in the forex market includes more than just knowing about these patterns. Rather, you should first develop a smart trading plan that protects you against losing more than you can afford. A general rule of thumb is to follow certain principles when trading with candlestick patterns in forex. These principles are as follows:
Know Your Candles
Although learning about candlestick patterns is not everything, it’s super important and worth investing your time in. Learn about different candles and practice recognizing them. It’s important to pay attention to the whole market sentiment when spotting patterns; you should assess the overall trend, overbought and oversold levels, etc.
Use Other Analytical Tools
While candles play a huge role in shedding light on market conditions, they’re not enough. Don’t be shy and incorporate other technical analysis tools like price action patterns, as well as indicators, such as MACD and RSI, into your candlestick trading strategy.
Take Your Risk Management Seriously
It doesn’t matter if you’re planning to invest in forex, stocks, or crypto. You should always have a robust risk management strategy that can protect you from losing more than you can afford to. Set yourself a clear risk tolerance, use stop-loss and take-profit orders, trade with discipline, and diversify your portfolio.
Wrap-Up
Forex candlestick patterns are an inseparable part of trading the FX market. They provide meaningful insights into the market sentiment and the potential changes in prices. The information they offer includes open, close, high, and low price levels, along with a possible prediction of how the market is going to change.
There are numerous types of candlestick patterns in forex, some of which we went over in this article. These patterns could be signs of trend reversals, continuations, or even indecisiveness in the market. The most important forex trading candlestick patterns include hammer, engulfing, doji, harami, morning and evening stars, and pin bar.
If you’re interested in starting your own forex candlestick pattern trading, then you should take some precautions first. Familiarize yourself with these patterns and practice with them. It’s a good idea to include your entire trading plan, trading strategy, and risk management techniques in test on a forex demo account. You can create your own demo account on ITBFX in just a few minutes to see what works for you and what doesn’t.
Forex candlestick patterns act as an x-ray for financial markets, including forex. They provide useful information about how the market is doing and also offer predictions about how things may go.
Each candlestick represents 4 vital price levels in its timeframe: the open, close, high, and low prices. These prices form the anatomy of the candle, which consists of a body and 2 shadows or wicks.
Some of the most important forex candlestick patterns include pin bar, hammer, shooting star, hanging man, doji, three white soldiers, three black crows, harami, and marubozu patterns.
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