In this section, we take a look at the candlestick patterns that forex offers us to trade with. Many Forex traders usually find it difficult to get into trades. This is where mastering candlestick patterns comes into play. We will cover candlestick patterns for beginners and show examples of how they are supposed to be used. Let’s get into the course.
A candlestick is a single bar that represents the price movement of a particular asset for a specific period. Candlestick charts are a technical tool that packs data for multiple time frames into single price bars.
Forex candlestick patterns are a popular tool to use when analyzing price charts and looking at trade setups. It is important to first know how and on what basis they are formed. The candlestick patterns are OHLC charts; this means that each candlestick shows the opening, high, low, and closing prices in the market.
Forex candlesticks patterns signal a continuation of a trend or its reversal. The patterns can be represented by single candlestick patterns (formed by one candlestick) or multiple patterns (two or more candlesticks). The formation of candlesticks represents the sentiments and the psychology of the market.
There are two main types of investors in the forex market: bulls and bears. A “bull” is an investor who thinks that the market is going to go up and thus buys securities with the hope of selling them later at a higher price; they are normally called “buyers.” A bear is an investor who thinks that the market price will go down and thus attempts to make profits from a decline in the market prices; normally called a seller. Whether the investor is a bear or bull, it all depends on the strategy they are using to predict the market.
Important Candlestick Patterns Forex Offers
Candlestick Patterns Engulfing Candlestick
An engulfing pattern is a two-candlestick pattern, one bullish and one bearish, whereby the current candlestick engulfs or covers the previous candlestick. The bigger the candlestick the stronger the move. This pattern signals a change in momentum.
For a bullish engulfing candlestick, the body of the green candlestick engulfs the body of the previous red candlestick indicating that currently, the bulls are stronger than the bears in the market. This shows that the market will go bullish or up.
For a bearish engulfing candlestick, the body of the red candlestick engulfs the previous green or bullish candlestick, thus indicating that the bears are currently stronger in the market and thus the market price may go bearish or down.
Candlestick Patterns Three-Line Bullish And Bearish
The bullish engulfing candlestick pattern is formed when the green candlestick body covers the previous red candlestick.
This shows that there is a strong buying momentum that breaks up the previous candlestick’s high.
N/B For bullish or bearish engulfing patterns to be formed it has to involve two candlesticks (one bullish and one bearish).
Characteristics Of Candlestick Patterns Three-Line Bullish
1. The bullish three-line strike consists of three red or black(sell) candlesticks within a downtrend.
2. These candlesticks post a lower low and close near the previous bar’s low.
3. The fourth bar opens even lower but reverses into a wide range of outside bars that close above the high of the first candle in the series.
Characteristics Of Candlestick Pattern Three-Line Bearish
1. The bearish three-line strike consists of three green or white(sell) candlesticks within a downtrend.
2. The three candlesticks should open at a lower point than the fourth candlestick. The fourth candlestick should close above the first candle.
3. The fourth bar opens at or even lower than the close of the third candle but closes above the opening of the first candle.
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Candlestick Patterns Hammer
The two look alike only that they have different meanings depending on past price action. They have long lower shadows and a short one or none on top.
The hammer candle is best viewed as a bullish reversal usually occurring at the bottom of a downward trend. In this kind of candlestick pattern, the security trades significantly lower than its opening. It then rallies within the period and closes near the opening price.
It includes a small body with a long shadow below and one small one on top that may be there or not. The open, high, low, and close prices are roughly similar.
How To Locate A Hammer
1. The real body of the candlestick is at the top of the trading range.
2. The long shadow below is about two or three times the real body.
3. There is a small or no shadow on top of the real body.
4. The color of the real body is not important.
If the high and close price is the same, a bullish hammer is formed. This is considered a strong formation because the bulls were able to push the price past the open price.
If the open price and the high are the same, it is considered to be less bullish but still bullish. This is because this time the bulls were not able to push the price a little bit higher. The lower shadow of the hammer implies that the market was tested to find where support and demand were located.
The hanging man, on the other hand, is a bearish reversal that can mark a top or strong resistance level; when the price is rising, the formation of a hanging man indicates that sellers are beginning to outnumber buyers.
It warns that prices may start falling; the bulls are beginning to lose control and the asset may soon enter a downtrend. The long shadow will indicate that the sellers pushed the prices lower during the session.
It shows that the selling interest is starting to increase, for the pattern to be valid, the candle following the hanging man must set the price of the asset to decline.
How To Locate A Hanging Man
1. The asset should be in an uptrend.
2. They occur after a price advance; they should be composed of at least a few price bars moving higher overall.
3. It carries a small real body and a long lower shadow that is at least twice the size of the body.
4. There is little or no shadow on top.
5. The closing price can be above or below the open price, but it should be near the open price so that the difference is small.
Candlestick Patterns Evening Star And Morning Star
It is first important to note that both are reversal patterns.
Evening Star Candlestick Pattern
The evening star candlestick pattern forms at the top of an uptrend, and the evening star is used to detect when a trend is about to reverse; it was in an uptrend, and now the market wants to head on a downtrend. It is a bearish candlestick pattern consisting of three candles;
How To Locate An Evening Star
1. A long bullish candlestick.
2. A small-bodied and indecisive candle.
3. A long and bearish candle.
In an uptrend, there is heavy buying as the bulls are optimistic, thus the first candle forms a long bullish candle. The indecision between the buyers and sellers causes the formation of a small-bodied candlestick pattern called a Doji.
From there, a long bearish candle is formed showing that there is an expectation of negative stock news in the market. The evening star pattern is usually linked with the top of an uptrend to show that it is nearing its end.
An easy way to remember this is by comparing it to the movement of the sun. In the evening the sun goes down; once an evening star is formed the market reverses and goes down
Morning Star Candlestick Pattern
The morning star candlestick pattern, on the other hand, is a reversal pattern that will predict the end of a downtrend and the beginning of an uptrend. An easy way to remember it is by comparing it to the movement of the sun. In the morning, the sun rises; thus, when the morning star is formed, the market is predicted to go up.
The small indecisive candle captures a moment of market indecision where the bulls are overpowering the bears. After that, the formation of a bullish candle means that the bulls have taken over. However, always use other indicators to confirm this change in trend.
Once formed, traders use additional indicators to confirm that there is indeed a trend reversal that will occur for them to trade.
The morning star pattern is formed by three candles:
1. A long bearish candlestick.
2. A small and indecisive candlestick with long wicks.
3. Finally, a long and bullish candlestick.
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