The Secrets of Forex Candlesticks: Your Guide to Analyzing Price Movements

Introduction

I once read somewhere that; trading without candlestick patterns is a lot like flying in the night with no visibility. Sure, it is doable, but it requires special training and expertise.

The world of forex trading can be complex and daunting, filled with intricate charts and indicators. However, amidst this complexity, one tool has stood the test of time and continues to be a staple for traders: forex candlesticks. These humble candlestick charts visually represent price movements, offering valuable insights into market sentiment and potential trading opportunities. In this blog post, we will explore the fascinating world of forex candlesticks and how they can empower you to make informed trading decisions.

There are several candle stick patterns, however you only need to master the below candle stick pattern as the other patterns are a variation of the below.

The Basics of Forex Candlesticks:

At first glance, forex candlestick charts may seem like a series of mysterious shapes and lines. But fear not, for understanding them is simpler than you might think. Each candlestick represents a specific time period, such as a day, hour, or minute. It consists of a rectangular body and thin lines called wicks or shadows. The body represents the price range between the opening and closing prices, while the wicks indicate the highest and lowest prices reached during that period.

What Is a Bullish Candle?

A bullish candle is formed when the price at the closing of the candle is higher than the open. This can be on any time frame: from a 1-minute candle to a 1-month candle. It will all be the same.

What Is a Bearish Candle?

A bearish candle is formed when the closing price is lower than the opening price. In this scenario, the price dropped below the time it took for the candle to form.

TOP 10 MOST CANDLESTICK PATTERNS

1 – MORNING STAR AND EVENING STAR

MORNING STAR

The Morning Star candlestick pattern is a bullish reversal pattern commonly observed in forex trading. It is formed by three consecutive candlesticks and typically appears after a downtrend. The pattern signifies a potential shift in market sentiment from bearish to bullish, indicating that the price may reverse and start to rise.

The Morning Star pattern suggests that the bears are losing strength, and the bulls are gaining momentum. It implies that buyers are stepping in, potentially leading to a price reversal and an upward trend. Traders often interpret this pattern as a signal to enter long positions or to close out existing short

positions.

EVENING STAR

The Evening Star candlestick pattern is a bearish reversal pattern commonly observed in forex trading. It is the opposite of the Morning Star pattern and typically appears after an uptrend. The pattern indicates a potential shift in market sentiment from bullish to bearish, suggesting that the price may reverse and start to decline.

The Evening Star pattern suggests that the bulls are losing strength, and the bears are gaining momentum. It implies that sellers are stepping in, potentially leading to a price reversal and a downward trend. Traders often interpret this pattern as a signal to enter short positions or to close out existing long positions.

2 – BULLISH & BEARISH ENGULFING

BULLISH ENGULFING

A bullish engulfing candle is a popular bullish reversal pattern observed in forex trading. It is formed by two consecutive candlesticks and typically appears after a downtrend. The pattern suggests a potential shift in market sentiment from bearish to bullish, indicating that the price may reverse and start to rise.

The bullish engulfing pattern indicates a shift in market sentiment, as buyers start to overwhelm sellers. It suggests that the bulls are taking control, potentially leading to a price reversal and an upward trend. Traders often interpret this pattern as a signal to enter long positions or to close out existing short positions.

The larger the bullish candlestick in relation to the preceding bearish candlestick, the more significant the potential reversal. A strong bullish engulfing pattern with high trading volume further confirms the reversal signal.

BEARISH ENGULFING

A bearish engulfing candle is a common bearish reversal pattern observed in forex trading. Two consecutive candlesticks form it and typically appear after an uptrend. The pattern indicates a potential shift in market sentiment from bullish to bearish, suggesting that the price may reverse and start to decline.

The bearish engulfing pattern indicates a shift in market sentiment, as sellers start to overpower buyers. It suggests that the bears are taking control, potentially leading to a price reversal and a downward trend. Traders often interpret this pattern as a signal to enter short positions or to close out existing long positions.

Similar to the bullish engulfing pattern, the size of the bearish candlestick in relation to the preceding bullish candlestick is important. A stronger bearish engulfing pattern with a larger size and higher trading volume provides more confirmation of the reversal signal.

3 – DOJI

A doji candlestick is a significant candlestick pattern frequently observed in forex trading. It forms when the opening and closing prices of an asset are very close or nearly identical, resulting in a candlestick with a small or nonexistent body. The doji pattern indicates indecision or a balanced market between buyers and sellers.

The doji candlestick pattern suggests that neither buyers nor sellers have gained control of the market during the specified time period. It reflects a state of market indecision, uncertainty, or a potential turning point. Traders interpret this pattern as a signal that a trend reversal or a period of consolidation may occur.

4 – HAMMER

A hammer candlestick is a bullish reversal pattern commonly observed in forex trading. It is characterized by its distinctive shape, resembling a hammer with a small body and a long lower wick. The pattern suggests a potential shift in market sentiment from bearish to bullish, indicating that the price may reverse and start to rise.

The hammer candlestick pattern suggests that bears were initially in control, pushing prices lower. However, bulls stepped in during the session and managed to drive the prices back up, resulting in a potential reversal. The long lower wick indicates that buyers were able to overcome selling pressure and push the price higher, potentially leading to an upward trend.

To confirm the significance of a hammer candlestick pattern, traders often look for additional factors such as support levels, trendlines, or other technical indicators. For instance, if a hammer candlestick forms near a strong support level or a trendline, it adds further weight to the potential bullish reversal signal.

5 – BULLISH & BEARISH HARAMI

BULLISH HARAMI

A bullish harami is a bullish reversal pattern commonly observed in forex trading. It consists of two candlesticks and typically appears at the end of a downtrend. The pattern suggests a potential shift in market sentiment from bearish to bullish, indicating that the price may reverse and start to rise.

The bullish harami pattern indicates a potential weakening of selling pressure and a shift in market sentiment. It suggests that buyers are starting to emerge, potentially leading to a price reversal and an upward trend. Traders often interpret this pattern as a signal to consider long positions or to close out existing short positions.

The smaller the second bullish candlestick in relation to the preceding bearish candlestick, the stronger the potential reversal signal. If the second candlestick is a doji, with its open and close prices very close or identical, it can add further significance to the pattern.

BEARISH HARAMI

A bearish harami is a bearish reversal pattern commonly observed in forex trading. It consists of two candlesticks and typically appears at the end of an uptrend. The pattern suggests a potential shift in market sentiment from bullish to bearish, indicating that the price may reverse and start to decline.

The bearish harami pattern indicates a potential weakening of buying pressure and a shift in market sentiment. It suggests that sellers are starting to emerge, potentially leading to a price reversal and a downward trend. Traders often interpret this pattern as a signal to consider short positions or to close out existing long positions.

Similar to the bullish harami pattern, the smaller the second bearish candlestick in relation to the preceding bullish candlestick, the stronger the potential reversal signal. If the second candlestick is a doji, with its open and close prices very close or identical, it can add further significance to the pattern.

6 – DARK CLOUD COVER

The Dark Cloud Cover is a bearish reversal pattern commonly observed in forex trading. It is formed by two consecutive candlesticks and typically appears after an uptrend. The pattern suggests a potential shift in market sentiment from bullish to bearish, indicating that the price may reverse and start to decline.

The Dark Cloud Cover pattern suggests a potential shift in market sentiment, as the bears start to counter the previous bullish trend. It indicates that sellers are gaining strength, potentially leading to a price reversal and a downward trend. Traders often interpret this pattern as a signal to consider short positions or to close out existing long positions.

The strength of the Dark Cloud Cover pattern can vary depending on the size and significance of the bearish candlestick. If the bearish candlestick is larger and has high trading volume, it adds further confirmation to the reversal signal.

7 – PIERCING PATTERN

The Piercing Pattern is a bullish reversal candlestick pattern frequently observed in forex trading. It is formed by two consecutive candlesticks and typically appears after a downtrend. The pattern suggests a potential shift in market sentiment from bearish to bullish, indicating that the price may reverse and start to rise.

The Piercing Pattern pattern suggests a potential shift in market sentiment, as the bulls start to counter the previous bearish trend. It indicates that buyers are gaining strength, potentially leading to a price reversal and an upward trend. Traders often interpret this pattern as a signal to consider long positions or to close out existing short positions.

Both the Piercing and Dark Cloud Cover patterns have similar characteristics. The difference is that the piercing line is a bullish reversal pattern as mentioned above, whilst the Dark Cloud Cover pattern is a bearish reversal pattern.

The strength of the Piercing Pattern can vary depending on the size and significance of the bullish candlestick. If the bullish candlestick is larger and has high trading volume, it adds further confirmation to the reversal signal.

8 – INSIDE BARS

An inside bar candlestick pattern is a commonly observed pattern in forex trading. It is formed when the high and low of a candlestick are completely contained within the range of the previous candlestick. This pattern indicates a period of consolidation or indecision in the market.

Inside bar patterns can occur in various market conditions and timeframes, from short-term intraday charts to longer-term daily or weekly charts. Traders often use this pattern as a tool for identifying potential entry or exit points, as well as for setting stop-loss and take-profit levels.

Traders use Inside Bars in alignment with the trend. For instance, if the market is experiencing a downtrend, traders would consider maintaining a short position when an Inside Bar appears. The same principle applies to an uptrend, where traders would look to continue with a long position when an Inside Bar is present.

9 – LONG WICKS

A long wick candlestick, also known as a long shadow candlestick, is a type of candlestick pattern commonly observed in forex trading. It is characterized by a significant difference between the opening or closing price and the high or low price of the candlestick. The wick or shadow of the candlestick is much longer compared to the body.

Long wick candlestick patterns frequently suggest a potential trend reversal. Long wicks manifest when prices are tested and subsequently rejected, with the wick representing the rejected prices.

10 – SHOOTING STAR

A shooting star candlestick is a bearish reversal pattern that appears in forex trading charts. It is formed when the price opens near the high, rallies significantly during the trading session, but eventually closes near or below the opening price. The pattern resembles a star with a small body and a long upper shadow (wick) that is at least two times the length of the body.

When traders identify a shooting star candlestick pattern, they may consider it as a potential opportunity to enter short positions or to close out existing long positions. However, it is crucial to consider other technical indicators and factors such as trend direction, volume, and overall market context to confirm the validity of the pattern.