This article is primarily intended to forex traders who are unfamiliar with candlestick patterns (reversal, continuation, and indecision candlestick patterns). In this tutorial, i am going to walk you through the most important and reliable candlestick patterns.
By the end of this lesson, you should be able to recognize different types of candlestick patterns because these candlestick patterns will help you to identity potential trading opportunities in the forex market.
What you see above is an axample of candlesticks. Candlesticks are formed by using the open, high, low, and the close prices.
If the open of the candlestick is below the close, then the candlestick is called “bullish” candlestick. If the open is above the close, then is called “bearish”. The colored part of the candle is called the “real body” or body. The two thin lines poking below and above the real body are called “shadows”.
These Candlestick patterns are divided into 3 groups: reversal, continuation, and indecision candlestick patterns.
Under reversal candlestick patterns I am going to talk about 7 types of candlestick patterns- hammer, hanging man, shooting star, dark cloud, piercing line, bullish and engulfing candlestick patterns.
If you see these candlestick patterns, these is a good chance that the market price might change directions.
Hammer & hanging man
A hammer is a bullish reversal candlestick pattern that occurs at the bottom of a downtrend: for example, when the market is in a downtrend movement and a hammer is formed, this usually indicate that the down trend is ending and the price will start to go up again.
- It is a single candlestick formation.
- Has a little or no shadow.
- The real body is at the upper end, the color of the body is not important.
- The lower shadow is longer than the real body.
Hanging man is a reversal candlestick pattern with the same characteristics as the hammer but a hanging man occurs at the top of an uptrend and signal the end of an uptrend.
When the market is in an uptrend movement and a hanging man is formed, this usually indicate that the uptrend is ending and the price will start to go down. Below is an example of a hammer and a hanging man.
Just like a hammer and hanging man, a shooting star is also a reversal pattern.
1.3 Bullish and bearish engulfing candlesticks
Bullish engulfing candlestick is a reversal candlestick pattern that occurs at the bottom of a downtrend. When you see this candlestick pattern at the bottom of a down trend,
The bearish engulfing candlestick is the exactly opposite of the bullish engulfing . it occurs at the top of an uptrend
- Is a 2 candlestick formation pattern.
- The 1st candlestick is a bearish or bullish candlestick that is completely covered by the 2nd candlestick.
- The opening of the second candlestick is lower than the first candlestick’s real body
Dark cloud and piercing line
Here is an example of a dark cloud and piercing line
Dark cloud is also a two reversal candlestick pattern that usually occurs after an uptrend.
- First candlestick is a bullish candle, the 2nd is a bearish candle gap up open higher than the previous candle and closes above the mid-part of the previous candle.
- The piercing candlestick is the opposite of the dark cloud pattern .
- The piercing candle is a bottom-reversing , a two candle pattern, the second candle must gap and open lower than the previous candle and closes above the midpoint of the first candlestick.
#2. Continuation candlesticks
A continuation candlestick pattern is a pattern that causes the price to pause or consolidate before it can continue to move in the original direction.
Rising three method
The bearish falling 3 method is a bearish continuation pattern also called a bear flag.
The first candle of the rising three methods pattern is a long bullish candle, followed by 3 small bodies( these 3 small candles do not always have to be bearish), they all remain within the range of the previous long bullish candlestick.
The opposite of the rising 3 methods is called the falling 3 methods. The rules are quite similar, but in a downtrend movement.
#3. Indecision candlsticks
These are three types of indecision candlesticks you must know: doji, harami and spinning top.
When you see these candlesticks, it means two things can happen:
- Price can continue to move in the original direction or
- Price can change direction.
Doji are probably the most recognized and powerful candlestickscandlesticks patterns.
The are 4 reliable doji candlestick patterns that you need to know as shown on the chart above. They are all indecision candlesticks.
Doji is a single candlestick formation that open and close nearly at the same level.
- Spinning top is a single candlestick formation.
- the color of the real body is not important.
- It has a long upper and lower shadow and a small real bodies.
- It indicates indecision between buyers and sellers.
- Is a 2 candlestick formation pattern.
- The 1st candle is bigger than the second candle. The second smaller candlestick is completely covered by the body of the first candlestick.
Important: NEVER EVER TAKE A TRADE BASED ONLY ON A CANDLESTICK. YOU MUST HAVE OTHER SIGNALS OR TRADING STRATEGIES LIKE TRENDLINES TO CONFIRM YOUR TRADING DECISIONS
That’s how I trade too- I only use candlesticks as confirmations. To see how I trade these candlestick patterns with other trading strategies you can either join my private room or my free weekly trading signals
There you have it: the most important and reliable candlestick patterns. Don’t forget to subscribe to my newsletters below to receive free weekly trading signals, trading tips, & strategies via email
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