Candlestick patterns are a leading popular technical analysis tool, used to describe price movements in the Forex, stock, crypto markets, etc. Understanding and recognizing candlestick patterns is Essentials that traders need to have.
What is the candlestick pattern in Forex?
- Candlestick patterns in the Forex market provide information about currency price movements, supporting trading strategies
- Using candlestick charts in forex trading is a useful skill to have and can be applied to all markets.
What could be more important to a technical trader in the Forex market than price charts? There is a distinct difference between a candlestick chart and a traditional bar chart and the unfamiliar Renko chart. Candlestick charts in the Forex market helps to inform FX traders about price movements, thus building a view of the trend, determining entry points, stop loss, take profit, and more.
All Forex traders should be knowledgeable about the candlesticks and indicators that candlestick patterns indicate. After learning how to analyze candlestick patterns, traders often find that they can identify many different types of price action with far greater efficiency than using other charts. The additional advantage of pattern analysis in the Forex market is that the same method can be applied on candlestick charts of all financial markets.
The individual candles often combine to form recognizable candlestick patterns.
Candlestick pattern interpretation
Three specific points make up a candlestick: the opening price, the closing price, and the shadow. The candle will turn green/blue (color depends on the chart settings) if the closing price is higher than the opening price. The candle will turn red if the closing price is lower than the opening price.
If you have a D1 timeframe setup chart, each candle represents a day, with the opening price being the first price traded for the day and the closing price being the last price traded for the day.
Opening Price: The opening price describes the first trading price during the formation of a new candle.
Highest price: The top of the upper shadow. If there is no upper shadow, then the highest price is the open price of the bearish candle or the close price of the bullish candle.
Lowest price: The bottom of the lower shadow. If there is no lower shadow, then the low is the open price of the bullish candle or the close of the bearish candle.
Closing Price: The closing price is the last price traded during the candlestick formation.
The image below shows a green candle with a closing price higher than the opening price and a red candle with a closing price lower than the opening price.
Why do traders in the Forex market tend to use candlestick charts rather than traditional bar charts?
Candlestick charts are the most popular chart for traders in the Forex market because they are more intuitive. Candlestick charts highlight the opening and closing prices of different time periods more clearly than other charts, like bar or line charts.
The advantages of candlestick charts:
Price movements in the Forex market are felt on candlestick charts more easily than on other charts.
Easily recognize price patterns and price action on candlestick charts.
Candlestick charts provide more information than line charts in terms of prices (opening, closing, high, and low)
Candlestick charts have several disadvantages:
A green (bullish) or red (bearish) closing candle can fool amateur traders into thinking that the market will continue to move in the direction of the previous closing candle.
Candlestick charts can be confusing because candlestick charts are not as simple as a line or bar chart.
Trading on the Forex market, how to use candlestick charts?
Candlesticks and price patterns are used by traders as entry and exit points for trading positions. Candles form individual candlestick patterns, such as hanging man candlestick pattern, hammer candlestick pattern, shooting star pattern, etc. Candlestick charts also form different price patterns such as triangles. , wedge, head and shoulders pattern,…
These candlestick patterns are not only popular on charts in Forex trading, but are also widely used in other markets such as the stock market, cryptocurrency,…
Forex Trading Example Using Candlestick Patterns:
Hanging man candlestick pattern
The Hanging man candlestick pattern is a candlestick formation that shows strong selling pressure at the top of an uptrend. The Hanging man candle is characterized by a long lower shadow, a short upper shadow, a small body, and a lower closing price than the opening price.
This is a bearish signal that the market will continue in the downtrend. Learning to recognize Hanging man candlesticks and other candlestick formations is a good way to spot some entry and exit signals when using candlestick charts.
The chart below shows the GBP/USD rate on the W1 timeframe. On the W1 timeframe, each candle depicts the opening price, closing price, high and low price of a week. The Hanging man candle below (circled) is a bearish signal. Traders use bearish signals like these to enter short-term trades, believing the GBP to depreciate against the USD.
If a trader uses the Hanging man candle to enter a short position, he or she should place a stop loss and take a profit order with a positive Risk/Reward ratio.
Shooting Star candlestick pattern
The Shooting Star candlestick pattern, like the Hanging man candlestick pattern, is a bearish reversal candlestick consisting of a shadow that is at least twice the length of the real body. The long shadow shows that there are more sellers than buyers. A Shooting Star candlestick pattern would be an example of market entry, be it a short position, or a long exit.
Traders can take advantage of the Shooting star candle by entering a Sell position after the Shooting Star candle closes. Then, traders can place a stop-loss order above the Shooting Star candle and take profit at the previous support levels or a price that guarantees a positive Risk/Reward ratio. A positive Risk/Reward ratio is a trait of successful traders.
Hammer candlestick pattern
Hammer candlestick patterns (hammer candles) are basically reversal Shooting Star candles. This is a bullish reversal candle that signals that the bulls are starting to outperform the bears. Hammer candlesticks are characterized by long shadows and small bodies. A Hammer candlestick will be used by traders to enter a position in the market such as exiting a short position, entering a long position.
The image below is an example of how a trader uses the Hammer candlestick pattern to enter a long position while placing a stop-loss order below the Hammer candlestick and taking profit at a level to ensure a positive Risk/Reward ratio…