Everything You Need To Know About Candlestick Patterns

Everything You Need To Know About Candlestick Patterns

Forex traders rely on various tools and techniques for analysing the charts, and being able to spot and read candlestick patterns well can be incredibly useful. Let’s unpack why these patterns are integral to every trader’s trading strategy, and how to read them effectively.

Candlestick patterns can empower your trades because they:

Paint a picture of the market sentiment
Each candlestick shows the opening, closing, high, and low prices for a specific period, helping traders quickly understand market trends and predict potential future movements.

Help identify trends
Being able to identify trends is essential for making fast and smart trading decisions. By identifying the start, continuation, or end of trends, traders can position themselves to make the most of market movements.

Signal reversal and continuation
Certain candlestick patterns indicate potential reversals or continuations in the market. Reversal patterns can signal the end of an existing trend and the beginning of a new one, while continuation patterns suggest that the current trend is likely to persist.

Potentially enhance your risk management
By recognising patterns that signal potential market reversals, traders can set more effective stop-loss orders and manage their positions more prudently.

Form part of your technical analysis toolkit
Candlestick patterns can be integrated with other technical analysis tools, like moving averages, RSI (Relative Strength Index), and Fibonacci retracements to enhance your trading strategy.

The Anatomy of Candlestick Patterns



Body
The rectangular area between the opening and closing prices.

Wicks aka Shadows
The lines extending from the body representing the high and low prices.

Colour
A bullish (price went up) candlestick is usually white or green. A bearish (price went down) candlestick is usually black or red.

How to Read Candlestick Patterns Common candlestick patterns and what they mean



Doji
A doji forms when the opening and closing prices are nearly the same, indicating indecision in the market. It can signal a potential reversal when found at the top or bottom of a trend.

Hammer and Hanging Man A hammer has a small body and a long lower wick, found at the bottom of a downtrend. This pattern usually indicates a potential reversal.

A hanging man is similar, but is found at the top of an uptrend, which could mean a reversal to the downside.

Double Candlestick Patterns

Engulfing Patterns
A bullish engulfing pattern occurs when a small bearish candlestick is followed by a larger bullish candlestick that completely engulfs the previous one. This could mean a potential upward reversal.

A bearish engulfing pattern is the opposite, signalling a downward reversal.

Harami
A harami is a pattern with a large candlestick followed by a smaller one inside the first. A bullish harami signals a possible upward reversal, while a bearish harami signals a possible downward reversal.

Triple Candlestick Patterns

Morning Star and Evening Star
A morning star is a three-candlestick pattern showing a bullish reversal: a long bearish candlestick, a short one (showing indecision), and a long bullish candlestick.

An evening star is the opposite, showing a bearish reversal.

Three White Soldiers and Three Black Crows
Three white soldiers are made up of three consecutive long bullish candlesticks, indicating a strong uptrend.
On the flip side, three black crows are three long bearish candlesticks, signalling a strong downtrend.