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What do you know about such a powered tool for a Forex trader like candlestick patterns? In this article, we’d like to clarify how to trade bullish and bearish candlestick patterns and how to use them for making more informed decisions when trading currency pairs. Invented by a Japanese rice trader in the 1700s, they help visualize price movements from the beginning to the end of the period (e.g., a day).
Truth be told, candlestick patterns are only some of many concepts out there. But it’s worth using them as an auxiliary tool in technical analysis.
Candlesticks patterns basics
The bullish candle (usually colored in green) indicates that traders (bulls) increase the price and the closing price is higher than the opening one. A bearish candlestick (usually colored in red) is the complete opposite of a bullish candle. It signals that the opening price is higher than the closing one. The stock market is the field where bulls (traders raising the price) are battling with bears (traders lowering the price).
The main parts of candlesticks are:
- Upper Shadow (Wick);
- Real Body;
- Lower Shadow (Wick).
Single Candle Patterns
Single candlestick patterns are divided into bullish and bearish ones. When these patterns occur in the market, they signal that the price may start moving in the opposite direction at a given timeframe. The most popular bullish candlestick patterns are the following:
- Inverted Hammer;
- Dragonfly Doji;
- Bullish Spinning Top.
Their occurrence during a downtrend indicates a potential price reversal. The bodies and the wick of the Hammer and Inverted Hammer candlestick patterns look like a hammer. The Dragonfly Doji has a short body and a long wick on the bottom. The Bullish Spinning Top looks like a square-type body with two equal wicks on the top and the bottom.
On the other hand, Bearish single candlestick patterns indicate price reversals to the downside after a consecutive increase. If they don’t occur after a consecutive increase, the signal isn’t clear and can be considered invalid. Here are the most popular bearish single candlestick patterns:
- Hanging Man;
- Shooting Star;
- Gravestone Doji;
- Bearish Spinning Top.
The shapes of the Hanging Man and the Shooting Star are similar to the Hammer and the Inverted Hammer. However, they are slightly different. As the Hanging Man and the Shooting Star are bearish candlestick patterns, their opening price is at the upper side of the rectangle and the closing price is at its lower side. The same goes for the pair of the Dragonfly Doji & the Gravestone Doji, and the pair of Bearish Spinning Top & Bullish Spinning Top.
Double Candle Patterns
The next are double candlestick patterns. The bullish candlestick patterns are the following:
- Bullish Kicker;
- Piercing Line;
- Bullish Engulfing;
- Bullish Harami;
- Tweezer Bottom.
The bullish Kicker has a gap on the upper side. It indicates a steady tendency for the further increase of the price. The Bullish Engulfing shows up on the bullish candle chart with a body longer than before. In pairs, these candlesticks indicate a bullish trend.
The Bullish Harami consists of a longer bearish candle and a shorter bullish candle beside it. The Piercing Line is a shorter bearish candle on the left and a bullish candle on the right that is lower than the bottom of the bearish candle. The second one should close above the middle of the first one.
The last one is the Tweezer Bottom. This Candlestick pattern consists of two equal candles with the bearish one on the left and the bullish one on the right. Their bottoms are at the same levels, which means the closing price of the first candle and the opening price of the second one are almost equal. Both candles have wicks to the upper side.
Let’s take a look at the bearish double candlestick patterns:
- Bearish Kicker;
- Dark Cloud Cover;
- Bearish Engulfing;
- Bearish Harami;
- Tweezer Top.
The Bearish Kicker is similar to the Bullish Kicker. The difference is that it's on the other side and has a gap to the downside. It indicates the declining price trend.
The Bearish Engulfing has a bullish candle with a shorter body on the left and a bearish candle with a longer body on the right.
The Bearish Harami usually starts with a longer bullish candle on the left and a shorter bearish candle on the right. However, the bearish candle remains within the range of the body of the bullish one.
Another pattern is the Dark Cloud Cover. The top of a bearish candle on the right is higher than the bottom of the bullish one. In this pattern, the bearish candle closes below the middle of the prior one.
The last pattern is the Tweezer Top. Similar to the Tweezer bottom, it consists of a bullish candle on the left and a bearish candle on the right. They usually have wicks to the downside.
Triple Candle Patterns
As you might have guessed from the title, triple candlestick patterns consist of three candles. When these patterns occur, they directly indicate the next price movements, while single and double candlestick patterns may sometimes provide a false signal. The bullish triple candlestick patterns are:
- Morning Star;
- Bullish Abandoned Baby;
- Three White Soldiers;
- Three Line Strike;
- Morning Doji Star.
As for the bearish triple candle patterns, there are the following:
- Bearish Abandoned Baby;
- Three Black Crows;
- Evening Doji Star;
- Evening Star;
- Three Line Strike.
These patterns are about the price reversal trend.
How to use candlestick patterns trading
Now you know the most common candlestick patterns. How to trade them? Here are the tips:
- As a single candlestick pattern isn’t enough to make a trading decision, always look for other indicators that support the pattern;
- As candlestick patterns aren’t a kind of the ultimate truth, it’s important to use stop-loss orders. It allows you to reduce your losses;
- Mastering trading with candlestick patterns is just a matter of practice. Start with a demo account to trade real money confidently.
Candlestick patterns are a useful tool in the Forex trader’s arsenal. Understanding the bullish and bearish candlestick patterns, as well as reversal candlestick patterns may help you make more informed trading decisions. Always wait for confirmation from other indicators, use stop-loss orders, and start with a demo account. That way you can include candlestick patterns into your trading strategy and use profitable opportunities in the Forex market.