Forex trading can seem mystifying to beginners. Staring at charts filled with bars, lines and candles can feel overwhelming. However, learning to read these charts and understand the story they tell is an essential skill for Forex traders. By mastering common candlestick patterns, you can take the first step towards becoming an expert Forex chart reader.
Candlestick charts are one of the most popular types of charts used in Forex trading. Unlike traditional bar charts, candlestick charts show the relationship between the opening and closing prices for a currency pair over a specific period of time, normally one day. The thick body of the candlestick represents the difference between the open and close. If the close is higher than the open, the body is green or white. If the close is lower than the open, the body is red or black. The thin lines above and below the body represent the high and low for that time period.
There are dozens of candlestick patterns that form over single days or multiple days. Each pattern gives traders clues into market psychology and potential future price movements. By learning the most common candlestick formations, Forex traders can better predict when trends may continue or reverse. Mastering candlestick patterns takes practice, but being able to read price charts gives a trader an advantage in the competitive Forex market.
This comprehensive guide will explain all you need to know to become an expert Forex chart reader. You’ll learn:
- The basics of candlestick charts
- Major single day candlestick patterns
- Complex multi-day candlestick patterns
- How to combine patterns with indicators
- Common candlestick trading strategies
- Tips for reading Forex candlestick charts
Follow along step-by-step and you’ll be reading Forex charts like a pro in no time.
The Basics of Candlestick Charts
Before diving into candlestick patterns, it’s important to understand the basic anatomy of a candlestick:
- Open – The opening price at the start of the time period.
- Close – The closing price at the end of the time period.
- High – The highest price during the time period.
- Low – The lowest price during the time period.
- Body – The thick bar between the open and close prices.
- Shadows/Wicks – The thin lines above and below the body representing the high and low.
When the close is higher than the open, the candlestick body is green or white indicating the price moved higher over the time period. When the close is lower than the open, the body is red or black indicating the price fell. The shadows represent volatility and the range the price traveled within the time period. Candlesticks with short or non-existent shadows indicate low volatility, while long shadows reflect high volatility.
Candlestick charts come in different time frames. Short term traders may use 1 or 5 minute charts to look for quick price movements. Day traders focus on 15 minute to 1 hour charts. For longer term swing trades or analysis, 4 hour or 1 day candlestick charts are preferred.
Across all time frames, the basics are the same. Each candlestick represents the open, close, high and low for that specific period of time. Reading a series of candlesticks gives insight into market direction, momentum, volatility, and trader psychology surrounding a currency pair.
Now that you know candlestick basics, let’s examine some of the most important single day candlestick patterns.
Major Single Day Candlestick Patterns
There are dozens of single day candlestick patterns that appear frequently on Forex charts. Familiarizing yourself with the most common patterns is key. Here are 5 must-know candlestick formations.
The Marubozu candle has a large body and little to no shadows. It shows a strong directional move higher or lower with minimal intraday volatility and no overlap between the open and close. There are both bullish and bearish Marubozu candles:
Bullish Marubozu – A long white or green body with no upper shadow and little or no lower shadow. The open equals the low and the close equals the high.
Bearish Marubozu – A long red or black body with no lower shadow and little or no upper shadow. The open equals the high and the close equals the low.
Marubozu candles show strong buying or selling momentum, and continuation in the direction of the candle is likely. Traders will go long on bullish Marubozu candles and short on bearish ones.
Stops are placed under the low for bullish trades in case the momentum stalls. For bearish trades, stops are placed above the high to protect capital if the selling pressure fades.
Doji candles have little to no body and look like a cross, plus sign or inverted cross. Prices open and close at roughly the same level after lots of volatility during the session. The long upper and lower shadows show indecision between buyers and sellers. There are four main Doji candle variants:
Standard Doji – The open and close are at the middle of the candle.
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Dragonfly Doji – The open, high and close are all at the same high level.
Gravestone Doji – The open, low and close are all at the same low level.
Long-legged Doji – The open and close are in the middle with very long upper and lower shadows.
Doji candles represent market indecision and signal potential reversals, especially after extended moves up or down. Traders will wait for confirmation before entering a reversal trade on a Doji candle, either on the next candle or through other indicators.
Hammer and Hanging Man
The hammer candle has a small body near the top of a large lower shadow. It shows rejection of lower prices and a potential bottom. In an uptrend, the hammer signals a continuation of the bull move. At market bottoms, it can mark a reversal higher.
The hanging man candle looks identical but forms at the top of uptrends. Here it signals potential rejection of higher prices and an impending reversal lower. Hammers and hanging men require confirmation on the next candle.
Hammer Long Trade – Go long after confirmation of the hammer candle, either on the close or next candle close above the hammer high. Place a stop under the low of the hammer body.
Hanging Man Short Trade – Short after bearish confirmation, closing the next candle below the hanging man low. Place a stop above the high of the hanging man for protection.
Bullish and Bearish Engulfing Patterns
Engulfing candlestick patterns form over two days and signal key potential reversals. The body of the second candle engulfs the body of the first, showing an intense shift in market momentum.
Bullish Engulfing – A large green real body engulfs a preceding small red real body signaling buyers have overtaken sellers. An uptrend reversal pattern.
Bearish Engulfing – A large red real body engulfs the previous real body showing sellers now control the market. Signals a downtrend reversal.
These patterns require confirmation. Traders wait for a bullish/bearish candle close on the next session before entering new long/short reversal trades. Stops are placed outside the engulfing pattern high or low.
Morning and Evening Star
The morning and evening star patterns incorporate Doji or small real bodies to foreshadow bullish and bearish trend reversals.
Morning Star – A bearish candle followed by a Doji star then a bullish candle shows rejection of lower prices and an impending uptrend.
Evening Star – A bullish candle followed by a Doji star then a bearish candle signals rejection of higher prices and a downtrend ahead.
These three candle reversals require confirmation before traders will enter. Long trades trigger after the bullish candle closes above the middle candle’s high. Short trades trigger when the bearish candle closes below the middle candle’s low.
Mastering single day candlestick patterns takes considerable chart time and practice. Keep studying formations and drilling your pattern recognition. Soon you’ll be able to spot these key candles as they form.
Next we’ll examine some of the most powerful multi-day candlestick patterns.
Complex Multi-Day Candlestick Patterns
While single session candlesticks provide helpful insight, some of the most valuable chart patterns develop over multiple days or weeks. Here are 5 of the most important multi-day candlestick formations for Forex trading.
The ascending triangle is a bullish continuation pattern that forms as buyers and sellers struggle to take control:
- Bounding resistance line with multiple highs at the same level shows supply limiting gains
- Rising higher lows along an uptrend support line reflect demand and buying pressure
- Eventually buyers overpower sellers and break resistance
Trading the Ascending Triangle
- Long at resistance break, target equal to pattern height added to the breakout level
- Place protective stop under pattern low to limit risk
The ascending triangle shows persistent buying interest and signals upside breakouts, making it a valuable chart pattern for Forex traders.
The descending triangle is the bearish opposite of the ascending triangle reversal pattern:
- Defined by horizontal support with multiple lows at the same level showing buying interest
- Sloping descending resistance line reflects selling pressure overhead
- Sellers eventually overwhelm buyers and support breaks lower
Trading the Descending Triangle
- Short at support break, target equal to height projected lower
- Place stops above pattern resistance to contain potential losses
Spotting descending triangles can help Forex traders catch major trend reversals as support gives way to new downside momentum.
The symmetrical triangle shows an even battle between buyers and sellers:
- Contracting pattern with two converging trendlines
- Upper resistance line with lower highs indicating supply
- Lower support line with higher lows reflects demand
- Breakouts favor the direction of the original trend
Trading the Symmetrical Triangle
- Consider direction of previous trend
- Long at upper resistance break, short at lower support break
- Set protective stops outside pattern support and resistance
Symmetrical triangles are continuation patterns showing bouts of indecision before directional momentum resumes.
Double Tops and Bottoms
Double top and double bottom reversals involve multiple touches of the same resistance or support level:
Double Top – Rally to resistance twice before turning lower, shows sellers in control at highs
Double Bottom – Decline to support twice before rebounding higher, indicates accumulation at lows
Trading Double Tops and Bottoms
- Short at resistance break on double top, long at support break for double bottom
- Profit targets equal height of pattern
- Place stops above resistance or swing high on shorts, above support or swing low on longs
These patterns show key rejection of price extremes and offer great reward potential on breakouts.
Head and Shoulders
The head and shoulders is one of the most reliable trend reversal patterns and a hallmark of technical analysis:
- Defined by three swing highs with the middle peak above flanking highs
- Signals growing weakness and reversal lower after right shoulder forms
- Triggered by breakdown below the neckline support
Trading the Head and Shoulders
- Short at neckline breakdown, profit target equal to height of pattern
- Place protective stops above the right shoulder high
Forex traders watch for emerging head and shoulders tops to catch major reversals as uptrends roll over.
Mastering multi-day candlestick patterns like these provide a clear edge in timing potential trend continuations and reversals on the daily charts. Now let’s examine how to combine candlestick patterns with other indicators.
Combining Candlestick Patterns with Indicators
Candlestick patterns become even more powerful when combined with Forex indicators. Analyzing overbought/oversold oscillators, moving averages and volume can help confirm formations and lead to higher probability trades.
Here are a few ways traders use indicators to reinforce candlestick signals:
- RSI Divergence – Watch for hidden bearish divergences on rallies and hidden bullish divergences on pullbacks. These add confidence to reversal candlestick patterns.
- Moving Average Crossovers – Candles closing over key moving averages like the 20 or 50-day lines help confirm uptrend patterns. Closes under the moving averages reinforce downtrend patterns.
- Volume Spikes – Breakouts on heavy volume add power to ascending/descending triangles and other continuation patterns. Light volume breakouts are suspect.
- Bollinger Bands – Tags of the upper or lower bands combined with rejection patterns like Doji’s signal upcoming reversals.
By adding complementary indicators, candlestick signals become even more reliable. The best Forex traders integrate chart patterns with other technical analysis tools.
Now let’s examine some winning candlestick trading strategies.
Common Candlestick Trading Strategies
Armed with an understanding of major candlestick patterns, here are two simple high probability trading strategies:
This strategy involves using retracements to get long or short at advantageous entry points after initial breaks:
- Mark swing highs and lows on the hourly, 4 hour and daily charts
- Identify support and resistance zones around those swing points
- Take long trades at support on pullbacks in uptrends, short trades at resistance on rallies in downtrends
- Long at bullish engulfing or hammer candles off support with stops under pattern lows
- Short at bearish engulfing or shooting star candles off resistance with stops above pattern highs
Pullback strategies allow traders to get the best candlestick reversal signals at value areas. This offers favorable risk vs reward trading opportunities.
Candlestick patterns also identify reliable breakout entry points:
- Use ascending/descending triangles, flags, channels to spot promising breakouts
- Enter long on upside resistance breaks with stops under the pattern low
- Enter short on downside support breaks with stops above pattern high
- Confirm breakouts with surges in volume and momentum oscillators like RSI
- Ride in direction of breakout for large potential gains
Finding high probability breakouts with candlestick patterns can lead to very profitable Forex trades.
Now let’s go over some key tips for reading Forex candlestick charts.
Tips for Reading Forex Candlestick Charts
Here are crucial tips to become a candlestick master:
- Review charts across short and longer time frames to gain a multi-dimensional view of trends and reversals
- Start by looking at daily and weekly charts, then drill down to 1 hour and 15 minutes for trade entry opportunities
- Scan charts for familiar patterns that signal continuation or reversal potential
- Combine candlestick signals with other indicators for added confidence
- Be patient and wait for your pattern to complete, don’t chase premature entries
- Practice reading candlestick charts every single day to accelerate your learning
- Catalog examples of patterns in a journal or excel spreadsheet for easy reference
- Note any emotional trading errors, successful patterns will emerge over time
- Stick to your strategy, plan the trade and trade the plan
With consistent practice and discipline, reading candlestick charts will feel natural and you’ll earn the skill of an expert Forex chart reader.
Reading Forex candlestick charts provides a window into market psychology and potential future opportunities. Mastery of the most common candlestick patterns will give you a true edge. Follow this guide step-by-step:
- Learn single and multi-day candlestick formations
- Combine patterns with indicators like RSI for confirmation
- Trade pattern breakouts and pullbacks for optimal entries
- Catalog examples and practice daily for expertise
- Stay disciplined, review mistakes and stick to your strategy
Integrating Japanese candlestick analysis into your trading repertoire is a proven path to Forex success.
So start reading those charts and unlocking their valuable clues. Consistent practice makes perfect. With the powerful techniques in this guide, you’ll be analyzing price action like a pro Forex chart reading master in no time. The future of your trading career begins now!
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