Getting Started with Forex Trading

Forex Chart Patterns Playbook: Top Candlestick Setups that Print Money

Foreign exchange (forex) trading can seem mystifying to beginners. However, learning to recognize key chart patterns can help you identify potential trade opportunities and increase your chances of profiting from forex trades. In this comprehensive forex chart patterns playbook, we provide a detailed overview of the most powerful candlestick formations, with actionable tips on how to trade them. Read on to become a forex chart pattern master!

Introduction to Forex Chart Patterns

Before diving into specific candlestick patterns, let’s briefly go over what chart patterns are and why they matter for forex traders.

At its core, technical analysis involves analyzing historical price charts to identify patterns that may signify future market movements. Forex chart patterns are recurring formations in the price action that emerge as candlesticks on the price chart. These patterns reflect the psychology and behavior of market participants.

Certain chart patterns tend to lead to predictable outcomes. Being able to recognize these high probability formations swiftly allows traders to capitalize on them and open profitable positions ahead of major market moves. Even beginners can rapidly improve their trading by becoming adept at identifying the most reliable candlestick patterns.

Now let’s explore some of the most powerful chart patterns every forex trader should know.

Top Forex Candlestick Patterns

Pin Bar Formation

The pin bar is by far one of the most popular forex chart patterns. It goes by several other names, including the “hammer candle” or “hanging man” depending on its orientation. The pin bar has a small real body and a long tail or “wick” that protrudes out from one end.

Pin bar example

Image source: Trading Setups Review

How to Trade the Pin Bar

The long wick of the pin bar shows a strong rejection of price by the market. This generates an excellent trade signal in the opposite direction once the pin bar closes.

For long trades:

  • The pin bar low forms the entry price
  • Place stop loss below the low/tail of the pin bar
  • Target take profit near the high of the candle, at a 1:2 or 1:3 risk-reward ratio

For short trades:

  • The pin bar high forms the entry
  • Place stop loss above the high/wick of the pin bar
  • Target take profit near the low of the candle

Pin bars work especially well with other confluence factors, like being at a key support and resistance level. Their long tails show strong buying or selling pressure, allowing you to ride the subsequent momentum.

Inside Bar Pattern

The inside bar pattern consists of at least two candlesticks, with the body of the second candlestick completely within the range of the previous candle. It signals consolidation before a major breakout move.

Inside bar example

Image source: Trading Rush

How to Trade the Inside Bar

  • Enter long when price breaks above the high of the inside bar
  • Place stop loss below the low of the inside bar
  • Take profit by aiming for 1:2 or 1:3 risk-reward ratio
  • Enter short when price breaks below the low of the inside bar
  • Place stop loss above the high of the inside bar
  • Take profit by targeting the 1:2 or 1:3 risk-reward zone

Inside bars work well when they form at support and resistance zones or consolidation periods. Be patient and wait for price to break out before entering. The breakout move will often extend by the height of the inside bar.

Double Top/Bottom Pattern

The double top and double bottom patterns provide powerful reversal trade signals. The double top forms after an uptrend, while the double bottom after a downtrend.

Double top and double bottom

Image source: StockCharts

How to Trade the Double Top/Bottom

For the double top:

  • Enter short when price breaks below the swing low between the two peaks
  • Place stop loss above the horizontal resistance line connecting the peaks
  • Take profit by targeting a 1:2 or 1:3 risk-reward ratio

For the double bottom:

Top 6 Forex EA & Indicator

Based on regulation, award recognition, mainstream credibility, and overwhelmingly positive client feedback, these six products stand out for their sterling reputations:

NoTypeNamePricePlatformDetails
1.Forex EAGold Miner Pro FX Scalper EA$879.99MT4Learn More
2.Forex EAFXCore100 EA [UPDATED]$7.99MT4Learn More
3.Forex IndicatorGolden Deer Holy Grail Indicator$689.99MT4Learn More
4.Windows VPSForex VPS$29.99MT4Learn More
5.Forex CourseForex Trend Trading Course$999.99MT4Learn More
6.Forex Copy TradeForex Fund Management$500MT4Learn More
  • Enter long when price breaks above the swing high between the two troughs
  • Place stop loss below the horizontal support line connecting the troughs
  • Take profit by aiming for 1:2 or 1:3 risk-reward

The double top/bottom signals a major trend reversal, allowing you to profit from the new emerging trend. Trade breakouts of key support/resistance with minimum 1:2 risk-reward.

Head and Shoulders Pattern

The head and shoulders is a reversal pattern that forms after an uptrend. It has a “head” peak, and two smaller “shoulders” top formations either side, at similar levels.

Head and shoulders top pattern

Image source: StockCharts

How to Trade the Head and Shoulders

  • Enter short when price breaks below the “neckline” support
  • Place stop loss above the right shoulder peak
  • Take profit by targeting a minimum 1:2 risk-reward ratio

The head and shoulders signals growing weakness in an uptrend, and impending reversal lower. Trade breakdowns of the neckline support for optimal risk-reward potential.

Bullish/Bearish Engulfing Patterns

Engulfing patterns form when the body of the current candle completely engulfs or “covers” the body of the previous candle, signaling reversal.

Bullish engulfing pattern

Image source: DailyFX

How to Trade Bullish/Bearish Engulfing

For the bullish engulfing pattern:

  • Enter long when engulfing candle closes
  • Place stop loss below low of engulfing candle
  • Take profit by targeting 1:2 or 1:3 risk-reward zone

For the bearish engulfing pattern:

  • Enter short when engulfing candle closes
  • Place stop loss above high of engulfing candle
  • Take profit by targeting 1:2 or 1:3 risk-reward zone

The larger the engulfing candle, the more powerful the reversal signal. Trade in the direction of the new emerging trend.

Morning and Evening Star Patterns

The morning and evening star patterns incorporate three candlesticks and signal potential trend reversals.

Morning and evening star patterns

Image source: Backtest Rookies

How to Trade the Morning/Evening Star

For the morning star bottom reversal pattern:

  • Enter long on close of the third bullish white candle
  • Place stop loss below the low of the second star candle
  • Take profit by aiming for a 1:2 or 1:3 risk-reward ratio

For the evening star top reversal pattern:

  • Enter short on close of the third bearish black candle
  • Place stop loss above the high of the second star candle
  • Take profit by targeting the 1:2 or 1:3 risk-reward zone

These patterns indicate potential exhaustion of the current trend, and likelihood of an impending reversal. Time entries correctly off the third confirming candle.

Trading with Confluence for Higher Probability Setups

While the above candlestick patterns reveal valuable information about market psychology on their own, you can improve your odds substantially by combining them with other confluence factors.

Some examples of powerful confluence factors include:

  • Support/Resistance – Combining candlestick signals with key support/resistance levels results in higher probability setups.
  • Moving Averages – Using 50/100/200 EMAs can help identify the prevailing trend and tilt probability in your favor.
  • Chart Patterns – Look for candlesticks forming at important chart pattern break/bounce points.
  • Fibonacci Levels – Candlestick signals at Fibonacci retracements/extensions have greater significance.
  • Momentum – Overbought/oversold oscillators like RSI increase odds of reversal patterns.
  • Volume – Candlestick signals are stronger with increasing/decreasing volume for reversals.
  • Fundamentals – Combining technicals with news events, economic data can boost probability.

By mastering high probability candlestick patterns and using them with other confluence factors, you will be able to spot prime forex trading setups regularly. This will vastly improve your ability to profit from forex.

Candlestick Pattern Cheat Sheets

Here are some handy forex candlestick pattern cheat sheets you can reference to recognize these formations faster on live price charts:

Bullish Candlestick Patterns Cheat Sheet

Bullish candlestick patterns cheat sheet

Image source: Trading Strategy Guides

Bearish Candlestick Patterns Cheat Sheet

Bearish candlestick patterns cheat sheet

Image source: TradingView

6 FAQs about Trading Forex Candlestick Patterns

Let’s go over answers to some frequently asked questions about trading price action and candlestick patterns in forex:

Q: What are the best candlestick patterns for day trading forex?

A: Excellent candlestick patterns for intraday trading include pin bars, engulfing candles, and breakouts/rejections of inside bars. Key is look for these signals at major support/resistance levels for higher probability.

Q: What candlestick patterns work best with trend trading strategies?

A: Continuation candlestick patterns like rising/falling three methods and up/down-gap side-by-side white soldiers work well for trend following. Look for clusters of bullish/bearish candles in the direction of the trend.

Q: How do you confirm a candlestick pattern is valid?

A: Use confluence factors like support/resistance, volume, moving averages to confirm candlestick patterns. For reversals, wait for a close outside key level before trading breakout. Let price confirm the pattern.

Q: Should you trade all candlestick patterns?

A: No – stick to trading only the most reliable, high probability candlestick formations. Avoid obscure, low probability patterns that generate lots of false signals. Master a few key setups like pin bars and engulfing candles.

Q: What time frame is best for trading candlestick patterns?

A: It depends on your trading style. For intraday trading, use 5/15 mins charts to spot setups. Swing traders can look at hourly/4-hour charts, while long-term investors daily/weekly timeframes.

Q: How do you avoid candlestick pattern traps?

A: Use confluence, don’t chase patterns, have patience, obey your stop loss. Wait for optimal conditions and price confirmation before entering trades. If multiple patterns conflict, stand aside.

Conclusion

Learning to recognize and trade forex candlestick patterns can significantly improve your trading results. The most reliable formations include pin bars, inside bars, engulfing candles and doji stars. Combine these high probability setups with confluence factors for optimal entries. Master these strategies, and you will be well on your way to forex trading success.

Now get out there and put your new forex candlestick pattern knowledge to work! Consistently apply these techniques with discipline and you will be amazed at the trading edge they can provide. This chart patterns playbook has armed you with all the knowledge you need to trade candlestick formations profitably, so start spotting these setups and take advantage today!

Top 10 Reputable Forex Brokers

Based on regulation, award recognition, mainstream credibility, and overwhelmingly positive client feedback, these ten brokers stand out for their sterling reputations:

NoBrokerRegulationMin. DepositPlatformsAccount TypesOfferOpen New Account
1.RoboForexFSC Belize$10MT4, MT5, RTraderStandard, Cent, Zero SpreadWelcome Bonus $30Open RoboForex Account
2.AvaTradeASIC, FSCA$100MT4, MT5Standard, Cent, Zero SpreadTop Forex BrokerOpen AvaTrade Account
3.ExnessFCA, CySEC$1MT4, MT5Standard, Cent, Zero SpreadFree VPSOpen Exness Account
4.XMASIC, CySEC, FCA$5MT4, MT5Standard, Micro, Zero Spread20% Deposit BonusOpen XM Account
5.ICMarketsSeychelles FSA$200MT4, MT5, CTraderStandard, Zero SpreadBest Paypal BrokerOpen ICMarkets Account
6.XBTFXASIC, CySEC, FCA$10MT4, MT5Standard, Zero SpreadBest USA BrokerOpen XBTFX Account
7.FXTMFSC Mauritius$10MT4, MT5Standard, Micro, Zero SpreadWelcome Bonus $50Open FXTM Account
8.FBSASIC, CySEC, FCA$5MT4, MT5Standard, Cent, Zero Spread100% Deposit BonusOpen FBS Account
9.BinanceDASP$10Binance PlatformsN/ABest Crypto BrokerOpen Binance Account
10.TradingViewUnregulatedFreeTradingViewN/ABest Trading PlatformOpen TradingView Account

George James

George was born on March 15, 1995 in Chicago, Illinois. From a young age, George was fascinated by international finance and the foreign exchange (forex) market. He studied Economics and Finance at the University of Chicago, graduating in 2017. After college, George worked at a hedge fund as a junior analyst, gaining first-hand experience analyzing currency markets. He eventually realized his true passion was educating novice traders on how to profit in forex. In 2020, George started his blog "Forex Trading for the Beginners" to share forex trading tips, strategies, and insights with beginner traders. His engaging writing style and ability to explain complex forex concepts in simple terms quickly gained him a large readership. Over the next decade, George's blog grew into one of the most popular resources for new forex traders worldwide. He expanded his content into training courses and video tutorials. John also became an influential figure on social media, with over 5000 Twitter followers and 3000 YouTube subscribers. George's trading advice emphasizes risk management, developing a trading plan, and avoiding common beginner mistakes. He also frequently collaborates with other successful forex traders to provide readers with a variety of perspectives and strategies. Now based in New York City, George continues to operate "Forex Trading for the Beginners" as a full-time endeavor. George takes pride in helping newcomers avoid losses and achieve forex trading success.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button