A candle on a price chart is a figure that is hard to confuse with other market signals. It has a clear formation and provides the most understandable indicators that are easy to interpret. That’s why all Forex candlestick patterns are actively used by traders, from beginners to professionals. You can also rely on this information when engaging in automated trading using trading robots from https://forexstore.com/best-forex-robots.
What Are Candlestick Patterns?
Considering the variety of candlestick patterns, let’s start with the simplest. What is a candlestick in Forex trading? A candlestick is a figure composed of several price bars and is interpreted based on:
- Body, indicating the range (open or closed);
- Wick (also called a shadow), signifying the minimum and maximum within the trading day’s range;
- The color of the figure, where a red or black body signifies a price decrease, while a white or green one signals a price increase.
Candlesticks have value on their own, but together, they can form complex patterns that allow a trader to identify support and resistance lines, understand the balance between buying and selling pressure, and recognize trend continuation or indecision, which may indicate a trend reversal. Thus, the Forex candlestick meaning is determined based on both the individual candle and the patterns they form on the chart.
Single Candlestick Patterns
Forex EA can automatically read and interpret signals, including the analysis of candlestick patterns. Nevertheless, every trader needs this information for precise and in-depth configurations and more profitable trading. So, let’s begin our journey into candlestick patterns with the simplest figures.
Hammer and Hanging Man
The hammer appears at the end of a downtrend, while the appearance of a Hanging Man on the price chart indicates the conclusion of an uptrend. In both cases, the upper shadows are very short or entirely absent, while the candle’s lower wick is long. Therefore, when a hammer appears on the chart, it means that the price will soon start rising again despite the significant push from sellers to drive the price down. Under such conditions, it is optimal to open buy positions. In contrast, Hanging Man signals the optimal time to close positions.
How to recognize these figures?
- The long shadow should be at least twice the length of the real body.
- The upper shadow is absent or very short.
- The body of the candle is located in the upper part of the trading range, whether it’s a Hammer or a Hanging Man.
Shooting Star and Inverted Hammer
Among the Forex candlestick names that you will encounter most frequently are Shooting Star and Inverted Hammer. They appear as two candles with approximately equal bodies, long upper shadows, and very short or entirely absent lower shadows. Figures of this type indicate a trend reversal. The Inverted Hammer appears at the end of a downtrend, while the Shooting Star forms on the chart when an uptrend concludes, and prices are expected to decline.
Continuation Candlestick Patterns
Candlestick patterns can also signal the continuation of a trend, not just its reversal. To understand that an uptrend or a downtrend is likely to persist, consider complex candlestick patterns, including:
- Ascending, descending, and symmetrical triangles. Ascending triangles form within an uptrend and indicate its probable continuation. A descending pattern is bearish and appears within a downtrend. A symmetrical triangle suggests uncertainty about future market sentiment.
- Rectangles also form between two trendlines and can be bullish or bearish. Bullish rectangles are observed within an uptrend, while bearish ones predict further price declines.
- A flag pattern signifies rapid price changes and is seen before a sudden asset price breakout in the direction of the prevailing trend.
Other continuation patterns include flags and cup and handle patterns. These can be either bullish or bearish, depending on whether they occur within an uptrend or downtrend.
Complex Candlestick Patterns
Complex patterns include reversal patterns like head and shoulders, bullish engulfing, and bearish pennant. These patterns are not technically complex, but they are more challenging to interpret because they require considering various aspects and factors. There is no straightforward signal, and each detail in these formations must be carefully evaluated for successful interpretation.
Combining Candlestick Patterns
By using candlestick patterns, you can assess price dynamics, understand the trend’s direction, and predict events to make successful trades. Combining multiple candlestick patterns and interpreting them correctly enables you to make more accurate forecasts. Analyze these patterns within the broader market context, considering external economic events, and look for consistent patterns that can confirm each other. This allows you to gain a thorough understanding of what is happening in the market.
Tips for Recognizing and Using Candlestick Patterns
Each candlestick pattern has its characteristics. Simple patterns are easy to recognize since each candle has a body, shadows, and a color to guide you. Complex patterns involve combinations of several candles on the chart, forming a particular shape like a triangle, rectangle, or flag. Start with recognizing the simplest candlestick patterns and gradually move on to more complex ones and their interpretations.
Keep in mind that a candle’s appearance can vary across different timeframes, so closely monitor this aspect. When you are new to working with candlestick patterns, seek confirmation of your predictions using additional indicators to avoid making incorrect assumptions.
Candlestick patterns are among the easiest to understand and interpret, and they can become valuable tools for making predictions and informed trading decisions. The more you practice and work with them, the more apparent the signals on the charts will become to you.