The best trader in the forex market is above all a proper fortune teller!
All the attempts that are made at market analysis with the help of all the different technical analysis tools, fundamental analysis, and of course charting tools, are all so that you would be able to predict the future of the foreign exchange market with some degree of certainty that can be relied upon for your trading decisions.
Candlesticks are a great and popular method of obtaining patterns on the trading chart. Patterns that can provide you with highly valuable information. For instance, you might be able to identify when a trend is forming, or when one is about to end.
In this article we are going to discuss the best candlestick patterns in the forex market.
Candlesticks 101: Quick Class of the Basics
Before we discuss the patterns themselves, let’s see what a candlestick is in its basic form and take a quick glance at its components.
A candlestick or rather the pattern that is called a candlestick pattern is a method for presenting data on the trading chart. These patterns can help traders understand the market better and even predict where the market is headed or how prices might move in the short to long term.
Basically a candlestick pattern is made from numerous candles that form the overall pattern. Each candle consists of a body that would be either green (sometimes white) or red. Naturally, this color indicates the market direction. The former is indicative of a bullish trend while the latter is of course indicative of a bearish market.
Other than the color of the body, there is the other matter of length of the body. This length presents the range of opt to close off the candles.
And finally, there are the wicks or shadows of the candle, which show the amount of price increase and decrease, in addition to the high and low of the candle.
Now that you have basic knowledge of what a candlestick is and what it is made of, we will go through a list of what we believe are the most important candlestick patterns in the forex market – in no particular order.
The first candlestick pattern that we want to discuss is called morning star. This pattern is indicative of a bullish pattern. It has three candles in its formation. The beginning of this pattern has a red candle with a long red body. Then there is another red candle with a much smaller body whose wick registers a new low. Finally, the third candle is a green candle with a big body. This pattern shows that a bullish market is in the making.
The opposite of a morning star is called the evening star. Naturally it would be indicative of a bearish market. Its formation is also exactly the inverse form of a morning star. Therefore, the three candles in an evening star are formed as follows: first there is a green candle with a big body. Second, there is a much smaller green candle that registers a new high with its high upper wick. The third and last candle in this pattern is a red candle with a very long body. Together they signal the coming of a bear trend.
Doji is one of the easiest candlestick patterns among all the patterns that exist in this form of analysis. Interestingly, Doji is made from only one candlestick. The Doji candlestick basically does not have a body. This is because the opening and closing price of this candlestick are quite identical. As a result, a bodiless candle is formed with only wicks. The price changes during the candle are only registered with wick and so a cross shape is formed. Doji is considered to be neither bullish nor bearish. It is a sign that a trend has yet to form in the market.
Shooting star is yet another single candlestick pattern. It is also one of the most widely used patterns. The shooting star is normally a red candlestick, with a small body – which means the opening and closing prices are rather closer to each other. However, it is signified by a long top wick. This means between opening and closing, prices registered a new high, but of course at the end got back close to the opening price again. Shooting star is the sign that a bearish trend is about to begin.
The bullish engulfing pattern is an indication for an uptrend as the name suggests. It mainly consists of two candlesticks. The first one is a red candle. The important candle is the second one which is a green candle with a lower low than the previous one and also a higher ending price than the opening price of the previous candle. This means the second green candle, at the button will be lower and at the top will be higher than the previous one.
This pattern is naturally the opposite of the one mentioned above. Therefore, it begins with a green candle. And the second candle is red. Which of course again registers a new low and ends with a higher price than the opening price of the green candle. In this way, the second red candle will be bigger than the first green candle from top and bottom, hence the name “engulfing.”
A hammer is also among the most widely applied candlestick patterns and among the simplest ones as well. The hammer pattern is a single candlestick with a small green body. The significance of this pattern is in the very long lower wick of the candle. This is clearly indicative that there was a huge push to sell which drove prices to register a lower low, but then closed with a higher price because the trend reversed toward an upward trend.
Although it is called an inverse hammer, it is not the opposite of the pattern above in its nature. In fact, both of them are indicative of a bullish push in the market. It is only opposite in shape.
Therefore, an inverse hammer has a short green body with a long top wick. This obviously means there was a push to sell but the force to buy was stronger which drove prices up and not down.
Three White Soldiers
The “three white soldiers” is one of the most powerful bullish indicators. As the name suggests it is made from three green (sometimes white) candles. They are registered after a bearish push in the market and each one is higher than the previous one. All three have rather long green bodies, but with very short wicks on both sides.
Hanging man candlestick pattern is the exact opposite of a hammer. This means unlike a hammer it is indicative of a bearish trend. Also, it has a short red body, but with a long wick at the bottom. This clearly indicates that there was a huge push to sell which registers a lower low price between the opening and closing prices of the pattern.
Candlesticks are a popular method of technical analysis and charting approach that can help you detect numerous patterns in the market. There are so many different candlestick patterns, but in this article we provided you with the best candlestick patterns in forex.