10 Forex Trading Candlestick Patterns Every Trader Should Know

Written by Finsai Trade  »  Updated on: November 07th, 2024

Forex trading is one of the most profitable online trading markets in the world. Why? Mainly because it is the most active one. Money worth billions of dollars is traded on this daily. Candlestick patterns are a vital part of technical analysis in forex trading, as it offer traders with visual insights into price action and market sentiment, ultimately assisting in predicting market movements. So here, read about the ten forex trading candlestick patterns that every trader should be aware of.


What Are Candlestick Patterns?

Before learning about the patterns in detail, let's first try to understand the Candlestick Patterns in simple words. It is a financial analysis tool that uses charts to represent price movements visually. This representation ultimately helps traders predict future market trends. To understand those patterns, you need to be aware of the four points of data:

Open: The first trade during the period.

High: The highest traded price.

Low: The lowest traded price.

Close: The last trade during the period.

Types of Candlestick Patterns

1. Doji Candlestick

Doji candlestick pattern usually occurs when the opening and closing prices are virtually the same, creating a candle with a very small body. This pattern indicates the balanced position of buyers and sellers.

Now, there are basically four types of Doji Candlesticks:

Standard Doji - Standard Doji is a small cross-like pattern.

Long-legged Doji: In long-legged Doji, you’ll see long wicks both above and below the body, representing high uncertainty.

Dragonfly Doji: In Dragonfly Doji, you’ll see a long lower wick, suggesting a potential bullish reversal, especially if it appears after a downtrend.

Gravestone Doji: This Doji has a long upper wick, often signaling a bearish reversal if it appears after an uptrend.

2. Engulfing Candlestick Pattern

An engulfing candlestick pattern occurs when a large candle completely engulfs the previous smaller candle. These are mainly of two types:

Bullish Engulfing: In Bullish Engulfing, a larger green (bullish) candle follows a smaller red (bearish) candle, suggesting a potential bullish reversal.

Bearish Engulfing: In Bearish Engulfing, a larger red (bearish) candle follows a smaller green (bullish) candle, suggesting a potential bearish reversal.

3. Hammer and Hanging Man Pattern

Both the Hammer and Hanging Man patterns have similar structures such as a small body and a long lower shadow. The difference lies in the context in which they appear.

Hammer - Usually found after a downtrend, this pattern suggests potential bullish reversal.

Hanging Man - Generally found after an uptrend, it indicates possible bearish reversal.

4. Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star looks similar in terms of appearance, with a small body and a long upper shadow. They can be used to signal potential reversals.

Inverted Hammer - Appears after a downtrend, suggesting a possible bullish reversal.

Shooting Star - Appears after an uptrend, indicating a potential bearish reversal.


5. Morning Star and Evening Star

The Morning Star and Evening Star are multi-candle patterns that signal potential reversals.

Morning Star - The Morning Star pattern is a three-candle pattern consisting of a long bearish candle, followed by a small-bodied candle (either bullish or bearish), and then a long bullish candle. It suggests a reversal from bearish to bullish.

Evening Star - The Evening Star pattern is a three-candle pattern consisting of a long bullish candle, followed by a small-bodied candle, and then a long bearish candle. It signals a reversal from bullish to bearish.

6. Bullish and Bearish Harami

The Harami is a two-candle pattern where the second candle is completely contained within the body of the first candle.

Bullish Harami - A small green (bullish) candle is completely within the body of a larger red (bearish) candle. It suggests a potential bullish reversal after a downtrend.

Bearish Harami - A small red (bearish) candle is completely within the body of a larger green (bullish) candle. It suggests a potential bearish reversal after an uptrend.

7. Dark Cloud Cover and Piercing Pattern

These are two-candle reversal patterns that occur at the end of a strong trend.

Dark Cloud Cover - Dark Cloud Cover is a bearish reversal pattern. The first candle, which is a large bullish candle, followed by a bearish candle that opens above the previous close but closes below the midpoint of the first candle.

Piercing Pattern - Piercing pattern is a bullish reversal pattern. The first candle is a large bearish candle, followed by a bullish candle that opens below the previous close but closes above the midpoint of the first candle.

8. Three White Soldiers and Three Black Crows

These patterns are made up of three consecutive candles and are often considered strong reversal indicators.

Three White Soldiers - Three White Soldiers are the three consecutive long bullish candles with higher closes. It indicates a strong bullish reversal after a downtrend.

Three Black Crows - The Three Black Crows is a three consecutive long bearish candles with lower closes. It signals a strong bearish reversal after an uptrend.

9. Marubozu Candlestick

A Marubozu is a candlestick with no wicks at all or has the very tiny ones. It indicates strong directional movement.

Bullish Marubozu - A Bullish Marubozu is a long green candlestick with no wicks, indicating strong buying pressure.

Bearish Marubozu - A Bearish Marubozu is a long red candlestick with no wicks, indicating strong selling pressure.

10. Island Reversal Pattern

The Island Reversal pattern is a rare but powerful pattern that signals a significant reversal. It occurs when a gap creates an "island" of price action, followed by a reversal gap in the opposite direction.

Bullish Island Reversal - It is a bearish gap down followed by a gap up in the opposite direction, indicating a shift from bearish to bullish.

Bearish Island Reversal - It is a bullish gap up followed by a gap down, indicating a shift from bullish to bearish.


Conclusion

So this was all regarding the ten forex trading candlestick patterns every trader must be aware of. However, no pattern guarantees success, but, understanding and recognizing these common candlestick patterns can enhance your ability to predict the market. Also, Finsai Trade is the best forex trading platform on the internet. Make sure to read about it as well before making the trading platform related decision. Best of luck!


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