Forex candlesticks are important to study if you want to master forex trading. Charts are the lifeblood of the retail trader. The three most popular types of charts in Forex trading are line charts, bar charts, and candlestick charts.
Each chart type offers a different perspective on the market which helps you with your technical analysis, strategies, and making informed decisions quickly.
Let's take a look at the main types as well as different candlesticks that will help you get a foundation in forex trading.
Line Charts in Forex
- A line chart is the simplest type of chart as it represents only the closing price on each day over a set period of time. The price action on a line chart is represented by a line. And prices are displayed along the side. The pros of using a line chart are its simplicity. It provides an uncluttered, easy to understand view of the assets price over a given period of time. The disadvantage associated with using a line chart is the fact that it doesn't provide visual information of the trading range for the individual points; such as the high-low opening and closing prices. That's where Forex candlesticks come into play.
1. Forex Bar Charts
A bar chart on the other hand displays their opening and closing prices; as well as the highs and lows for the trading period. If you look at the bar chart you can see that the vertical bar represents the high and low for the trading period.
The top of the bar represents the highest price. And the bottom of the bar represents the lowest price. The close and open prices are represented on the vertical line by a horizontal dash.
Opening prices are shown by a dash on the left side of the bar conversely the close is represented by the dash on the right-hand side.
Now a bar that's red signals that price has gone down in that period. Likewise, a bar that's green signals that the price has gone up in that period. Much like Forex candlesticks.
2. How To Read Forex Candlesticks Charts
How do we read Forex candlesticks charts? The advantage of the candlestick charting is the fact that they're easy to use and interpret the market.
Candlestick charts are especially easier for beginners to learn technical analysis. They can be used on all timeframes; from those looking for long term investments to those who do swing trading or day trading.
However, the power of candlesticks is the fact that they're great at identifying market turning points. For example, reversals from an uptrend to a downtrend or a downtrend to an uptrend.
Therefore, when used properly candlesticks can help to potentially decrease market risk exposure. Candlesticks form several unique patterns that help to identify the price action.
The patterns are formed with the help of single and multiple candlesticks. Let's discuss some of the common patterns.
Forex Candlesticks Patterns
- The patterns that are comprised of only one candlestick are called Single Candlestick Pattern. Forex candlesticks patterns are so versatile that even a single candlestick can inform you about a trend reversal or an indecision period in the market. These candlesticks can be spotted very easily because they have unique shapes. As a trader, you can use their signal to place the trade or combine with other patterns to get even more confident trade.
1. Doji Forex Candlesticks
Doji's are a single candlestick pattern that can frequently appear anywhere in a trending or sideways market. Doji candlesticks have almost the same opening and closing.
Meaning they have very small real bodies like a thin line. A Doji reflects the confusion or indecision period in the market. It's not considered a reversal or a continuation pattern.
Since it only indicates confusion among the market forces that is why it's important to wait for another signal before trading.
The signal can be confirmed with the help of another candlestick pattern. There are several variations of a Doji. So let’s discuss the most common ones.
2. Long Legged Doji's
These dojis have long upper and lower wicks and a small real body in the middle of the candlestick. The color of the Doji isn't significant.
This Doji indicates the tussle between the bulls and bears. They attempt to take control by taking the price up and down. However, both forces fail to control and end up in the middle leaving confusion around the market.
3. Dragonfly Doji
Candlesticks have long upper and lower wicks with a small real body in the middle of the candlestick. The color of the Doji isn't significant.
This Doji indicates the tussle between the bulls and bears who attempt to take control by taking the price up and down. But they both fail to control and end up in the middle leaving confusion around the market.
4. Gravestone Doji
This Doji has a long upper wick and small real body at the bottom of the candlestick with a very small or no lower wick at all. The Gravestone Doji again signifies the struggle between buyers and sellers.
The buyers take the price high up and the sellers manage to pull it back. However, they're unable to push it further lower than the opening.
Using Double Forex Candlesticks Patterns
- Double candlestick Patterns in Forex are patterns that are made of two candlesticks are called Double Candlestick Patterns. These patterns indicate a trend reversal or the continuation period in the market. Since these patterns represent two time-frames in the market they hold more information on the outlook of the market and their signal is considered stronger. Let’s find out more about Double Candlesticks Patterns below:
1. Engulfing Patterns
Engulfing candlestick patterns are the reversal patterns that are made up of two candlesticks. What defines as being engulfed in these patterns is the size of the two candlestick bodies.
The size of the wicks don't matter. Instead the bodies of the two candlesticks are compared. So let's start with the Bearish Engulfing Pattern.
2. Bearish Engulfing Patterns
A Bearish Engulfing Pattern appears after a bullish move and signals a bearish reversal. In this pattern, a green candlestick is followed by a red candlestick.
The body of the second red candle is larger than the first green candle. It completely engulfs the first candle body in a way that the open and the close of the green candle lies within the open-close range of the second candle.
The pattern is important because it signals that the uptrend is slowing down and bears can take control of the market anytime.
3. Bullish Engulfing Pattern
A Bullish Engulfing Pattern is the opposite of the Bearish Engulfing Pattern. The difference is that it appears after a bearish move and signals a bullish trend reversal.
In this pattern, a red candlestick is followed by a green candle that completely engulfs the body of the first red candle. Bullish Engulfing pattern is useful to identify the reversal in a bearish trend.
4. Dark Cloud Cover
Dark cloud cover is a bearish reversal pattern that we anticipate to appear after an uptrend. The pattern is comprised of two candles.
The first candle is a strong green candle. And the second candle is a red candle that opens above the closing of the previous candle. The closing of the second candle needs to be near to the low and well within the body of the preceding candle.
The wisdom is that the deeper the second candle closes into the body of the first candle the greater the chances of a bearish candlestick reversal occurring.
Triple Forex Candlesticks Patterns
- These patterns are made up of three candlesticks and offer more reliability because they represent three different time frames. For instance, if you were analyzing an up-trending market, the first candlestick may represent a bullish move while the second candlestick can possibly mark the beginning of the reversal. The third can finally confirm the reversal. Let’s dig deeper to learn more about Three Candlesticks Patterns.
1. Morning Star Candles
Morning Star is a bullish reversal pattern and is made up of three candles. The first is a long red candle. It's followed by a second candle with a small real body that gaps lower than the previous close.
In other words, the second candle opens lower than the previous close. The color of the second candle doesn't matter. The third and the final candle is a green candle with a big enough real body that penetrates back up deep into the body of the first red candle.
The middle candle looks like a star. As a result, the pattern gets its name from the morning star in the east that precedes the sunrise. Leading up to this pattern, the market is in a downtrend and the bears are in control.
The bears further assert themselves by opening the next session lower than the previous close. However, at the end of the day, they fail to push the market meaningfully lower.
This indicates that their control is being seeded. The next candle finally demonstrates that the control has now indeed shifted to the bulls. Thus marking a trend reversal.
Evening Star is the opposite of the Morning Star pattern. The pattern is also comprised of three candles. However, it appears after an uptrend and signals a bearish reversal.
Like the Morning Star, it gets its name from the star that appears in the west just before the evening falls. The first candle in this pattern is a tall green candle.
While the second candle is the star with a small real body that opens higher than the close of the previous candle. The small body of the second candle provides a warning of a possible top.
The color of the second candle doesn't matter. What's important is the opening gap from the preceding candle. The third and the final candle is a long red candle that penetrates deep into the body of the first green candle.
The third candle completes the pattern and confirms the signal that the bulls have run into a brick wall.
Forex Candlesticks Bottom Line
Knowing forex candlesticks patterns are so important for knowing when to get in and get out before a lagging indicator; like a moving average. Study the charts and know these patterns like the back of your hand if you want to be a Forex chart candlestick master!