Why Candlestick Patterns Are Key To Success in Forex Trading

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Candlestick Patterns

Candlesticks patterns in Forex trading refer to a group of reversal patterns shown on price charts. These patterns are identified by candles of varying colors. And are associated with particular behaviors. The candlestick pattern is one of the most important indicators in forex trading online. It is a charting technique used by many traders and can help you make better trades and increase your profits.

The candlestick pattern is a type of Japanese charting that is used to show the price action in a security over a certain period of time. It shows the opening price, the high, the low, and the closing price of the given period. Candlesticks also highlight significant market moves by showing whether prices closed up or down for that day.

The Japanese Candlestick Theory

Japanese candlesticks are a type of bar chart that was developed in the 17th century by Japanese rice traders. Candlestick charting was introduced in western countries by Steve Nison in his book Japanese Candlestick Charting Techniques. Candlesticks are also called candle charts or bar charts.

The basic idea behind Japanese candlesticks is that they represent the opening and closing price of a security for a given time period.

A candle has two lines — the body and the wick. And the most basic candle is the bar or body, which is simply the height of a candle from its open to close. Japanese candlestick charting techniques use many more candles than basic bar charts.

The body is the most important part of a candlestick because it shows you how much money was made or lost during that period of time. If the open price is higher than the close price, then you have an up-bodied candle. And if it is lower, then you have a down-bodied candle.

The thickness of the body represents how much volume was traded during that period of time. This gives traders an idea as to whether they should pay attention to this particular candle or not.

What You Need To Know About Forex Candlestick pattern – The Basics

A candlestick pattern is a specific arrangement of a stock’s high, low, open, and close prices on any given trading day. Many traders believe that they can predict the direction of the stock’s price based on the type of pattern or formation. Candlestick patterns can be bullish or bearish and are often used as a way to gauge where the current trend may be heading next.

Traders use hundreds of candlestick patterns to predict future price movements in stocks and other financial instruments. Some of these patterns can be used to generate buy signals. While others indicate that a sell signal should be issued by traders. Investors need to understand what each candlestick pattern means before they attempt to use them as part of their trading strategy.

What are Candlestick Patterns In Forex Trading and CFDs?

Candlesticks represent the range of a currency pair at any given time. Each candlestick on a chart shows four key pieces of information—the open price, high price, low price, and closing price—as well as the highest and lowest points during that time.

Candlestick patterns in forex trading are a form of technical analysis. These patterns are also known as candlesticks or Japanese candlesticks. Candlestick patterns are a way to display the price action in forex trading.

They are used to plot price action and show the bar’s opening, closing, and high and low. The way these patterns are formed is very similar to how they’re formed in stock trading. The difference is that there are different names for them and the time frame for each pattern is different.

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Different Parts of Candlestick Chart in Forex Trading

Candlesticks provide an easy way to digest the information in the price bar. There are four candlestick parts: the body, Shadow(wick), upper shadow, and lower shadow.

The parts of a candlestick are:

1. The body

The body is the widest part of the candle. It can be either red or green (depending on whether it is an up or down day). It can also be referred to as the real body.

2. The shadow

The shadow represents the difference between the open and close price. It can also be referred to as the wick or tail.

3. The upper shadow

This is the higher of the two shadows on a candlestick, which appears on top of an up-trending candle. If it touches or goes beyond the upper Bollinger band, then this indicates possible trend reversal (especially if there are other signs of reversal).

4. The lower shadow

This is the lower of the two shadows on a candlestick, which appears on top of a down-trending candle. If it touches or goes beyond the lower Bollinger band, then this indicates possible trend continuation from here (especially if there are other signs of continuation).

The color of each candle depends on whether it’s an up candle (green) or a down candle (red). A green-up candle indicates that prices closed higher than they opened during this period. A red down candle indicates that prices closed lower than they opened during this period.

Besides the color of the candles and their size and position, you will also need to learn the different patterns created by candles in combination to make accurate predictions.

Candlestick Patterns

How to read candlestick chart for day trading

The day trading candlestick chart is one of the most popular ways to analyze and interpret the price action of stocks, commodities, and forex currency pairs. The candlestick chart represents each trade made during a given time period. A single candlestick shows when the price closed, as well as its opening and closing prices.

The first price, called the open or opening price, is when a new currency pair is traded for the first time. The last price, called the close or closing price, is when a trader buys or sells their last currency pair units. These trades create the shape of a candlestick on a graph, which helps traders and investors analyze past performance.

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Candlestick Patterns and The Stories They Tell

There are hundreds of candlestick patterns, but most fall into three categories: reversal, continuation, and indecision.

1. Candlesticks Reversal Patterns

Reversal patterns are reversal formations that indicate a change in price direction. These patterns can be found in candlesticks, bar charts, and line charts. They are formed by two or more candlesticks, which are either bearish or bullish. They have the same shape and color, but their wicks (tails) point in opposite directions.

Reversal patterns appear at significant turning points in the market. And they are always preceded by an uptrend or downtrend. This means there must be substantial volume behind the move before it reverses direction.

2. Candlestick Continuation Pattern

A candlestick continuation pattern is a type of candle that shows no change in price. It may be used as an indication that prices will continue to move in the same direction.

When a candlestick continues a trend without any significant change in price, it forms a continuation pattern. These patterns are usually found at the end of trends. And they can provide signals for Forex traders to buy or sell at support or resistance levels.

A continuation pattern can be bullish, bearish or neutral and will appear in an uptrend or downtrend.

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3. Candlestick Indecision Patterns

The indecision candlestick pattern is one of the most common candlestick patterns in the market. The indecision candlestick pattern shows price movement in the direction of the previous day’s close but does not move beyond that point. It is indicated by the gap between the open and close prices. This can be either above or below the previous day’s close.

Different Types of Candlestick Patterns

A candlestick pattern is a price chart that uses Japanese candlesticks to display a security’s price change over time. Candlesticks are a type of bar graph, but they offer more information than standard bar graphs.

Candlestick patterns are patterns formed from the shape of the candlesticks – both filled and hollow. They are used to predict the direction of the trend.

There are a lot of candlestick patterns that you can use to predict the direction of the market. The most common ones are as follows:

Shooting Star

The shooting star candlestick is a bearish reversal pattern that occurs at the top of an uptrend. It consists of a long upper shadow and a small real body.

The long upper shadow shows that the price has risen strongly, but has subsequently fallen back to close near its open, hence the small lower shadow. The candle is named after its resemblance to the tail of a flying star (shooting star).

The shooting star is regarded as bullish when it appears at the top of an uptrend (i.e., after an advance). And a bearish when it appears at the bottom of a downtrend (i.e., after a decline).

In an uptrend, this pattern suggests that there is intense downward pressure on prices, which may cause further declines in price over the next few days.

Bullish Engulfing Candlestick Pattern

The bullish engulfing pattern is a variation of the engulfing pattern. It occurs when there are two candles in a row, with the second candle completely engulfing (covering) the body of the first candle. This signals that there was significant buying pressure during that period. Or that sellers were overwhelmed by buyers and had to sell at a lower price than they would have liked to sell at.

The Bullish Engulfing Pattern usually forms after an extended downtrend. Or after a series of lower highs and lower lows. It means that the bears are losing their grip on the market, and it’s time for bulls to take over. The longer the period of the drop, the more significant this pattern becomes. It can also indicate that a reversal is imminent when it appears near support levels.

Bearish Engulfing Candlestick Pattern

A bearish engulfing candlestick pattern is a two-candlestick pattern that appears during an upward trend. It’s made up of a small body candle. This is followed by a large body candle that opens lower and closes higher than the previous candle. The difference between the two bodies should be at least twice as large as the first one. If this doesn’t happen, then you can’t consider it a valid Bearish Engulfing pattern.

The bearish engulfing candlestick pattern marks a reversal in price action from an uptrend to a downtrend. It’s created when there’s an increase in open interest, but prices fail to move beyond the previous day’s high or low. This indicates weakness in the current trend, which leads to profit-taking and falling prices on the following day.

The Doji Candlestick Pattern

A Doji line with no lower wick suggests indecision in the market. The gravestone Doji forms at either end of a strong downtrend. Or at the start of an uptrend, suggesting that momentum may be about to change directions.

The Doji is a neutral pattern because it can be interpreted in many ways. It can signal indecision, mark a top or bottom, or indicate support or resistance. It may appear at the end of an uptrend or downtrend, and it may appear in any time frame, from daily to hourly charts.

The Gravestone Doji is a bearish candlestick reversal pattern. It is formed after a long downtrend or after a long uptrend has reversed. A Gravestone Doji is a sign of extreme price action in both directions on a chart. As such, they can sometimes be used as confirmation of a trend reversal or to anticipate one.

Hammer Candlestick Pattern

A Hammer candlestick pattern is considered a bullish reversal pattern. It is formed after a decline in price and is named for the shape of its body (similar to the head of a hammer). The Hammer candles consist of one day where prices open at or near their low, trade lower during most of the day but close near their high. This suggests that there may be some buying pressure at the end of the session. If this occurs in an uptrend, it can be considered a bullish signal for traders looking for confirmation that prices will continue to climb higher.

Gaps

Gaps are one of the most common short-term trading patterns. They can be found on bar charts as well as on Japanese candlesticks.

Gaps are a type of continuation pattern, but they are not considered bullish or bearish. A gap is a sudden and dramatic price movement where there is no trading between the opening and closing prices. If a gap forms on the open, it’s called an up-gap. And if it forms on the close, it’s called a down-gap. Gaps can occur when a new company issues stock or when there is news about an important event like earnings or legislation.

The Evening Doji Star

This pattern is formed when there is a small white or green candle and then a large red or black candle the next day. The large candle must engulf the previous day’s small candle.

Evening star patterns are reversal patterns that are used to show that the market has reversed to an upward trend from a downward trend. These patterns can also be used to predict trends and reversals in prices. The last trend before this pattern usually shows a downward trend, so you must note this before you trade this candlestick pattern.

The evening star pattern can be seen in any time frame, but for best results, it should be observed on a daily chart or higher time frames like weekly charts or monthly charts, as these patterns can last longer than shorter time frames like 15 minutes or hourly charts.

Inverted hammer

The inverted hammer, also known as a hanging man, is a bearish reversal pattern that forms at the end of an uptrend. It looks like a candle with a long lower shadow and a small real body. The open and close are at the lower end of the range, while the high and low are at the upper end of the range. The long lower shadow shows selling pressure, and the small real body shows little buying pressure. The inverted hammer is a reversal signal which means it can be used to open short positions or go flat in existing long positions.

Marubozu

Marubozu candlesticks are the most popular candlestick patterns used by retail traders. They represent a bullish or bearish trend and can be easily identified on any chart.

A Marubozu candlestick is an empty or white body with no shadows at all. The opening and closing prices are equal, which means that the candle has neither a real body nor shadows.

The name “Marubozu” comes from Japanese, meaning “a long pole.” It’s a reference to the shape of this type of candle in a chart, which looks like a long pole with no shadows at all.

Marubozu candles are so popular because they’re easy to spot on any price chart. They indicate the direction of price movement. Marubozu candles are more reliable than other types of candles because they don’t have wicks or shadows, which could be misleading for traders who aren’t familiar with this type of pattern.

Final Thought on Candlestick patterns

Before you start trading using candlestick patterns, you need to understand a few things about the market. First, candlestick charting is a form of technical analysis. Second, it involves predicting the future price movements of assets on the stock market using past data. And recognizing that there are many forms of technical analysis. Most traders choose one method over others. It only makes sense to ask what makes candlestick patterns stand out among other forms of technical analysis.

Candlestick patterns are very important in forex trading. They can give much better signals than many technical indicators. These patterns are part of an art form in the forex market, not a science. They help you trade and make decisions by investing in the flow of the market instead of against it. Candlestick patterns can help you with fundamental analysis and conventional technical analysis and give you some valuable ideas about approaching the market for successful forex investing.

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