Forex candlestick chart patterns

Candlesticks build patterns that predict price direction once completed. Proper color coding adds depth to this colorful technical tool, which dates back to 18th-century Japanese rice traders. Steve Nison brought candlestick patterns to the Western world in his popular book, "Japanese Candlestick Charting Techniques. In addition, single bar patterns including the doji and hammer have been incorporated into dozens of long- and short-side trading strategies.

Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they've been analyzed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail investors and traditional fund managers who execute technical analysis strategies found in popular texts. In other words, hedge fund managers use software to trap participants looking for high-odds bullish or bearish outcomes.

However, reliable patterns continue to appear, allowing for short- and long-term profit opportunities. Here are five candlestick patterns that perform exceptionally well as precursors of price direction and momentum. Each works within the context of surrounding price bars in predicting higher or lower prices. They are also time-sensitive in two ways:. This analysis relies on the work of Thomas Bulkowski, who built performance rankings for candlestick patterns in his book, "Encyclopedia of Candlestick Charts.

In the following examples, the hollow white candlestick denotes a closing print higher than the opening print, while the black candlestick denotes a closing print lower than the opening print.

The bullish three line strike reversal pattern carves out three black candles within a downtrend. Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar. The bearish two black gapping continuation pattern appears after a notable top in an uptrend , with a gap down that yields two black bars posting lower lows.

This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. The bearish three black crows reversal pattern starts at or near the high of an uptrend, with three black bars posting lower lows that close near intrabar lows. The most bearish version starts at a new high point A on the chart because it traps buyers entering momentum plays.

The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high. The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. The bullish abandoned baby reversal pattern appears at the low of a downtrend, after a series of black candles print lower lows.

The market gaps lower on the next bar, but fresh sellers fail to appear, yielding a narrow range doji candlestick with opening and closing prints at the same price.

A bullish gap on the third bar completes the pattern, which predicts that the recovery will continue to even higher highs, perhaps triggering a broader-scale uptrend. According to Bulkowski, this pattern predicts higher prices with a Candlestick patterns capture the attention of market players, but many reversal and continuation signals emitted by these patterns don't work reliably in the modern electronic environment. Fortunately, statistics by Thomas Bulkowski show unusual accuracy for a narrow selection of these patterns, offering traders actionable buy and sell signals.

Putting the insights gained from looking at candlestick patterns to use and investing in an asset based on them would require a brokerage account. Long shadows show that trading went far past the open and close values while short shadows indicate most of the trading happened near the open and close.

Please let us know how you would like to proceed. Technical Analysis. Japanese Candlesticks. The Benefits of Candlestick Charts Candlestick charts are one of the most common tools traders use for technical analysis. Most traders prefer to use the candlestick chart because it can help them to: Determine the current state of the market at a glance. Just by looking at the color and length of a candlestick, traders can determine instantly if the market is strengthening becoming bullish or weakening becoming bearish.

See the direction of the market more easily. Candlesticks contain the same data as a normal bar chart but highlight the relationship between opening and closing prices. The narrow stick represents the range of prices traded during the period high to low while the broad mid-section represents the opening and closing prices for the period. The advantage of candlestick charts is the ability to highlight trend weakness and reversal signals that may not be apparent on a normal bar chart. The shadow is the portion of the trading range outside of the body.

We often refer to a candlestick as having a tall shadow or a long tail. The long white line is a sign that buyers are firmly in control - a bullish candlestick. A long black line shows that sellers are in control - definitely bearish. An open and close in the middle of the candlestick signal indecision. Long-legged dojis, when they occur after small candlesticks, indicate a surge in volatility and warn of a potential trend change.

The dragonfly occurs when the open and close are near the top of the candlestick and signals reversal after a down-trend: control has shifted from sellers to buyers. The hammer is not as strong as the dragonfly candlestick, but also signals reversal after a down-trend: control has shifted from sellers to buyers. The shadow of the candlestick should be at least twice the height of the body. A gravestone is identified by open and close near the bottom of the trading range.

The candlestick is the converse of a hammer and signals reversal when it occurs after an up-trend.

We now look at clusters of candlesticks. How one candlestick relates to another will often indicate whether a trend is likely to continue or reverse, or it can signal indecision, when the market has no clear direction.

Engulfing patterns are the simplest reversal signals, where the body of the second candlestick 'engulfs' the first. They often follow or complete doji , hammer or gravestone patterns and signal reversal in the short-term trend. Harami formations, on the other hand, signal indecision. Harami candlesticks indicate loss of momentum and potential reversal after a strong trend.

Harami means 'pregnant' which is quite descriptive.

What is a candlestick?

The second candlestick must be contained within the body of the first, though the shadows may protrude slightly. A Dark Cloud pattern encountered after an up-trend is a reversal signal, warning of "rainy days" ahead. The Piercing Line is the opposite of the Dark Cloud pattern and is a reversal signal if it appears after a down-trend.

More controversial is the Hanging Man formation. A Hammer candlestick is a bullish signal in a down-trend but is called a Hanging Man when it occurs in an up-trend and is traditionally considered a bearish reversal signal. It is therefore advisable to treat the Hanging Man as a consolidation pattern, signaling indecision, and only take moves from subsequent breakouts, below the recent low or high.