Learn Forex: Trading candlestick patterns

Candlestick patterns show forex market movement in a graphical format, and many traders use them to predict market events. Read on to learn about the most common candlestick patterns and how to use them.

1)         Bullish-

Hammer-

Occurs after a long downtrend and signals a trend reversal. The pattern comprises of a single candle, and can be either bullish or bearish.

Criteria-

The candle is recognized when the open, high and close are almost similar and is recognized by a small body with a long lower shadow, at least twice as long as the body.

The trend reversal will be confirmed with a higher open the following day.

EUR/JPY- DAILY CHART

Inverted hammer-

This pattern can be seen after a prolonged downtrend and signals a trend reversal. The pattern comprises of a single candle, either bullish or bearish.

Criteria-

The candle is identified when the open, low and close are almost the same and is represented by a small body with a long upper shadow, at least twice as long as the body. The trend reversal will be confirmed, if on the next day, prices open up with a gap.

 

USD/CAD- DAILY CHART

 Piercing pattern-

Occurs after a prolonged bearish trend and signals a trend reversal. The pattern comprises of two candles- the first a bearish candle and the second a bullish.

Criteria-

Candle- 1 is a long bearish candle indicating the expansion of the current downtrend

Candle- 2 is a long bullish candle that opens below the closing price of candle- 1 and closes at least halfway into the previous candle.

USD/CAD- DAILY CHART

Bullish engulfing-

Occurs after a prolonged downtrend and signals a trend reversal. The pattern involves two- candles; the first a bearish and the second a bullish, similar to the piercing pattern.

Criteria-

Candle- 1 is a bearish candle representing the bearish trend.

Candle- 2 is a bullish candle that opens below the closing price of candle- 2 and closes above the opening price of the previous candle, thereby completely engulfing the bearish candle.

AUD/CHF- DAILY CHART

Morning star-

This candlestick pattern can be seen after a prolonged downtrend and indicates a trend reversal. It is a three- candlestick pattern with the first and last candles comprising of a long bearish and a long bullish candle correspondingly, and sandwiched in between is a small bodied candle or a doji.

Criteria-

Candle- 1 is a bearish candle, representing the bearish trend

Candle- 2 is a small bullish/ bearish candle or a doji that opens with a downward gap.

Candle- 3 is a long bullish candle, opening higher with a gap and erasing most of the losses of day- 1, thus indicating a reversal.

CAD/CHF- DAILY CHART

2)         Bearish-

Hanging man-

Occurs after a long uptrend and signals a trend reversal. The pattern is similar to the ‘Hammer’ and comprises of a single candle, and can be either bullish or bearish.

Criteria-

The candle is recognized when the open, high and close are almost similar and is recognized by a small body with a long lower shadow, at least twice as long as the body.

The trend reversal will be confirmed with a higher open the following day.

EUR/JPY- DAILY CHART

Shooting star-

This pattern can be seen after a prolonged uptrend and is very appears very similar to an ‘Inverted hammer’. The pattern comprises of a single candle, either bullish or bearish.

Criteria-

The candle is identified when the open and the low are almost the same and is represented by a small body with a long upper shadow.

USD/CAD- DAILY CHART

Dark cloud cover-

Occurs after a prolonged bullish trend and signals a trend reversal. The description is very similar to the ‘Piercing pattern’ and comprises of two candles- the first a bullish candle and the second a bearish.

Criteria-

Candle- 1 is a long bullish candle indicating the expansion of the current uptrend

Candle- 2 is a long bearish candle that opens above the closing price of candle- 1 and closes at least halfway into the previous candle.

USD/CHF- DAILY CHART

Bearish engulfing-

Occurs after a prolonged uptrend and signals a trend reversal. The pattern involves two- candles; the first a bullish and the second a bearish, similar to the dark cloud cover pattern.

Criteria-

Candle- 1 is a bullish candle representing the bullish trend.

Candle- 2 is a bearish candle that opens above the closing price of candle- 2 and closes below the opening price of the previous candle, thereby completely engulfing the bullish candle.

AUD/JPY- DAILY CHART

 Evening star-

The chart pattern can be seen after a prolonged uptrend and indicates a trend reversal. It is a three- candlestick pattern with the first and last candles comprising of a long bullish and a long bearish candle correspondingly and sandwiched in between is a small bodied candle or a doji.

Criteria-

Candle- 1 is a bullish candle, representing the bullish trend

Candle- 2 is a small bullish/ bearish candle or a doji that opens higher with a gap

Candle- 3 is a long bearish candle, opening lower with a gap and erasing most of the losses of day- 1, thus indicating a reversal

EUR/CAD- DAILY CHART

 

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