Candlestick Patterns Every Forex Trader Should Know

Candlestick patterns have been used by traders for centuries, originating in 18th-century Japanese rice markets. These patterns provide visual insights into market psychology and can signal potential reversals or continuations. In this guide, we'll cover the essential patterns every forex trader should recognize.

Understanding Candlestick Anatomy

Before diving into patterns, let's review candlestick basics:

• Body: The rectangle showing the range between open and close
• Upper wick/shadow: The line above the body showing the high
• Lower wick/shadow: The line below the body showing the low
• Bullish candle: Close above open (typically green/white)
• Bearish candle: Close below open (typically red/black)

Single Candlestick Patterns

Doji

A doji forms when open and close are nearly equal, creating a cross or plus sign shape. It signals indecision in the market.

• At resistance: Potential bearish reversal
• At support: Potential bullish reversal
• In trend: Possible pause before continuation

Hammer / Hanging Man

Small body at the top with a long lower wick (at least 2x the body).

• Hammer: Appears after a downtrend - bullish reversal signal
• Hanging Man: Appears after an uptrend - bearish reversal signal

Inverted Hammer / Shooting Star

Small body at the bottom with a long upper wick.

• Inverted Hammer: After downtrend - potential bullish reversal
• Shooting Star: After uptrend - bearish reversal signal

Marubozu

A candle with no wicks (or very small wicks), showing strong momentum.

• Bullish Marubozu: Strong buying pressure
• Bearish Marubozu: Strong selling pressure

Two-Candlestick Patterns

Engulfing Patterns

The second candle completely engulfs the body of the first.

• Bullish Engulfing: Small red candle followed by larger green candle - buy signal
• Bearish Engulfing: Small green candle followed by larger red candle - sell signal

Key point: The more the second candle engulfs, the stronger the signal.

Piercing Pattern / Dark Cloud Cover

• Piercing Pattern: Red candle followed by green candle that opens below the low but closes above the midpoint - bullish
• Dark Cloud Cover: Green candle followed by red candle that opens above the high but closes below the midpoint - bearish

Tweezer Tops and Bottoms

Two candles with matching highs (tweezer top) or lows (tweezer bottom).

• Tweezer Top: After uptrend - bearish reversal
• Tweezer Bottom: After downtrend - bullish reversal

Three-Candlestick Patterns

Morning Star / Evening Star

Three-candle reversal pattern:

• Morning Star: Long red candle → Small candle (gap down) → Long green candle - bullish reversal
• Evening Star: Long green candle → Small candle (gap up) → Long red candle - bearish reversal

Three White Soldiers / Three Black Crows

• Three White Soldiers: Three consecutive long green candles - strong bullish signal
• Three Black Crows: Three consecutive long red candles - strong bearish signal

Each candle should open within the previous body and close near its high/low.

How to Trade Candlestick Patterns

1. Context is Everything

A pattern's reliability depends on where it forms:

• At key support/resistance levels
• At trend lines
• At moving averages
• At Fibonacci levels

A hammer at major support is much more significant than one in the middle of nowhere.

2. Wait for Confirmation

Don't trade the pattern alone. Wait for:

• The next candle to confirm the direction
• A break of the pattern's high/low
• Increased volume supporting the move

3. Use Proper Timeframes

Patterns on higher timeframes are more reliable:

• Daily/Weekly: Highly reliable signals
• 4-Hour: Good for swing trading
• 1-Hour: Day trading signals
• Below 1-Hour: More noise, less reliability

4. Combine with Other Analysis

Candlestick patterns work best when combined with:

• Trend analysis
• Support and resistance levels
• Technical indicators (RSI, MACD)
• Volume analysis

Common Mistakes to Avoid

• Trading every pattern: Be selective; quality over quantity
• Ignoring the trend: Reversal patterns need an existing trend
• No stop loss: Always define your exit if wrong
• Perfect patterns: Real markets rarely form textbook patterns
• Overcomplicating: Master a few patterns well rather than many poorly

Recommended Patterns for Beginners

Start with these high-probability patterns:

1. Engulfing patterns - Easy to spot, reliable
2. Hammer/Shooting Star - Clear visual signal
3. Morning/Evening Star - Strong reversal signal
4. Doji at key levels - Indecision at important prices

Conclusion

Candlestick patterns are a valuable tool in your trading arsenal. They provide quick visual cues about market sentiment and potential turning points. However, they should never be used in isolation.

Combine candlestick analysis with support/resistance, trend direction, and other technical tools for the highest probability trades. Practice identifying patterns on historical charts before trading them with real money.