Looking for a way to interpret the forex trading charts and predict market movements? Candlestick chart patterns are the way to go! You can use these candlestick chart patterns for forex trading:
The Hammer
The Hammer design is widely regarded as one of the most effective uses of candlesticks. The Hammer signal tells traders that a downward trend is about to reverse into an upward trend, which means they should purchase the currency pair.
The fact that this Hammer design is uncomplicated and straightforward makes it exceptionally well-liked. It is a single candlestick that has a huge wick on the bottom and a colorful body that is relatively tiny on the top. The fact that the body is relatively tiny suggests that the opening and closing prices are not too far off from one another.
Because it indicates that prices traded significantly lower but then reversed to close in the upper half of the candle’s range, this pattern is most effective when it forms toward the end of a downward trend. This is because it suggests that prices traded significantly lower but then reversed to close in the upper half of the candle’s range. This shift in attitude can frequently trigger a broader change in trend, one that goes from a downward to an upward trajectory.
Engulfing
Another common trading formation that many follow is called the Engulfing pattern. There is a bullish variation of the Engulfing pattern that is known as the Bullish Engulfing, while the bearish variation is known as the Bearish Engulfing.
Two candlesticks are required to complete the Engulfing design. The initial candle will move in the same direction as the trend that came before it. When a Bullish Engulfing pattern is formed, the first candle in the pattern will have a red color.
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After then, the second candle will hit a new low, but it will still end its trading session higher than where it started, thereby swallowing the first candle whole. The inverse is true for a bearish engulfing, which consists of two candles, the first of which has a little green body and the second of which has a massive red body that fully engulfs the body of the first candle. This pattern indicates a bearish price trend. The Engulfing pattern is a type of reversal pattern that indicates a significant shift in the market’s overall direction.
Shooting Star
A common chart pattern that many traders pay attention to is called the Shooting Star. This popular pattern just requires one candle, which contributes to its ease of execution. A lengthy wick will protrude from the top of the Shooting Star’s little body.
This indicates that prices started the trading session in the lower part of the candle’s range, moved to new highs, and then promptly retraced to finish around where they started. When trying to identify the pattern, the color of the body is completely irrelevant. When observed, the shooting star serves as a warning to forex traders that a bullish trend has come to an end.
The Doji
On a price chart, the Doji is one of the other single candle patterns that is the simplest to recognize. The Doji’s opening and closing prices are quite close to one another, and the price range between high and low is not particularly large. As a direct consequence of this, the price action here takes the form of a plus sign “+.”
There is no guarantee that the Doji will either be bullish or bearish. The Doji is seen as a neutral pattern since the hesitation of the market resulted in opening and closing prices that were relatively identical. The appearance of a Doji candlestick pattern indicates that the market has temporarily halted its movement and that it will return to following the trend that existed previous to the formation of the pattern.
Inside Bar
Two candlesticks joined together to form a pattern that indicates market consolidation. This pattern is called an Inside Bar. The first candle is a large-bodied candle that is either red or green in color, depending on your preference. The second candle is often the opposite hue from the first candle and is located within the same range as the first candle.
The trader might deduce from the appearance of this pattern that prices are now consolidating the trend that was established by the first candle. As a direct consequence of this, an escape is only around the corner. In most cases, traders anticipate the breakout to take place in the same direction as the previous trend.
If the first candle was red, the second candle should be analyzed for a potential breakdown below the low of the second candle. In the event that the first candle is green, you should search for a break that occurs higher than the peak of the second candle.
Key Reversal
A reverse formation is what the Key Reversal pattern is, which is exactly what the name portrays it to be. There are two candlesticks involved in the Key Reversal. The first stick is of standard length and may be whatever color you choose.
The second candle takes things to a new level before reversing course and becoming a candle with a huge body. When determining whether the pattern is bullish or bearish, the second candle is the most important indicator. In the event that the second candle is green, this indicates that a bullish Key Reversal has occurred, and more gains are anticipated.
If the second candle is red, then you should anticipate a downward correction in the market. If the Key Reversal happens to show close to levels of support or resistance, then the signal is likely to be more powerful.
Morning/Evening Star
The final pattern of candlesticks that every trader should be familiar with is called the Morning/Evening Star. There are three candles included in this design. The bullish form of this pattern is called the Morning Star, and it consists of a lengthy red body for the first candle, which is then followed by a little body that makes a new low.
After then, the third candle is a sizable green one that has a price that is somewhat similar to the price at which the first candle began trading. The combination of the three candles that make up the Morning Star chart is indicative of the start of a bullish reversal.
The Evening Star pattern is the inverse of the Morning Star pattern and indicates that a bearish reversal is beginning. The unique appearance and duration of the three candles make it simple to identify them on the charts. As a result, traders who are attempting to identify trend reversals enjoy using them.
Final Verdict
These are the most frequently used chart patterns in forex trading. We recommend first trying them out on a demo account until you get used to them and know how to interpret them the right way. Happy trading!