Candlestick patterns: Everything you need to know

Candlestick patterns are a powerful tool that can help forex traders make more informed trading decisions. In this guide, we’ll cover the basics of candlestick patterns, the most common bullish, and bearish candlestick patterns, and how to trade them.

What are Candlestick Patterns?

Candlestick patterns are a visual representation of price movements over a specific period. They provide valuable information about the market sentiment, such as the strength of buyers and sellers, and potential price trends. A candlestick consists of a body and shadows, which represent the opening, closing, high, and low prices for a given period.

Every candlestick is comprised of the following three elements:

• The Body: The body of the candle shows the strength of the candle. A larger body shows stronger (bearish or bullish) momentum and vice versa. The difference between the open price and the close price of the candle is the body.
• The Wick: Also referred to as the shadow, indicates the highest price point and the lowest price point for a given timeframe. 
• The Color: This reveals the direction of the market movement – a green body indicates a price increase i.e. a bullish candle, while a red body indicates a price decrease i.e. the bearish candle.

A graphical display is presented below for clear understanding:

Now that we have identified what a bearish and bullish candlestick looks like. Let us now move to learn some candlestick patterns for:

1 – Bullish candlestick patterns

2 – Bearish Candlestick patterns

Bullish Candlestick Patterns

Bullish candlestick patterns suggest that buyers are in control of the market. Here are some of the most common bullish candlestick patterns:

• Bullish Hammer Candlestick Pattern: This pattern has a small body and a long lower shadow, indicating that buyers overcame sellers at the end of the period. It’s a strong bullish signal. Following is the image of a Bullish Hammer candle.

• Bullish Engulfing Candlestick Pattern: This pattern is observed in a downtrend. The Bullish body of the candle fully engulfs the bearish body of the previous candle i.e., its open price is lower than the low of the previous candle and the close price is above the high of the previous candle. Following is the image of the Bullish Engulfing candle.

• Piercing Line Candlestick Pattern: The Piercing line is also a two-stick pattern where a long body bearish candle is followed by a long body bullish candle. There is usually a significant gap down between the first bearish candlestick’s closing price and the following bullish candlestick’s opening price. It indicates a strong buying pressure as the price is pushed up to or above the mid-price of the previous candle. Following is the image of the Pierce line pattern.

• Morning star candlestick pattern: This pattern is a three-stick pattern. This is where one very short body candle is seen in the middle of the long body bearish candle and long bullish body candle. It hints that the selling pressure is simmering down and the bullish reversal is imminent. Following is the image of the Morning star candlestick pattern.

Bearish Candlestick Patterns

Bearish candlestick patterns suggest that sellers are in control of the market. Here are some of the most common bearish candlestick patterns:

• Hanging man Candlestick Pattern: This pattern is the opposite of the Bullish hammer candle we discussed earlier. It is exactly the similar shape but this time you will observe it in an uptrend with a bearish body. Following is the image of the Hanging man candlestick pattern.

• Bearish Engulfing Candlestick Pattern: This pattern is observed in an Uptrend. The Bearish body of the current candle fully engulfs the bullish body of the previous candle i.e., its close price is lower than the low of the previous candle and the open price is above the high of the previous candle. Following is the image of the Bearish Engulfing candle.

• Shooting Star Candlestick Pattern: This pattern is seen in an uptrend. It is inverted of hanging man i.e., it has a lower bearish body and larger upper wick. This happens when the candle takes a high but the buyers are not able to maintain the momentum and the sellers outweigh the buyers hence closing below the opening of the candle. Following is the image of the Shooting star candlestick pattern.

• Evening Star Candlestick Pattern: This pattern is a three-stick candlestick pattern. It is the opposite of the Morning star pattern we covered under Bullish candlestick patterns. This is where one very short body candle is seen in the middle of long body bullish candle and long body bearish candle. It hints that the buying pressure is simmering down and the bearish reversal is imminent. Following is the image of the Evening Star candlestick pattern.

Trading with Candlestick Patterns

Now that you know the most common candlestick patterns, how do you trade them?

Here are some tips:

• Always look for confirmation. A single candlestick pattern is not enough to make a trading decision. Look for other indicators that support the pattern.

• Use stop-loss orders. Candlestick patterns can be wrong sometimes, so it’s important to use stop-loss orders to limit your losses.

• Practice: Like any other trading strategy, trading with candlestick patterns requires practice. Start with a demo account before you trade with real money.

To wrap-up:

Candlestick patterns are an essential tool for any forex trader’s arsenal. Whether you’re a beginner or a pro, understanding the most common bullish candlestick patterns, bearish candlestick patterns, and reversal candlestick patterns can help you make more informed trading decisions. By looking for confirmation from other indicators, using stop-loss orders, and practicing with a demo account, you can incorporate candlestick patterns into your trading strategy and take advantage of profitable opportunities in the forex market.