Understanding Candlestick Patterns in Forex: A Beginner's Guide

Why Reading Candlestick Charts Is Important in Forex Trading

If you want to succeed in the Forex market, candlestick analysis skills are an indispensable tool because candlesticks appear on every trading platform, and millions of traders rely on reading candlesticks to make buy and sell decisions and profit from Forex trading.

This article aims to explain candlestick patterns comprehensively, from the basics to practical trading applications.

Candlesticks Tell the Price Through Shapes

Candlestick is a small unit of a chart consisting of the body, upper wick, and lower wick. Each candlestick records the opening price, closing price, highest price, and lowest price within a specified period.

Candlestick patterns can be applied to any timeframe, whether it’s 15 minutes, 1 hour, 1 day, or 1 week. You can choose according to your trading strategy needs.

Reading Signals from Candles and Wicks

White Candlestick (Bullish): Closing price is higher than opening price, indicating buying pressure during that period. The longer the candlestick, the stronger the buying force.

Black Candlestick (Bearish): Closing price is lower than opening price, indicating selling pressure during that period. The longer the candlestick, the stronger the selling force.

Wicks: Show intense price movements between buying and selling forces. Short wicks indicate less price fluctuation; long wicks indicate fierce battles between buyers and sellers.

Why Traders Favor Candlestick Patterns

Market Sentiment Analysis: Candlesticks tell the story of market sentiment through the shape of buying and selling pressure, unlike line charts or simple bar charts.

Ease of Understanding: Candlestick patterns are repetitive. Once you recognize these patterns, you can better predict price directions, especially when combined with other tools like trend lines or support-resistance levels.

Historical Provenance: Candlestick reading originated in Japan over 200 years ago. Rice traders used this method to understand rice price changes in Osaka markets. This technique remains effective in modern financial markets.

Learn Basic Candlestick Patterns

1. Doji - Indecision Signal

Doji is a candlestick where the open and close prices are nearly the same, with relatively long upper and lower wicks. This indicates that buying and selling forces are balanced and often signals a potential trend reversal.

Types of Doji:

• Gravestone Doji: Long upper wick shows buying attempts but pushed down by selling.
• Dragonfly Doji: Long lower wick shows selling attempts but absorbed by buying.
• Four Price Doji: All four prices (Open, Close, High, Low) are the same, indicating market stagnation.

2. Marubozu - Decisiveness

Marubozu is a candlestick with no wicks or very small wicks.

• Bullish Marubozu: Open equals the lowest price, close equals the highest price, indicating full buying power.
• Bearish Marubozu: Open equals the highest price, close equals the lowest price, indicating full selling power.

3. Spinning Top - No Clear Dominance

Spinning Top has a short body with long wicks on both ends. This reflects a struggle between buyers and sellers, with neither side gaining dominance. If it appears in an uptrend, it suggests waning buying interest; in a downtrend, waning selling interest.

Single Candlestick Patterns: Reversal Signals

Hammer and Hanging Man

Hammer appears in a downtrend: long lower wick and a short body. It indicates that sellers tried to push the price down but buyers managed to pull it back up, possibly signaling a reversal from downtrend to uptrend.

Hanging Man appears in an uptrend: long lower wick and a short body. It suggests that although buyers showed interest, sellers managed to push the price down somewhat, possibly signaling a reversal from uptrend to downtrend.

Inverted Hammer and Shooting Star

Inverted Hammer appears in a downtrend: long upper wick and a short body. It shows buying pressure weakening the selling force.

Shooting Star appears in an uptrend: long upper wick and a short body. It indicates selling pressure weakening the buying force.

Two-Candlestick Patterns: Signal Strength

Bullish Engulfing and Bearish Engulfing

Bullish Engulfing: A black (bearish) candle followed by a larger white (bullish) candle that completely engulfs the previous candle’s body. This signals strong buying dominance and a potential reversal upward.

Bearish Engulfing: A white candle followed by a larger black candle that engulfs the previous candle’s body, indicating strong selling dominance and a potential reversal downward.

Tweezer Tops and Tweezer Bottoms

Tweezer Tops: Two candles with matching high prices, with the first in an uptrend and the second in a downtrend. This signals a potential top and a reversal downward.

Tweezer Bottoms: Two candles with matching low prices, with the first in a downtrend and the second in an uptrend. This signals a potential bottom and a reversal upward.

Three-Candlestick Patterns: High Reliability Signals

Evening Star and Morning Star

Morning Star indicates a reversal from downtrend to uptrend, consisting of:

• First candle: long bearish (black)
• Second candle: Doji or small-bodied
• Third candle: large bullish (white)

Evening Star indicates a reversal from uptrend to downtrend, consisting of:

• First candle: long bullish (white)
• Second candle: Doji or small-bodied
• Third candle: large bearish (black)

Three White Soldiers and Three Black Crows

Three White Soldiers: Three consecutive white candles closing higher than the previous period, indicating strong buying momentum.

Three Black Crows: Three consecutive black candles closing lower than the previous period, indicating strong selling momentum.

Three Inside Up and Three Inside Down

Three Inside Up: Sign of buying recovery:

• First: long black candle
• Second: smaller white candle within the first
• Third: white candle closing above the first

Three Inside Down: Sign of selling recovery:

• First: long white candle
• Second: smaller black candle within the first
• Third: black candle closing below the first

Tips for Using Candlestick Patterns in Trading

1. Always be cautious: Candlestick signals have less than 50% success rate; do not rely solely on patterns.

2. Wait for confirmation: After a reversal signal, wait for the next candle to confirm the move.

3. Combine with other tools: Use candlestick patterns with support-resistance levels, trend lines, or indicators.

4. Consider the context: Price action, news, and overall market conditions are crucial.

Summary

Basic characteristics of candlesticks:

• White candle = bullish dominance
• Black candle = bearish dominance
• Short wick = minor price fluctuations
• Long wick = fierce battle between buyers and sellers

Patterns to know:

• Single: Doji, Marubozu, Spinning Top, Hammer, Hanging Man, Inverted Hammer, Shooting Star
• Two: Bullish Engulfing, Bearish Engulfing, Tweezer Tops, Tweezer Bottoms
• Three: Morning Star, Evening Star, Three White Soldiers, Three Black Crows, Three Inside Up, Three Inside Down

Reading candlesticks is not an exact art, but understanding patterns and combining them with other techniques increases your chances of success in Forex trading.