Important Forex Candlestick Patterns

[forex-scribe]

I decided for the sake of organization, to split my technical analysis articles so the forum members can access them by topic instead of having to go through the whole article.

So in this post, I want to continue the discussion of candlestick charts and their patterns.

Here are some very significant candlestick patterns you may encounter:

Piercing Line
 



This indicates that sellers are losing their dominance, hence this pattern is also called Bullish Reversal.


Dark Cloud Cover
 


The presence of this pattern also known as the Bearish pattern is indicative of a slowdown in the momentum of the buyers.

Shooting Star
 


This particular reversal pattern happens following gaps where buyers are able to attain but not sustain new highs. Another pattern called Reverse Hammer has the same signal but with a much longer wick.

Harami
 



This pattern which may either be bullish or bearish depending on the current trend, is indicative of a trend slowing down and possibly reversing.

Evening Star



 
This is a reversal pattern which indicates that upon attaining new highs, a trend promptly reversed.

Morning Star


 
Another reversal pattern which indicates that upon attaining new lows, the trend reversed.

The important thing to remember here is that when you see these patterns in a chart and they are in agreement with other indicators such as moving averages and Fibonacci, then it may indicate an opportunity for a potentially good trade.

[atenean]

Are there other significant patterns aside from these?

[forex-scribe]

There are most definitely a lot more patterns as far as candlesticks are concerned. In fact whole books have been written about Japanese candlesticks and most of them are filled with the different types of patterns along with their interpretation.

For instance there are two categories of candlestick patterns which interest many traders. These are the bullish and bearish candlestick patterns. There are five patterns in each category which are considered significant by most  candlestick traders. While some of these patterns were mentioned in the previous post, I figured it might facilitate the understanding of the newbies on the forum if they are classified by market outlook or sentiment.

The five significant bullish candlestick patterns are as follows:

•   engulfing - this pattern shows two candles, the first one showing a narrow trading range, with the next one engulfing the previous candle which indicates more volatility and activity in the market. The direction of engulfing indicates if it is bearish or bullish.

•   hammer - this pattern indicates that early on, sellers were in control but by the time trading closed, buyers had taken over leading the currency to close at the top of its trading range.

•   harami - this pattern is the opposite of engulfing and shows that while the first candle indicated sellers control of the market, the succeeding candle indicated that they no longer had control.

•   piercing - indicative of an impending reversal is shown by two wide range candles, with the first candle indicative of a closing price around the bottom of the range, with a second candle closing halfway into the previous candle.

•   doji - this pattern shows a stock that barely moved from the opening price. It is indicative of uncertainty on the part of the traders regarding the current direction of the currency. Thus it can set the stage for a reversal.

The five significant bearish candlestick patterns are as follows:

•   engulfing
•   shooting star
•   harami
•   dark cloud cover
•   doji

Basically the bearish candlestick patterns are the opposite of the bullish ones and can indicate reversal as well but this time on a downward trend.

The best way to understand candlesticks is to take one of several excellent books on the subject and relate them to your ongoing demo account trades. In fact, it would be a great learning experience if you would try trading a demo account on the basis of the patterns you recognize in the candlestick charts. IMHO, in Forex trading, the best way to learn is by reading followed by demo trading because the old saying "learning by doing" applies 100% to Forex.