If you are a price action trader you might already be using candlestick patterns but if you are not, this guide will help you determine which candlestick patterns are suitable for your trading strategy. In this guide, we will talk about how to trade forex using candlestick patterns. We will discuss single, double, Doji, and triple candlestick patterns that you can utilize in your trading.
What are candlestick patterns?
Candlestick patterns are patterns that appear in the candlestick chart. There is a range of candlestick patterns that help traders determine if the market is going to reverse or it is going to continue. Now we will look at single candlestick patterns
Single Candlestick patterns
There is a range of single candlestick patterns that you can use to trade the forex markets. These are:
- Hammer
- Hanging man
- Inverted Hammer
- Shooting Star
- Marubozu
Now let’s look at a few examples of two of these single candlestick patterns. The following chart shows a shooting star candlestick pattern.
As shown in the above chart the shooting star is a candlestick pattern with a short real body, a short lower shadow, and a long upper shadow. The real body is at the end of the session. It is important that the upper shadow of this candlestick pattern be at least twice the size of the real body.
This candlestick pattern is a bearish reversal pattern. For this candlestick pattern to work the market must be in an uptrend. Then when the shooting star is formed you enter a trade as shown below. It is important to note that even if the shooting star is a good reversal pattern it is good to use other trading strategies in combination with it. It is also important where you exit the trade.
Now let’s look at an example of another single candlestick pattern. The chart below shows a hammer formed in the market.
The hammer is a bullish reversal pattern. For this pattern to work the market must be in an uptrend. The hammer is a candlestick pattern with a short upper shadow and a long lower shadow. The real body is at the top of the pattern as shown in the chart.
It is important that the lower shadow is at least twice the size of the real body of this candlestick pattern. When trading with single candlestick patterns it is a good idea to combine them with other price action/indicator-based strategies. If you are interested in learning more about single candlestick patterns check out this guide.
Doji’s
Dojis are certain types of single candlestick patterns. There are three main types of Doji candlestick patterns, these are:
- Gravestone Doji
- Long Legged Doji
- Dragonfly Doji
The following chart shows a Gravestone Doji being formed in the market.
The gravestone Doji is a reversal candlestick pattern with a very small real body. The real body is at the bottom of the candlestick. It has a very long upper shadow and a very short lower shadow. These Doji candlestick patterns can be extremely powerful reversal patterns.
As you can see from the above chart the market reverses when the Gravestone Doji pattern is formed. If you are interested in learning more about doji’s check out this guide.
Double Candlestick Patterns
There is a range of double candlestick patterns that you can use to trade the forex markets. These are:
- Bullish Engulfing
- Bearish Engulfing
- Bullish Harami
- Bearish Harami
- Tweezer Top
- Tweezer Bottom
- Dark Cloud cover
- Piercing Line
Now let’s look at a few examples of two of these double candlestick patterns. The following chart shows a bearish engulfing pattern formed in the market.
The bearish engulfing pattern is a double candlestick pattern. For the bearish engulfing pattern to be applicable the second candle has to be bearish/red and the first candle has to be bullish/green. Also, the second candle has to engulf the first candle.
The bearish engulfing pattern is a bearish reversal pattern while the bullish engulfing candle is a strong bullish reversal pattern. If you are interested in learning more about double candlestick patterns make sure to check out our guide here.
Triple Candlestick Patterns
There is a range of triple candlestick patterns that you can use to trade the forex markets. These are:
- Morning Star
- Evening Start
- Three white soldiers
- Three Black Crows
It is not easy to find these triple candlestick patterns in the market. But if you see any it can be a powerful indication of a reversal. The following chart shows a morning star candlestick pattern formed in the market. As you can see when the morning star was formed the market reversed its direction.
A strategy using candlestick patterns
A great way to use candlestick patterns is inside a channel. This can be an up channel, a downward channel, or a horizontal channel. Below is an example of a bearish engulfing pattern formed near the resistance of a horizontal channel.
As you can see from the chart above when the bearish engulfing pattern was formed near the resistance of the horizontal channel the market reversed. A possible trade would be to enter after the bearish engulfing pattern is formed and place the stop loss above the resistance and take profit at the support of the horizontal channel.
The following example shows another bearish engulfing pattern formed but this time in a downward channel. You can enter a trade after this pattern is formed and exit the trade at the support.
Conclusion
It is great to incorporate candlestick patterns into your trading strategy. Pick a few candlestick patterns that you understand and add them to your trading strategy. Make sure to back-test your strategies with these candlestick patterns to familiarize yourself with them. If you are interested in learning more about trading currencies check out our free guide here.