What is a candlestick in forex trading?
Forex candlesticks can be particularly useful for representing short-term value movements in the bazaars, which makes them a significant tool for day trading strategies in Forex. In a regular Japanese candlestick chart, each candlestick represents the opening, high, low and closing values due to a specific period of time for the purpose of monetary evaporation.
For example, in a daily candlestick chart for the purpose of evaporation of EUR/USD, the reprimand or semi-darkness in the upper part of the candlestick will demonstrate the largest degree of value acquired in the given period, and the reprimand or semi-darkness in the lower part of the candlestick – the most insignificant degree of value acquired in the given period.
In order to develop a candlestick, we need the opening, maximum, minimum and closing values of a particular stage. For example, in order to develop a day candlestick, a trader will need the daily opening, maximum, minimum and closing values. In this case, the most belongs to the weekly or monthly candlesticks. For the purpose of effective candlestick score should wait for the closing value of the session.
How to read candlesticks in forex trading?
The torso of the candlestick shows the difference between the opening and closing rates due to the period. Candlesticks, as well as the principle, are colored, because in this way it is easier to understand whether a candlestick is considered bullish or bearish. The body of the candlestick is considered hollow, and the areas above and around the body are called shadows.
Multicolored candle (usually dark or scarlet tone) shows in such a case, that the cost of closing existed further than the cost of disclosure, and the candle with a colorless body (in addition, usually snow-white or greenish tone) – in such a case, that the cost of closing existed more than the cost of disclosure in this period.
Candlestick Pattern Strategy
The conditions for this Forex candlestick pattern strategy are as follows:
- Indicators: Exponential Moving Average (EMA) 30, 60 and 100 – are set at the close
- Entry Signal: Identification of Forex Candlestick Patterns
- Timeframe: H4
First we need to add three EMAS to our candlestick chart. In the example on the chart below, EMA 30 is blue, EMA 60 is red and EMA 100 is green.
To display the trend, all three EMAS must be correctly aligned. When the blue EMA is below the red EMA, which is below the green EMA, the trend is bearish. When the blue EMA is above the red EMA, which is above the green EMA, the trend is bullish.
For example, the USD/JPY chart below shows an example of an uptrend:
It should be remembered that in order to display the trend, the EMA must be properly aligned. If the EMAS are intertwined, it means that there is no trend at the moment.
After the trend is established, entries are made when the price makes a rollback to the EMA. When we see a pullback, bullish or bearish candlestick patterns appear depending on the trend direction.
Entries are made using any of the following Forex candlestick patterns, and none of them is more reliable than the other:
- Hammer
- Shooting Star
- Hanged
- Piercing line
- Dark Cloud
- Bullish/bearish engulfing
The stop loss in this example is set 10 points below/above the entry candle. As goals, we recommend using Admiral Pivot (available only in the MetaTrader Supreme Edition), set to a “Weekly Timeframe”.
The best Forex candlestick patterns
In total, there are more than 40 recognized candlestick patterns in the Forex market. Below is a list of the eight best candlestick patterns that can be found in Forex trading:
Marubozu
Black marubozu
Black marubozu are significant candlestick patterns that provide valuable information about sales pressure. Black marubozu are rectangular candles with a small shadow on top or bottom. They point to the selling pressure in the market and indicate that bears acted on the market from the opening to the closing of trading. The marubozu trading strategy is especially valuable for significant support and resistance levels and may indicate that a potential price level is about to be passed.
White marubozu
White marubozu are similar to their black counterparts, but they indicate that prices are under the control of buyer pressure. These are rectangular blocks with a very weak or practically absent shadow on top or bottom. White maruboses most often indicate the continuation of an uptrend, while on a downtrend they may indicate a possible trend reversal.
Doji
Doges, or crosses, usually consist of one candle and show that the opening and closing price of the candle is almost the same. Doge candles resemble crosses, inverted crosses or plus signs. In technical analysis, doji usually represents a neutral value, meaning that the trend is likely to continue. Shadows or wicks on the doge are an important indicator of market sentiment. For example, if the shadow at the top of the candle is long, it means that investors tried to push the price up, but failed, while a longer shadow at the bottom indicates the presence of selling pressure.
The “Bay” candle model (bullish/bear market)
Engulfing candle models (bullish/bear market) mean a potential trend reversal and manifest themselves as a large candle coming out above and below the previous candle (literally covering it). The larger the size of the filling candle, the more significant it seems to analysts. A black candle means a potential bearish reversal on an uptrend, and a white candle may indicate an imminent bullish reversal on a downtrend. Learn more about how to trade in a bear market.
Hammer
The hammer is a common bullish reversal pattern indicating the likelihood of an uptrend. As the name suggests, hammer candles have a short body with a shadow or wick that is twice as long at the base. When the high and close coincide, this indicates the formation of a bullish candlestick pattern, that is, while the bears were trying to push prices down, the pressure of bulls on buyers pushed prices up, and as a result they closed at the same level as the high of the day. The “hammer” candlestick patterns, in which the opening coincides with the maximum, are considered less bullish, but nevertheless indicate a possible bullish trend.
Shooting Star
Shooting stars from above are very similar to inverted hammers and indicate that a bearish reversal is coming soon. Shooting star candles are formed when the minimum, opening and closing of the day are close to each other, and the maximum of the day is located high at the top, forming at least twice the length of the candle body. If the minimum and closing prices coincide, the shooting star is considered more significant, as it indicates that the bulls tried to push prices up, but they were overpowered by bears, and as a result, prices closed at the same level as at the opening. The “shooting star” candle patterns can sometimes look like a “tombstone doji”.
Three – line strike
The “three-line strike” model represents three white candles appearing on the daily timeframe for three consecutive days, which indicates that prices have closed higher for three simultaneous days. Three-line strikes usually occur at the end of a downtrend and, therefore, may indicate the possibility of a reversal.
Three black crows
Three Black Crows” is a common forex reversal indicator on an uptrend, which is indicated by three consecutive black candles on the daily chart, where the closing prices were lower than the opening price of the day. Formed from three consecutive black candlesticks with long bodies, they indicate a lack of confidence in buying in the market, which allowed the bears to successfully push prices down.
Evening Star
Evening Star candlestick patterns usually appear at the top of an uptrend and signal an imminent trend reversal. The evening star consists of three candles, and the first candle has a much larger green or white body, which indicates that prices have closed above the opening level. The second candle opens higher after the gap, which means that buyer pressure remains in the market. The second candle in the “evening star” model is usually small, and prices close below the opening level. The third and last candle of the evening star opens lower after the gap and means that the selling pressure has negated the gains from the opening levels of the first day.
Understanding forex candlestick patterns
When using candle models in combination with other types of analysis, they can serve as a useful indicator of potential trend reversals and price breakouts in the market, helping to build a stronger and more effective Forex trading strategy.
What are the risks of trading on the strategy of candlestick patterns in the Forex market? Trading in financial markets, you are constantly exposed to market risk. When trading patterns and research, traders should always be aware of the potential risk of algorithmic trading. It uses information at the speed of light and can change the situation at any time using data that may not be available to the trader.
Therefore, it is important to consider risk management before entering into transactions. As in other trading systems, before entering a trade, you need to have an idea of where you can put a stop-out and where you can lock in profits. We also recommend traders to take into account stop-loss orders, since trading using leverage can maximize profits, but it can also maximize losses.
Benefits of Using Candlestick Patterns
Candlestick modifications provide cryptocurrency traders with more clarity about the possible moves that are expected in the future. In other words, they function as signals, helping traders to find a decision if to reveal big or short views and if to enter or exit the trade. For example, swing traders rely on candlestick charts to indicate swing trading, in order to establish reversal modifications as well as modifications to continue trading.
Candlestick charts as well as their patterns can help traders establish direction, realize momentum as well as understand the current trading spirit in the order of the present period.
Final reflections
Candlestick patterns should be in the arsenal of every cryptocurrency trader, including crypto day traders, as they demonstrate the same efficiency as in the Forex or stock market.
Although they can give significant individual trading signals, we recommend combining these models with technical analysis indicators to confirm or refute them.