Forex Basics: How to Read and Interpret Candlestick Charts

Patterns that form in a strong trend yield different results than those in a consolidating market. Economic indicators, news events, and geopolitical factors affect market how to read candlestick patterns in forex sentiment and render candlestick patterns less effective. The components of the Rising Three pattern—five candles—are crucial for the pattern’s legitimacy.

Experience and common sense allow traders to read the message even if it does not exactly match the picture or definition in the book. Candlestick patterns have very strict definitions, but there are many variations to the named patterns, and the Japanese did not give names to patterns that were ‘really close’. If a large number of relatives were disbursed in a crowd of strangers it would be easy to miss them. These have small bodies with upper and lower wicks of similar length, indicating a tug-of-war between bulls and bears. It appears at the end of a downward trend when a market may be bottoming out. The Japanese Candlestick method of visualising charts is one of, if not the, most popular methods of looking at charts for the modern trader.

Candlesticks chart highlights

As you can see in figure 1, when you read a candle, depending on the opening and closing prices, it will provide you information on whether the session ended bullish or bearish. When the closing price is higher than the opening price, it is called a Bullish Candlestick. By contrast, when the closing price is lower than the opening price, it is known as a Bearish Candlestick.

Evening Star Doji

The components of the Three Inside Down pattern help validate the pattern’s significance. The first candle should be a long bullish candle, while the second candle is a smaller bearish candle that closes within the body of the first. The third candle should open below the second candle’s close and close below the first candle’s open. The Three Inside Down pattern is most effective when it forms after a sustained uptrend due to enhanced predictive power. Confirmation factors play a key role in assessing the reliability of the Bearish Kicker pattern.

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1. The Bearish Abandoned Baby pattern’s fake signal rate is about 25-35% if the first candle is not bullish enough.
2. This pattern signals to traders that bulls still don’t have enough to be able to reverse the bearish trend.
3. During this time the candlestick can change colours from green to red until the time period ends with the last price which is the close price.
4. The long lower shadow of the Dragonfly Doji candlestick pattern shows that selling pressure was countered by buyers stepping in to push the price back up (price rejection).
5. For example, candlesticks can be any combination of opposing colors that the trader chooses on their trading platform, such as blue and red, or any other combination of their liking.

Remember that when trading the financial markets, you are constantly exposed to market risk. While trading following patterns and studies, traders should always be aware of the potential risk of algorithmic trading​. This uses information at the speed of light and can alter the landscape at any time using data that might not be available to the trader. This allows a trader to quickly get a picture of whether the buyers or sellers are controlling price.

Remember to combine candlestick analysis with other technical indicators and risk management strategies to maximize your chances of success in the forex market. The Hammer pattern features a small body at the upper end of the price range and a long lower shadow that indicates that buyers have stepped in after a period of selling. The Hammer candlestick pattern has a success rate of approximately 70-80% when confirmed by a subsequent bullish candle, according to Russell Rhoads’ “Candlestick Charting For Dummies”.

1. Stop-loss orders are placed below the low of the smaller bullish candle to manage risk.
2. The Long-Legged Doji has a success rate of around 40-60% and needs additional confirmation to indicate a reversal.
3. Bullish reversal candlestick patterns show that buyers are in control, or regaining control of a movement.
4. The shape and structure of a Bullish Abandoned Baby pattern consists of three distinct candlesticks.
5. The Three Outside Down pattern is used near resistance levels because traders anticipate that the market is going to struggle to continue rising.
6. Some traders interpret the evening star candlestick pattern as a warning sign of a diminishing upward momentum.

The presence of three robust bullish candles suggests that buyers have gained confidence and momentum. The strong bullish sentiment makes it likely that the market prices are going to continue rising. Identify the pattern formed by the arrangement of individual candlesticks over a specified time frame when reading candlestick patterns. Each candlestick represents a segment of price action that details the open price, the high price, the low price, and the close price. A green (or white) body indicates bullish movement where the closing price exceeds the opening price.

This is specially valid if you work with daily charts but intraday charts superior to 1 hour will also show differences in the patterns. In any case, because of the 24 hour nature of the Forex market, the candlestick interpretation demands a certain flexibility and adaptation. You will see how some of the textbook patterns look slightly different in Forex than in other markets. In fact, candlestick charts had been used for centuries before the West developed the bar and point-and-figure charts we know and use today. In the 1700s, a Japanese man named Homma noted that in addition to the link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders.

Understanding the different types of candlesticks and their meanings is crucial for interpreting candlestick charts. Traders should focus on identifying trends and patterns in the charts, as well as using them to identify support and resistance levels and potential trend reversals. By incorporating candlestick charts into their trading strategies, traders can improve their chances of success in the Forex market.

Candlestick charts are more visually intuitive due to the color coding of the price bars and thicker real bodies. Highlighting prices this way makes it easier for some traders to view the difference between the open and close. As the name suggests, the bearish engulfing pattern is the opposite of the bullish engulfing pattern. This bearish signal can occur at any time on the chart but is more likely to occur after a price advance. There are several different types of candlestick patterns that you can use to trade the markets. In this article, we will focus on many different candlestick patterns, including bullish, bearish, and continuation candle patterns.