Identifying Candlestick Patterns – Know Your Candles – part 2
In our earlier post Identifying candlestick patterns part 1 we discussed some major patterns now we will discuss few more important patterns which are easy to identify and can help you out in predicting future outcomes in the Forex market.
Candlestick patterns in Forex
Bullish engulfing is formed by two candlesticks. When a small bearish candlestick is fully covered by a next big bullish candlestick then this pattern comes into formation. The bearish body of the first candlestick is contained within the bullish body of the next candlestick. Bullish engulfing is formed in a downtrend, it then signals a strong reversal indicating that now is the time to get long.
Bearish engulfing is also formed by two candlesticks. When a small bullish candlestick is fully covered by a next big bearish candlestick then this pattern comes into formation. The bullish body of the first candlestick is contained within the bearish body of the next candlestick. Bearish engulfing is formed in an uptrend it then signals a strong reversal indicating that now is the time to get short.
Candlesticks which have long lower and upper shadows and smaller bodies are called spinning tops. They illustrate the fact that buyers and sellers were fighting with each other and prices moved high and low during the session but in end none of them got the upper hand.
Whether it forms in an uptrend or downtrend it can signal possible reversal in direction. Lets have a look at the following currency pair:
Tweezers are made up of two candlesticks which are next to each other or are very close and they both form identical tops or identical bottoms. They depict that price is being rejected twice at a certain top or at a certain bottom and now it will possibly reverse. The highs or lows may differ a few pips but not more. You should look for this pattern under the resistance lines or above the support lines because there they can signal an opportunity for you. Also look for their wicks, the longer the better.
Double top or double bottom
If you find quite more candlesticks between the pair of candlesticks forming tweezers then don’t let go of it because this leads to the formation of other important pattern called double top or double bottom.
In double bottom the twice touched low is now the support level and market has rejected the price here twice therefore it tends to go up now. Similarly in double top the twice touched top is the resistance level where after being rejected twice market will head downwards.
Morning star is a three candlestick pattern which also signals reversal. It forms on a downtrend and signals bullish reversal. The first candlestick is a large bearish candlestick. The second is a small body candlestick either bullish or bearish which closes below the first one. The third and the last is a large bullish candle that closes quite above the second candle and its body covers a significant portion of the first candle.
Evening star is a three candlestick pattern which also signals reversal. It forms on an uptrend and signals bearish reversal. The first candlestick is a large bullish candlestick. The second is a small body candlestick either bullish or bearish which closes above the first one. The third and the last is a large bearish candle that closes quite below the second candle and its body covers a significant portion of the first candle.
Three white soldiers
It’s a three candlestick pattern signaling a bullish reversal. It is formed by three long or normal bullish candlesticks that increment higher just like a staircase. The opening of each candlestick is slightly lower than the close of the previous candlestick and then the price moves upward and closes higher than the previous candle. This pattern is usually formed when market is stuck in a long downtrend and now bulls are all ready to enter the market.
Three black crows
It’s a three candlestick pattern signaling a bearish reversal. It is formed by three long or normal bearish candlesticks that are descending lower just like a staircase. The closing of each candlestick is slightly lower than the open of the previous candlestick and then the price moves downward and closes lower than the previous candle. This pattern is usually formed when market is stuck in a long uptrend and now bears are all ready to enter the market.
Later on we will be doing more complicated patterns like the head and shoulders and so forth. So stay tuned for that and remember to either subscribe or follow us on twitter to keep up with updates.
Candlestick charts offer a clearer picture of price action than any other chart. They are used by most of the traders out there. Although they are quite reliable but still its a game of risk sometimes the market may not respond to these patterns and act opposite so you should be ready for such things. Since there are a lot of candlestick patterns with different interpretations so its better to keep track of some important patterns only so that you may not get confused. I hope that now after reading and observing these patterns in real charts you have a clear understanding of all the patterns described above.
Find these candlestick patterns interesting? Do you know of any that you’d like to share? Please feel free to share any questions or comments related to the post.