Forex: How to Read Candlestick Patterns

Candlestick charts are often used as part of a technical analysis strategy. They are popular with forex market traders because they are quick to read and provide a lot of useful information about trends and sentiment. All serious investors who trade forex markets must learn to use candlestick charts if they want to know price direction. 

Candlestick charts

A candlestick chart consists of a graph showing multiple candles indicating price action over a set period. Individual candles and complex candle patterns give valuable information on forex market trends and current sentiment.

These charts have the advantage over more well-known bar charts by being easier to read, and allowing quick interpretation. Candlestick charts also provide more useful information compared to older style line graphs. These charts are an accurate and reliable strategy that is now greatly trusted by many traders.

Individual candles

Each individual candle shows the opening and closing price over a period. This information makes up the main body of the candle. A narrow upper and lower wick shows the market extremes by representing the highest price and lowest price reached during the set period. If a candle does not have an upper or lower wick, this means the opening or closing price was the extreme price for that period. The range is shown by working out the difference between the highest and lowest values.

Bullish or bearish candles

The color of each candle represents the direction of price. The colors used will be set by the program, but frequently green is upwards, and red is downwards. This provides an easy visual assessment of price direction, enabling simple predictions to be made from a quick assessment of the chart.

A bullish candle will also have a higher closing price than the opening price, showing an upwards trend. Conversely, a bearish candle will show a downward trend with a higher opening price than the closing price.

Reading individual candles

A lot of useful market information can be gained from analyzing an individual candle.

  • Current sentiment
  • Changing momentum
  • Market price trends

There are many different candle patterns that traders should become familiar with in order to accurately interpret candlestick charts. It is important to identify bullish and bearish markets, as well as be able to recognize neutral trends. Bullish markets will encourage traders to buy orders, and a bearish market will encourage selling, so candlestick charts can help find the optimum time for investments to be made. 

Hammer candlestick formations are an important individual candle pattern to be able to identify. It indicates a trend reversal and is a vital bullish signal. This candle has an easy-to-recognize pattern, characterized by a long lower wick and a small main body. The hammer candlestick represents a market that started to decline after opening, but buyers pushed the market up before closing.

Complex candle patterns

These candle patterns use multiple candles of at least two to form a pattern. Though these patterns can look overwhelming, it is the location of individual candles that is important for interpretation. Complex candle patterns can indicate whether a trend reversal will continue based on their position on the chart. This helps traders make predictions about the market and can provide reliable investment opportunities.

Engulfing patterns

Bullish and bearish engulfing patterns often indicate a market reversal, so it is essential to be able to recognize them. This pattern is formed from two candles, where the second candle is able to superimpose over the first candle. Bullish engulfing patterns are strongest at the bottom of a downward trend, but traders will want confirmation of this pattern by looking for support from other indicators.

Engulfing patterns are particularly important because they can indicate trend reversals, potentially presenting the best opportunity to buy or sell orders. Otherwise, if this type of pattern is found within a trend then this is a strong indicator that the trend will continue.

Additional candlestick patterns

There are many complex candle patterns that can be identified on candle charts. Some of the most commonly used include,

  • Bearish evening star
  • Bearish harami
  • Bullish harami
  • Bullish morning star
  • Three white soldiers
  • Three black crows

Being able to separate random price changes from meaningful patterns that give trading predictions is vital to staying ahead of the market. There is no guarantee that prices will follow the pattern but accuracy with candlestick charts can be high. 

Understanding how to read individual candles and complex engulfing patterns is essential for interpreting the basics of candlestick charts. This provides valuable information on price action and identifies signs of market reversals, vital for potential investments. However, these graphs have much more to offer to traders who learn to read all complex candle patterns.