Forex Candlestick Patterns Cheat Sheet
What are Candlestick Patterns?
Candlestick patterns are chart formations that occur within a series of candlesticks, which show price movements over a specific time frame. They are derived from Japanese candlestick charting techniques and provide information about the momentum of price movements.
Each candlestick has four key components:
- Open: The price at the start of the period.
- Close: The price at the end of the period.
- High: The highest price within that period.
- Low: The lowest price within that period.
Candlestick patterns can signal reversals, continuations, or neutral market conditions, which can be used to make trading decisions.
Types of Candlestick Patterns
1. Single Candlestick Patterns
These are the most basic candlestick patterns, consisting of a single candle. They are straightforward but can provide powerful signals when interpreted correctly.
Hammer
- Meaning: A hammer appears after a downtrend, signaling a potential reversal.
- Key Features: Small body, long lower wick (at least twice the length of the body), little to no upper wick.
- Trading Insight: This pattern suggests that although sellers initially pushed the price down, buyers stepped in, driving the price up before the close.
Shooting Star
- Meaning: This is the opposite of a hammer and appears after an uptrend, indicating a bearish reversal.
- Key Features: Small body, long upper wick, little to no lower wick.
- Trading Insight: The shooting star shows that buyers drove prices higher during the session, but sellers came back strongly before the close.
2. Double Candlestick Patterns
These patterns involve two candlesticks and typically signal reversals or continuations.
Engulfing Pattern
- Bullish Engulfing: Occurs during a downtrend and signals a bullish reversal. The second candle (bullish) completely engulfs the first (bearish).
- Bearish Engulfing: Appears after an uptrend, signaling a bearish reversal. The second candle (bearish) engulfs the first (bullish).
Trading Insight: These patterns show a strong change in market sentiment, often marking the beginning of a new trend.
Harami Pattern
- Bullish Harami: Appears during a downtrend. The first candle is large and bearish, while the second is small and bullish, signaling a potential reversal.
- Bearish Harami: Occurs in an uptrend with a large bullish candle followed by a smaller bearish one.
Trading Insight: This pattern shows indecision and a possible reversal, but confirmation from subsequent price action is important.
3. Triple Candlestick Patterns
Triple candlestick patterns consist of three candlesticks and provide more confirmation than single or double patterns.
Morning Star
- Meaning: This is a bullish reversal pattern that appears after a downtrend.
- Key Features: A bearish candle, followed by a small indecisive candle, then a large bullish candle.
- Trading Insight: The morning star indicates that selling pressure is fading, and buying pressure is increasing.
Evening Star
- Meaning: The opposite of the morning star, this pattern signals a bearish reversal after an uptrend.
- Key Features: A bullish candle, followed by a small indecisive candle, then a large bearish candle.
- Trading Insight: This pattern shows that buying pressure is weakening, and sellers are starting to take control.
Chart Patterns and Their Application
Reversal Patterns
Doji
- Meaning: The Doji is a candlestick pattern that signals indecision in the market. It has little to no body, as the open and close prices are almost the same.
- Key Features: Small or no real body, equal-length wicks on both sides.
- Trading Insight: When a Doji forms after a strong uptrend or downtrend, it indicates that the market is losing momentum and could reverse.
Continuation Patterns
Three White Soldiers
- Meaning: This is a bullish continuation pattern seen after a downtrend or consolidation.
- Key Features: Three consecutive bullish candles, each with higher highs and higher closes.
- Trading Insight: This pattern signals that buyers are taking control of the market, pushing prices higher.
Three Black Crows
- Meaning: A bearish continuation pattern that occurs after an uptrend or consolidation.
- Key Features: Three consecutive bearish candles, each with lower lows and lower closes.
- Trading Insight: This pattern shows that sellers are dominating, and further price drops could follow.
How to Use Candlestick Patterns in Forex Trading
Understanding candlestick patterns is only the first step. To use them effectively, follow these guidelines:
1. Combine Candlestick Patterns with Other Indicators
Candlestick patterns are powerful, but they work best when combined with other technical indicators. For example, if you see a bullish engulfing pattern near a major support level, that’s a strong buy signal.
2. Look for Confirmation
Don’t rely on a single candlestick pattern to make your trades. Look for confirmation from subsequent price action or other indicators like moving averages, RSI, or MACD.
3. Practice Risk Management
Candlestick patterns don’t guarantee price movements, so it’s important to use proper risk management. This includes setting stop-loss levels and calculating the risk-to-reward ratio before entering a trade.
4. Use Multiple Time Frames
Candlestick patterns can occur on any time frame, but they are more reliable on longer time frames like the daily or weekly charts. However, some traders use candlestick patterns on shorter time frames for intraday trading. It’s best to analyze multiple time frames to get a complete picture of the market.
Advanced Candlestick Patterns
1. The Piercing Line
- Meaning: A bullish reversal pattern that forms in a downtrend.
- Key Features: A bearish candle followed by a bullish candle that opens below the low of the bearish candle but closes above its midpoint.
- Trading Insight: This pattern suggests a strong shift in momentum from sellers to buyers, providing a potential buying opportunity.
2. Dark Cloud Cover
- Meaning: A bearish reversal pattern that occurs during an uptrend.
- Key Features: A bullish candle followed by a bearish candle that opens above the high of the bullish candle but closes below its midpoint.
- Trading Insight: This pattern indicates that buyers are losing control and sellers are starting to dominate, signaling a potential sell opportunity.
Common Mistakes When Trading Candlestick Patterns
1. Ignoring Market Context
Candlestick patterns should always be interpreted within the context of the broader market. A bullish pattern that appears in a strong downtrend might not signal a reversal, but rather a temporary pullback.
2. Over-reliance on Candlestick Patterns
While candlestick patterns are a great tool, relying on them alone can be risky. It's important to combine them with other forms of technical analysis and fundamental factors.
3. Failing to Wait for Confirmation
One of the biggest mistakes traders make is acting too quickly on a candlestick pattern without waiting for confirmation. For example, after seeing a bullish engulfing pattern, wait for a higher close on the next candle to confirm the bullish sentiment.
Table of Candlestick Patterns
| Pattern Name | Type | Description | Trading Insight |
|---|---|---|---|
| Hammer | Single Candle | Bullish reversal, long lower wick | Signals potential uptrend reversal |
| Shooting Star | Single Candle | Bearish reversal, long upper wick | Indicates a possible downtrend |
| Engulfing Pattern | Double Candle | Bullish or bearish reversal, second candle engulfs first | Strong market sentiment change |
| Doji | Single Candle | Indecision in the market, open and close are the same | Signals potential reversal or continuation |
| Morning Star | Triple Candle | Bullish reversal, downtrend losing momentum | Marks the beginning of a new uptrend |
| Evening Star | Triple Candle | Bearish reversal, uptrend losing strength | Signals the end of an uptrend |
| Three White Soldiers | Triple Candle | Bullish continuation, three strong bullish candles | Strong buying pressure, likely continuation upwards |
| Three Black Crows | Triple Candle | Bearish continuation, three strong bearish candles | Strong selling pressure, likely continuation downwards |
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