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Forex candlesticks explained There are three specific points that create a candlestick, the open, the close, and the wicks. Open price : The open price depicts the first traded price during the formation of a new candle. High price: The top of the upper wick. If there is no upper wick, then the high price is the open price of a bearish candle or the closing price of a bullish candle. Low price: The bottom of the lower wick. If there is no lower wick, then the low price is the open price of a bullish candle or the closing price of a bearish candle.
Close price: The close price is the last price traded during the formation of the candle. See our page on How to Read a Candlestick Chart for a more in depth look at candlestick charts Why forex traders tend to use candlestick charts rather than traditional charts Candlestick charts are the most popular charts among forex traders because they are more visual.
Candlestick charts have certain advantages: Forex price movements are perceived more easily on candlestick charts compared to others. It is easier to recognize price patterns and price action on candlestick charts. Candlestick charts offer more information in terms of price open, close, high and low than line charts.
However, there are some disadvantages of candlestick charts: Candles that close green or red may mislead amateur forex traders into thinking that the market will keep moving in the direction of the previous closing candle. Candlestick charts may clutter a page because they are not a simple as line charts or bar charts.
Recommended by David Bradfield. Find more expert insight with our complete beginner course. Get My Guide. Introduction to Technical Analysis 1. Doji forex strategy is usually strategy based on the Daily chart Doji pattern. Usually, the doji pattern has the biggest impact on daily, weekly, and monthly charts when a breakout occurs. The best strategy is to monitor several triggers when you create a trade. For example, change in Volume, important economic news, important support, or resistance level touch can be excellent triggers with a Doji pattern combination.
If the Doji pattern appears when the market starts to trend upwards, traders can take this to indicate buying momentum slowing down. On the contrary, it could also depict that the selling momentum is picking up. It can be viewed as the exit signal from a long trade. Although traders are advised not to blindly move according to the selling indication and consider his previously set exit strategies and the coexistence of a technical indicator with the Doji pattern, this will help them to cross-check the reality with the indications of the market and be assured that what the market is offering would be beneficial to him in reality as well.
This practice of conducting a cross-check is important because the market may show the trend for a limited period or be just a flicker in the trend. Whenever there is indecision in the market, traders use the Doji candlestick pattern. However, it is important to highlight that the Doji star pattern is often associated with this market. There are 4 other variations of Doji that have different ways to help the trader understand the market from different points of view and make decisions accordingly.
As we have discussed above, the Doji pattern alone cannot be trusted as an indicator. It must be accompanied by a strong and significant signal to establish what it has been forecasting properly. Risk management is also a great way to steer clear of unexpected losses if things unfold differently from what the pattern has predicted. Below are the different types of Doji patterns, their meanings, characteristics, and identifying them. Doji star pattern has the same closing and opening prices, and the upper and the lower wicks are all small and have the same length.
As we know by now, the Doji star pattern or the traditional Doji pattern represents indecision in the market. Therefore, it is out of the control of the seller and the buyer. There are often hints of a trend reversal. There is nothing new about the fact that while trading in this particular pattern, there is a need for a strong signal to support the trend predictions.
The long-legged Doji pattern has the same closing and opening prices, and the upper and the lower wicks are extended. It is often associated with a market that has greater volatility. Just like the Doji star pattern, it also shows indecision in the market.
The Long-Legged Doji commonly has a larger expansion of the vertical lines beyond and beneath the horizontal line. By this, we can make out that the candle price movement energetically fluctuated at the time frame of the candle price movement but locked at nearly the similar level that it opened. This demonstrates the inability to make decisions between the seller and purchaser. In the spot where The Long-Legged Doji appears, it is noticed that the rates are recalled just after a reasonable downward move.
If Doji serves at the top of the retrieval that we are unaware of while it is still developing , a dealer can now clarify their decision and possible changes in a direction. And later on, looking forward to minimizing the combination of the upcoming candle next to Doji. For The Long-legged Doji, The stop loss will be spotted on the tip of the uppermost wick. You will find this pattern tucked away at the bottom of a downtrend.
It shows that lower prices have been rejected. It signals a bullish trend. It shows a change in the price direction. It signifies the upcoming change in the trend, mostly bullish. It strongly opposes the lower prices and can be seen at the bottom of a downtrend, hence, the bullish signal. The Dragonfly Doji can be seen at the elite of an upward move or the base of a downward move and indicates the possibility of changes in a direction.
An expanded, reduced wick on this Doji at the base of a bearish movement is a much more bullish indication. Traders usually look for its formation at the resistance and support levels to trade with the Doji candlestick. In this case, the Dragonfly Doji can be seen at the trendline. This rejection of lower prices signifies that the trader can expect a bullish trend and prepare for a selling trend.
This pattern is found at the top of an uptrend. It shows that higher prices have been rejected. It signals a bearish trend. It shows a change in the price direction as well. The Gravestone Doji and Dragonfly Doji are inversely proportional to each other. It occurs as the movement of rates starts and ends at the bottom end of the trade limit. Once the candle was opened, purchasers could push the rates upward, but they could not bear the bullish moment while closing.
It indicates bearishness on the elite of an upward movement. The 4 Price Doji is just a horizontal line without any vertical line beyond or beneath the horizontal. The 4 price Doji pattern represents the maximum inability to decide as all the four rates, high, low, open, and close showcased by the candle, are similar. The 4 Price Doji is an exclusive pattern that represents an unstable and peaceful market.
It comprises only horizontal lines.
The closer the close is to the high, the closer the Bulls are to winning the engagement, and the closer the close is to the low, the closer the Bears are to winning. The above six formations are the generalized formations of candlesticks, and can help guide the trader along to easily spot the characteristics of Bullish and Bearish candlesticks.
Below I will attempt to illustrate some of the more specific candlestick patterns, grouping them into the Bullish and Bearish Formations. Explanation: We see the black body in a falling market suggesting that the bears are in command, then a small real body appears implying the incapacity of sellers to drive the market lower, and the strong white body of third day proves that bulls have taken over.
Explanation: Black real body while market is falling down may suggest that the bears are in command. Then a Doji appears showing the diminishing capacity of sellers to drive the market lower. All the above candlestick formations should act as confirmations of trend reversal, and you should be aware of the following three steps:.
Step 1 — Wait for the above patterns to appear during an established downtrend. An established downtrend is when the price is below the MA of D1 or H4. Step1 Alternate -Better yet, wait for the above pattern to appear during an established uptrend that is currently experiencing a bearish correction.
In other words, the price is below the MA of D1 and H4, and thus in an established downtrend, but recently the price has been charging above the MA of smaller time frames, such as H1 or M Step 2 — Confirm the potential for a trend reversal if the price is nearing key support levels. These support levels would be defined by horizontal lines across swing highs, or pivot point resistance lines, or even Fibonacci retracement levels. The strength of any bullish candlestick pattern is determined by the nearness to a support level.
If the pattern appears in the middle of a trading range, it tends to have little significance. Step 3 — Confirm the reversal with any of the above Bullish Candlestick Patterns. Keep in mind that it is just as important to see the basic strong signs for Bears i. Exit Signal: Place stop loss x pips above the next lower support level swing low, pivot or fib.
Place take profit at next support level swing low, pivot or fib. Alternately, place a stop loss of pips, and a take profit of pips. Step 1 — Wait for the above patterns to appear during an established uptrend.
An established uptrend is when price is above the MA of D1 or H4. Step1 Alternate — Better yet, wait for the above pattern to appear during an established downtrend that is currently experiencing a bullish correction. In other words, the price is below the MA of D1 and H4, and thus in an established downtrend, but recently the price has been charging above the MA of H1 or M Step 2 — Confirm the potential for a trend reversal if price is nearing key resistance levels defined by horizontal lines across swing highs, or pivot point resistance lines, or Fibonacci retracement levels.
This is very important. The strength any candlestick pattern is determined by the nearness to a resistance level. Step 3 — Confirm the reversal with any of the above patterns. Keep in mind that the exact patterns above do not have to mature.
It is just as important to see strong signs for Bears such as long black candles, or candles with long lower shadows and weak signs of Bulls such as short white candles, or better yet, candles with a long upper shadow. Exit Signal: Place stop loss x pips above the next resistance level pivot or fib. Place take profit at next support level pivot or fib. At first, it can be difficult to train your eye to see Candlestick patterns as they occur, and so it is practical to insert Candlestick pattern indicators that can be on the alert for these patterns 24 hours of the market.
One of the indicators in this category did spot the 10 candlestick patterns illustrated above, making it one of the more interesting:. Pattern Recognition. Note: you should not be basing your trades from the candle patterns themselves, but from the candlestick patterns in relation to the market context, along with confirmations from support and resistance. Hopefully, you can now differentiate between long and short bodies, long and short shadows, and spot various types of Bullish and Bearish candlestick formations.
Keep in mind that Candlestick Patterns are just one device in your arsenal of trading tools. They are very useful in honing in on the immediate battle between the bulls and bears, in order to see who is winning the struggle for control over the immediate candlesticks. The significance of this struggle depends upon whether or not the prior trend main trend or corrective trend is nearing key support and resistance levels, as determined by swing highs and lows, pivot points , or Fibs.
Once the candlesticks reach these levels, the battle between the bulls and bears over who controls the bars is critical for determining a reversal. More than likely you will be seeing candlesticks that display more general bullish or bearish characteristics, as seen from body size and color long white for Bullish, long black for Bearish , or from long shadows long lower for Bullish, long upper for Bearish.
Some MT4 indicators can be useful in spotting these more specific patterns, if you are not around to see them or have your doubts. If you get really intrigued with Candlestick patterns, there is plenty more out there on the net to read about. Writers of these patterns give you examples of when and why they work, but rarely give examples of when and why they do not. The Forex markets of today are much more complicated than the rice markets of 18th Century Japan, and trading in real time with many of these patterns can kill your capital in short order.
Undoubtedly, you will find that candlesticks can give you a more tactical view into the market than any type of chart. And if you do not become a fan of the specific patterns themselves, it is important to pay attention to the length and color of the body and the length and positing of the shadows, as they can give you an insight on whether or not the Bulls or Bears are in control over the bar.
Once you become more familiar with the fundamental characteristics of candlesticks and the more popular of the patterns , then you can use them in conjunction with support and resistance levels in order to better spot a potential reversal from the main trend, or better yet, a reversal from a corrective phase back in the direction of the main trend. It is the main trend that determines the side you should be on, the support and resistance levels that will direct you to where the battles will be fought, and the real-time information from the candlesticks at those levels that will allow you to assess with more probability who might win the battle so that you can join the winning team on its victory march.
Share the following link to refer others to this page using our affiliate referral program. Share this page! Academy Home. Learn Forex. How to Trade Forex: Step-by-step Guide. How Technical Analysis Works. How Fundamental Analysis Works. How Support and Resistance Works. How Trend Analysis Works. How to Properly Manage Risk.
How to Analyze Fundamentals. Best Time to Trade Forex. What are Forex Rebates. Introduction to Automated Trading. Forex Brokers. Financial and Forex Regulators. Benefits of Micro and Nano Lot Brokers. Technical Indicators. Forex Basics. Training Videos. The Advantages of Candlesticks Candlestick charts show the same Open, High, Low, and Close OHLC information as bar charts but they have a number of important advantages: They visually display who is winning the mini battles between the Bulls and the Bears.
We can more easily spot the single bar and multi-bar patterns We see an easy-to-decipher picture of price action, comparing the relationship between open and close as well as high and low. They are more visually appealing. The Anatomy of a Candlestick: Bodies and Shadows Candlesticks are formed using the open, high, low and close of the bar.
Long and Short Bodies. Is this article helpful? Sign Up. Remember Me. Join our mailing list? He shows us that the market has reached its bottom, and the "bulls" took over "bears". We clearly know where to enter a trade and where to place your stop loss. In the case of a pattern "The hanged man" we have to wait for a candlestick confirmation, and if it is a bear candle, then open the deal to sell.
Please note that for the above-described Japanese candlestick patterns is not important the color of the candle. Since the size of the candle body is small, then there is no difference "bullish" it's a candle or bearish. Belt hold strong pattern.
It's a candle with a large body and small, almost non-existent shadows. Here the color of the candle plays a crucial role. If that bearish candle at the top of the market, we will open the transaction for sale. Remember the first rule of candlestick analysis — the larger the candle body and the shorter the shadow, the higher the potential price move in a given direction. See also what brokers to trade cryptocurrency are considered the most reliable. As you already understood from the name, two candles participate in two-candle models, and if in one-candle models we focused more on the shadow of candles, then in two-candle models we will look more at the body and color of candles.
The shorter the shadows in the two-light models, the more reliable the patterns. Absorption the most reliable pattern. The first candle in this pattern must be slightly more than half of the second candle. In this case the second candle has a pronounced direction of motion and the shortest shadow:.
The dark cloud cover and piercing. Sometimes it may be dvuhsvetny patterns, similar to Absorption. The only difference is that the opening price of the second candlestick is above the closing price of the first candle in the pattern "Veil of dark clouds" on top of the market , or below in the pattern of "piercing" at the bottom of the market.
The data patterns can not be called Absorption, because the second candle does not absorb the first, they are almost identical. But, of course, there will be a market reversal, since both of these pattern are very strong;. The penetration line. This is similar to the previous models pattern except that the opening price of the second candle is below the close of the first candlestick, but not above as the "Veil of dark clouds", and the closing price of the second candle is below the open price of the first candle, called this pattern "Bearish penetration of the line.
These patterns are also very strong;. Here everything is the same as in previous patterns, with the only exception that the opening price of the second candlestick coincides with the closing price of the first candlestick;. Harami in Japanese means "pregnant". This is the complete opposite of the engulfing pattern. The first candle of a large size, and the second candle is typically less than half of the first candle.
This is the weakest two-spring model, since we do not know the reason for stopping the price. She turned around and went no further. You must wait for another candle to enter the market. If it is bearish candle, which breaks through the low of the first candle, we open the deal to sell and stop-loss set at the top of the market.
If it is a bullish candle that breaks the high of the first candle, we open a buy trade and the stop loss set at the bottom of the market. See also what Forex brokers offer Deposit bonuses. Three-light combinations are rather rare on the chart, but their advantage is that after their formation the price goes far up or down.
The three-spring model consists of three candlesticks, and the middle one is usually small. Consider the most popular three-candlestick candlestick models:. Bear pattern "Evening star" consists of a single pronounced bullish candle, small medium candle and one "bearish", while the latter closes below the half of the first candle.
After the close of the third candle open the deal to sell and set stop loss at the high of the middle candle. Bullish pattern "Morning star" consists of a single pronounced "bear" candles, small candles and the middle one is bullish, the latter should close above half of the first candle. After the close of the third candle opened a buy trade and set stop loss at the low of the middle candle. Three crosses. It is a combination of three candlesticks doji where the middle candle is higher than the first and the third candle if we are talking about top of the market, or lower if we are talking about the bottom of the market;.
Abandoned baby. Another kind of pattern, "the Three crosses", the exception lies only in the fact that between the first and third shadows, and the shadow of the middle candle is open. This is a very rare but powerful pattern.
See also who are the ECN brokers and what are their advantages in trade. Multi-core models consist of a large number of candlesticks, sometimes dozens. Consider the most common ones:. Three mountains. The price first reaches its maximum, then minimum, and so until, until the formation of three "mountains", and then the price breaks the base of the mountains, and you can open a sell deal;. The three vertices. Sometimes it may happen that each top of the mountain a little higher than the previous.
Traders call this model the "Three peaks";. Three riversI. This is the opposite model of the pattern of "Three mountains", are formed when three of the bottom, followed by the break up;. The three valleys.
Inverse hammer. A similarly bullish pattern is the inverted hammer. Bullish engulfing. The bullish engulfing pattern is formed of two candlesticks. Three white soldiers.