Candlestick formations in forex

Candlesticks in forex chart are packed with information. Therefore, they are the best method of price reading. They were first used in 1800s Japan for rice trading. They are similar to standard bar chart, providing open, close, high and low readings. Using candles, direction of price development becomes clearly visible and easily readable.

 

Forex chart candle

The candle body represents change of price during our chosen period (according to our timeframe). In one hour timeframe, candle will represent change in price and direction of change within one hour.

 

Hollow candlestick (white, green) means that the opening price was lower than the closing price. Instrument gained value within our timeframe. Candle is bullish. Filled forex candlestick (black, red) means that the opening price was higher than the closing price. Instrument lost value within our timeframe. Candle is bearish.

 

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Basic candlestick formations in forex

Combination of candle can be either a continuation or reversal signal. Each candlestick formation can therefore give you even more information on price development by capturing market psychology a common repetitive behaviour of traders, as a reaction to price development.

 

Doji star candle pattern

 

relatively common candlestick pattern. Doji appears when opening and closing price is basically equal, which results in extremely flat candle body. Hight of the wick below and above candles body has no significant effect on dojis validity. Doji should be interpreted as marked being indecisive, without clear direction in mind. Next movement of the price will be based on broader price analysis. Most of the time it can be estimated based on candle following doji. With bullish candle we expect bullish move and vice versa.

 

Gravestone doji forex candle pattern

With this type of doji, opening and closing price is almost equal. What makes it stand out, is extremely high upper wick signalising that candle has reached massive resistance that forced candle to close at its low range. It is considered to be a red flag for long entry and green flag for short entry.

 

Long legged doji

Opening and closing price is equal or almost equal. During our reporting period, price swings down substantially before closing back at the open, thus creating very tall bottom wick. This Doji signalises that market has reached support and the bullish move becomes more likely. It is considered to be red flag for short entry and green flag for long entry.

 

Two candle formations in forex

 

Spinning tops forex candle pattern

Candle formation that consists of candle with relatively narrow body, that can be either bullish or bearish. Either way, difference between opening and closing price remains small. Wick of the candle is usually similar on top and the bottom.  Extremely tall wick on one of the sides may signalise substantial support/resistance on the side of the candle where it is created. This candle formation is interpreted and traded similar as doji candle formation. Market is indecisive therefore we wait for another candle or chart formation for price direction to conclude.

 

Hammer and hanging man forex candle pattern

Difference between opening and closing price remains narrow resulting in flat candle body. Wick on the bottom of the candle is very tall. Wick at the top of the candle is very flat as well. In cases when this candle formation appears at the bottom of the downtrend (low price) it usually signalises possible trend reversal. This formation alone, is not sufficient signal for position entry. As with other candle formations, it can be considered to be a green flag for entry.

 

Three candle formations in forex

 

Morning star forex candle formation

Morning star is a three candle formation signalising that price has reached support in downward movement. This forex formation often times marks end of the downtrend. Once confirmed It can be considered to be very strong bullish signal.

 

Evening star forex candle formation

Candle formation occurring when uptrend hits resistance zone. It signalises that instrument has hit massive hurdle in its upwards movement. This may cause uptrend to lose momentum or to completely reverse. It is therefore considered to be a bearish signal.

 

Shooting star forex candle formation

Shooting star candle formation will often mark a sudden end to a violent uptrend. After third signal candle closes, market has paused to elaborate on its direction. Reversal becomes more likely.

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