A Guide To Learn Candlestick Patterns

Forex trading can offer insane profitability when done correctly. While people use multiple trading tools and techniques to make the most of the forex market, candlestick patterns are among the most popular tools to evaluate market trends and identify profitable opportunities. This article covers the basics of candlestick patterns and how to use them to improve your trading performance.  

Basics of Candlestick Patterns

Candlestick patterns appear on price charts as a result of the price fluctuations of an asset over a given time frame. Each "candle" on a candlestick chart represents the opening, closing, high, and low prices for a given period. These patterns include doji, hammer, shooting star, engulfing, and more. 

Common Candlestick Patterns

Below are some common candlestick patterns. 

Doji: A doji has a small body, showing that an underlying asset's opening and closing prices were quite close. It's a sign of market uncertainty and a possible reversal.

Morning Star: Morning Star candlestick patterns consist of three candles, including a big bearish candle at the beginning, then a little candle that may go either way and then a big bullish candle. It indicates a possible trend reversal from bearish to bullish.

Hammer & Hanging Man: Hammer and Hanging Man candles appear to be the same. The only difference between them is the length of the preceding trend. The appearance of a hammer after a downward trend suggests a bullish reversal, whereas the formation of a hanging man following an upward trend suggests a bearish reversal.

Engulfing: When a larger candlestick completely engulfs a previous smaller candlestick, it forms an engulfing pattern that may indicate a trend reversal.

Evening Star: The evening star emerges after an uptrend, consisting of a large bullish candle, followed by a small doji or spinning top, and then a large bearish candle. Contrary to the morning star, it's a bearish reversal pattern.

How To Trade Candlestick Patterns

Trading candlestick patterns successfully requires familiarity with chart patterns. Different patterns mean different things and can foretell changes in market mood. For example, a Doji pattern indicates market hesitancy, whereas a hammer pattern may foreshadow a positive reversal. Conversely, engulfing patterns are indicative of decisive changes in market trends. Let's quickly look at some crucial factors you need to consider when trading candlestick patterns.

1) Identification 

Look for developing candlestick patterns using a price chart analysis and focus on the candlestick's base, wicks, and how they interact with other candles.

 2) Confirmation

Confirming indicators and the subsequent price activity before making any move is crucial when trading candlestick patterns. Therefore, consider using a combination of technical indicators and candlestick patterns that point in the same direction as the market. Essentially, technical indicators such as moving averages, RSI, MACD, stochastic oscillators, etc. can help verify the indications generated by candlestick patterns.

3) Using Risk Management Tools 

Risk management is another important aspect when using candlestick patterns as a trading technique. Protect yourself from unexpected market reversals by setting stop-loss orders below or above the pattern's critical levels. Similarly, traders can maximize profitable opportunities while avoiding greed-driven blunders by setting take-profit goals based on the pattern's predicted price movement.

Candlestick patterns are just like any other trading method in that they can fail. Therefore, employing appropriate risk management strategies such as stop-loss orders and risk-reward calculations is essential to protecting your funds and limiting losses.