How to Trade Forex Using Candlestick Patterns

Forex candlestick patterns are among the most commonly used systems to obtain a signal for market trends in foreign exchange. The relations between these variables can provide some useful indicators regarding the state of the market to use for traders. A trader needs to be able to understand patterns easily so as to make a profit within the volatility of the foreign exchange market.

In its simplest form, a candlestick chart is a visual depiction of the price range of an asset of interest over some specified period of time. The candlestick indicates the opening, closing, the highest, and the lowest price for that given period. The main part of the candle is for the opening and the closing prices, and the shadows inside the body of the candle represent the high and the low of the period covered. It is when these individual candles form known patterns that analysts refer to as candlestick patterns, which indicate direction in the market.

Image Source: Pixabay

It is important to note that forex trading employs one of the most frequently used candlestick patterns known as the “doji.” Bulls and bears battle it out for control of the price, and a doji is formed when both the opening and closing prices are near the same, and the body is small with relatively small wicks. They are commonly manifested in such a way that shows doubt in the market, meaning that the value may reverse soon. Because the doji is formed when both the highs and lows of the candle are similar, traders tend to wait for this formation to appear after a long price bar.

The second one, which is known as the “engulfing” pattern, is also relevant to mention. It consists of two candles. The first candle is small and the second one is completely dominant and covers the body of the first candle completely. A bullish engulfing pattern is constructed when the second candle is comparatively large and its close is higher than the first’s close. On the other hand, a bearish engulfing pattern occurs when the second candle is bigger than the first one and its close is beneath it, which is an indication of a down move. These patterns are expected to work as reversal signals in forex trading, and the entry or exit can be made at this point.

The “hammer” and “hanging man” are other formations that traders focus on in forex trading. Both candle patterns have a small body at the upper part of the price range and a long lower wick. A hammer, which comes after a price fall, implies that the market might just be reversing for a bullish move. On the other hand, a hanging man, which occurs after an upward and bullish run, has the same meaning as a warning that the market might be turning bearish. Such patterns are especially helpful when they are used in coordination with other technical tools, which intensify the signal of a reversal.

There are also many traders who utilize candlesticks together with other indicators like moving averages or support and resistance levels while trading forex. The candlestick pattern is even stronger when it ranges along a support or resistance level due to increased confidence when trading.

Overall, mastery of candlestick pattern trades in forex is an important aspect every trader should know. While the patterns described above, when applied to trading and reinforced with correct risk management strategies, can help the trader to better anticipate the course of the market and make better decisions.