Trend and candlestick patterns
First of all I want to say "Trend is your FRIEND". Go with the trend, otherwise you will loose most of the trades.
Anyway now you know something about forex charts. Here we'll learn further more about reading forex charts.
What is "Trend"
Trend is the next most important thing in forex trading. By now you already know that we have to predict the price movement of the currency pair to buy it now or to sell it. So for this we have to know what is the likely direction for the price to move in next few minutes or hours. So it is called a "Trend"
The trend can be of two types
- Upward trend ( Bullish trend)
Upward or bullish trend is an upward price movement with the time. If you have found that there's an unward trend is developing for a currency pair, you can buy the currency pair at that time. Then you have to wait till it's price goes up and once it is at your desired level, you can sell it. So you make a profit...!
- Downward trend (Bearish trend)
Similarly a downward or bearish trend is a downward price movement with the time. If you have found that there's an downward trend is developing for a currency pair, you can sell the currency pair. Then you have to wait till it's price decreases. Once it is at your desired level, you can sell it. So you make a profit again...!
So now you will understand how important to identify the correct trend of a price movement. This is the ultimate Goal of this learning. So trend is your friend...!
Most important candlestick types
The most important candlestick type is "Doji". Doji is a name given to a candlestick whose body is short but having long upper and lower shadows. Importance of Dogi is that they occur at the places where the trend reverses...! So you can make decisions to buy (if it's a bullish reversal) or to sell (if it's a bearish reversal) the currency pair. Depending on the shape of Doji and the associating other candlesticks, There are different patterns of reversal are found. As an example see below chart of USD/EUD.
Candlestick patterns at trend reversals
When should you buy or sell a currency pair looking at a forex chart..? You should buy (Enter into the trade) currency pair a the beginning of an up trend and you should sell it (Close the trade) when it finishes it's uptrend. Similarly when you are selling, you have to enter into the trade at the beginning of a down trend and you should close the trade when the downtrend is over. For this you should have the ability to identify where does the trend start and what are the signs of ending the trend.
The most important use of candlesticks is to identify trend reversal points. Below we'll discuss about how to identify trend reversals using candlestick patterns.
1. Hammer and Hanging man :
These names are given on the appearance of the Doji at reversal points. Hammer is a Doji that signals the end of a down trend and beginning of an up trend (bullish reversal)
Hanging man sign occurs when an uptrend stops and reverse to start a new down trend (bearish reversal). Following diagram shows these signs How to identify Hammer... ?
1. Short upper shadow and long lower shadow
2. Lower shadow should be about two or three times of the body
3. The Hammer pattern Doji can be of any color.
How to identify Hanging man
1. Long upper shadow and short lower shadow
2. Upper shadow should be about two or three times of the body
3. Doji can be of any color.
Inverted hammer is a sign of bullish reversal and shooting star is a sign of bearish reversal. By looking at these all four types of reversals you will understand that any Doji with a long shadow (which is about 2 or 3 times as the body) and a very short shadow will signal the reversal of the current tend..!
How to identify inverted hammers and shooting stars
1. Long upper shadow and short lower shadow
2. Upper shadow should be about two or three times of the body
3. Doji can be of any color
3. Engulfing patterns
Here we consider only about the body of considering candlesticks. When a price range of the preceding candlestick's body (smaller) is completely included (engulfs) in the succeeding candlestick's body (bigger), the pattern is known as an engulfing pattern.
Here the preceding candlestick's color is the opposite of the succeeding one. When a green body engulfs a red body of the preceding candlestick, it is an indicator of a bullish reversal. Likewise, when a red body engulfs the green body of the preceding candlestick, it indicates a bearish reversal.
Harami is the opposite pattern of engulfing. Here a large candlestick is followed by a smaller candlestick whose body is located within the vertical range of the large candlestick's body. Preceding large candlestick's color is the opposite of the succeeding small candlestick's color.
5. Harami cross
The Harami Cross is a strong indicator of trend reversal, especially when it occurs after a long body in a downtrend. But in uptrend also Harami Cross signs reversal. It is the same as the Harami, except that the second candlestick is a Doji.
6. Piercing line and Dark cloud cover
Piercing line is a bullish reversal pattern. This occurs only in a down trend. In this pattern a long red body of a candlestick in a down trend is followed by a another green candlestick which has a long body. But here the close price of the body of the green candlestick is higher than the midpoint of the preceding body of the red candlestick.
Dark cloud cover is the opposite of the piercing line pattern. So it is the bearish reversal pattern which occurs only in a up trend. Here, long green body of a candlestick in a up trend is followed by a another red candlestick which has a long body. But here the close price of the body of the red candlestick is lower than the midpoint of the preceding body of the green candlestick.
7. Morning star and Evening star
Morning star is a strong, but little uncommon bullish reversal pattern. We identify this pattern by following features.
1. The first bar is a large red candlestick found in a defined downtrend.
2. The second candlestick has a small body that closes below the first red candlestick. (Color can be red or green)
3. The last candlestick is a larger one whose open is above the middle candlestick and close is near the center of the first candlestick's body
8. Morning Doji star and Evening Doji star
This reversal pattern is very similar to morning star and evening star. The only difference is replacing the middle small candlestick by a Doji. The features of identification are also same as above.
A Brake after a long lesson...
This is the end of candlestick reversal patterns. I know it looks a long list. But you don't have to remember everything at once. You can remember one or two patterns first. Then as you go on trading you can come back to your lesson and see whether you are at a reversal pattern.