How To Read Candlestick Patterns (Candlestick Chart): Ultimate Guide For New Traders

How To Read Candlestick Patterns (Candlestick Chart): Ultimate Guide For New Traders

What’s up Traders, in this article, we’re going to be talking about Candlestick Patterns (Candlestick Chart). The Candlesticks are used to discover trading patterns that aid technical analysts in setting up transactions. These candlestick patterns (Japanese candlestick pattern) are used to forecast the direction of price movements in the future.

Candlestick patterns are created by arranging two or more candles in a specific pattern. A single candlestick can sometimes send out tremendous indications.

In this guide, I’m helping to read candlestick patterns for beginners to use in trading strategy. We’ll go over all 5 powerful candlestick patterns in this blog, but first, let’s go over how to interpret candlestick charts.

 

Definition of a Candlestick in a Trading

 

  • What Is A Candlestick And What Does It Do?
  • The Fundamentals Of A Candlestick
  • Candlestick Trading Patterns for Two Days
  • Candlesticks Trading Patterns for Three-Day

 

What is a Candlestick Pattern and What does it do?

A candlestick is a form of technical analysis price chart that shows the high, low, open, and closing prices of a securities over time.

It was developed hundreds of years ago by Japanese rice merchants and traders to watch market prices and daily momentum before becoming popular in the United States.

The “true body” is the wide area of the candlestick that shows investors whether the stock closed higher or lower than it opened (black/red if the stock ended lower, white/green if the stock closed higher).

For a given period, candlestick charts show the high, low, open, and closing prices of a security.

Before becoming famous in the United States, candlesticks were used by Japanese rice merchants and dealers to track market prices and daily momentum.

Traders looking for chart patterns can employ candlesticks.

 

The Fundamentals of a Candlestick

 

The Fundamentals Of A Candlestick
(Source: Investopedia)

The shadows of the candlestick depict the day’s high and low, as well as how they compare to the open and close. The link between the day’s high, low, opening, and closing prices determines the shape of a candlestick.

Technical analysts use candlesticks to identify when to enter and exit trades since they indicate the impact of investor mood on security prices.

Candlestick charting is based on a rice price tracking technique developed in Japan in the 1700s. Candlesticks can be used to trade any liquid financial instrument, including stocks, foreign exchange, and futures.

Long white/green candlesticks show significant purchasing pressure, indicating that price is likely to rise. However, rather than looking at them individually, they should be considered in the context of the market system. 

A lengthy white candle, for example, is more likely to be significant if it forms at a strong price support level. Long black/red candlesticks suggest that selling pressure is strong.

This indicates that the price is declining. When price drops significantly lower after the open, then rallies to close near the high, a typical bullish candlestick reversal pattern known as a hammer occurs.

A hanging man is the bearish candlestick’s equal. These candlesticks resemble a square lollipop and are frequently utilised by traders attempting to predict a market’s peak or bottom.

Note: Traders can utilise candlestick signals to examine any and all trading periods, including daily, hourly, and even minute-long trading cycles.

 

Candlestick Trading Patterns for Two Days

Candlestick patterns are used in a variety of short-term trading methods. The engulfing pattern indicates a possible trend reversal since the first candlestick’s body is entirely enveloped by the second candlestick.

When it appears at the end of a downtrend, it is referred to as a bullish engulfing pattern, and when it appears at the end of an upswing, it is referred to as a bearish engulfing pattern.

The harami is a reversal pattern in which the second candlestick is completely enclosed by the first candlestick and is of the opposite hue. When the open and close are effectively equal, the harami cross pattern has a second candlestick that is a doji.

 

Candlesticks Trading Patterns for Three-Day

A bearish reversal pattern in which the first candlestick maintains the uptrend is known as an evening star. The second candlestick has a small body and a space up in the middle.

The third candlestick closes below the first candlestick’s midpoint. A morning star is a bullish reversal pattern in which the first candlestick is long and black/red-bodied, then a short candlestick that has gapped lower, and finally a long-bodied white/green candlestick that closes above the first candlestick’s midpoint.

 

Understanding the Fundamentals of Candlestick Charts

 

  • Components for Candlesticks
  • Bar Charts vs. Candlestick Charts
  • Pattern of a Bearish (BEARISH ENGULFING PATTERN)
  • Pattern of a Bullish (BULLISH ENGULFING PATTERN)
  • Evening Star with a Bearish Attitude
  • Harami, the Bearish
  • Harami, the Bullish
  • Harami Cross with Bears
  • Harami Cross with Bullish
  • Three Bullish are rising
  • The Falling Three are bearish

Candlestick charts were established in Japan over a century before bar and point-and-figure charts were developed in the West. While there was a link between pricing and rice supply and demand in the 1700s, a Japanese man named Homma observed that the markets were heavily impacted by traders’ emotions.

Candlesticks depict this emotion by using different colours to graphically express the size of price movements. Traders use candlesticks to make trading decisions based on patterns that appear on a regular basis and help foretell the price’s short-term direction.

Traders use candlestick charts to forecast price movement based on previous patterns.

Candlesticks are important in trading because they display four price points (open, close, high, and low) across the time period specified by the trader.

Many algorithms use the same price data that is displayed in candlestick charts.

Emotion is typically a driving force in trading, which can be seen in candlestick charts.

 

Components for Candlesticks

A daily candlestick chart, like a bar chart, displays the market’s open, high, low, and close prices for the day. The “true body” of the candlestick is a large section of the candlestick.

The price range between the open and close of that day’s trade is represented by this genuine body. It signifies the close was lower than the open if the true body is filled in or black. The fact that the true body is empty indicates that the close was higher than the open.

The price range between the open and close of that day's trade is represented by this genuine body
(Source: Investopedia)

These colours can be changed on a trader’s trading platform. A down candle, for example, is frequently tinted red rather than black, and an up candle is frequently shaded green rather than white.

 

Bar Charts vs. Candlestick Charts

The “wicks” or “shadows” are located just above and below the real body. The shadows represent the trading day’s peak and low prices. If the upper shadow on a down candle is short, it means the day’s open was close to the day’s high.

On an up day, a brief upper shadow indicates that the closing was near the high. The appearance of the daily candlestick is determined by the relationship between the open, high, low, and close of the day. Real bodies come in many shapes and sizes, and can be black or white. Long or short shadows are possible.

The same information is displayed in both bar and candlestick charts, but in different ways. Due to the colour coding of the price bars and thicker real bodies, candlestick charts are more visually appealing and better at displaying the difference between the open and close.

The same information is displayed in both bar and candlestick charts
(Source: Investopedia)

Over the same time period, the same exchange-traded fund (ETF) is shown in the graph above. Colored bars are used in the lower chart, while coloured candlesticks are used in the upper chart. Some traders enjoy the sight of genuine bodies with their thickness, while others prefer the clean image of bar charts.

 

Candlestick Patterns for Beginners

Candlesticks are formed by price changes that go up and down. While price fluctuations can look random at times, they can also establish patterns that traders can utilise for study or trading. There are numerous candlestick designs to choose from. To get you started, here’s a sample.

Bullish and bearish patterns are distinguished. Bullish patterns suggest that the price will likely climb, while bearish patterns suggest that the price will likely decrease. Candlestick patterns are tendencies in price movement, not guarantees, so they don’t always work.

 

Pattern of a Bearish Candle (BEARISH ENGULFING PATTERN)

When sellers outweigh purchasers in an uptrend, a bearish engulfing pattern forms. A long red genuine body devouring a little green real body reflects this action. The pattern suggests that sellers have regained control of the market and that the price may continue to fall.

When sellers outweigh purchasers in an uptrend
(Source: Investopedia)

Pattern of a Bullish Candle (BULLISH ENGULFING PATTERN)

When buyers outpace sellers on the bullish side of the market, an engulfing pattern forms. A lengthy green genuine body engulfing a small red real body is reflected in the chart. The price could rise now that the bulls have gained some grip.

When buyers outpace sellers on the bullish side of the market
(Source: Investopedia)

Evening Star with a Bearish Attitude

A topping pattern is an evening star. The last candle in the pattern must open below the previous day’s little actual body to be recognised.

The little actual body can be red or green in colour. Two days previously, the last candle closes deep into the genuine body of the candle. The pattern shows the buyers delaying and then the sellers seizing control. It is possible that more selling will occur.

Evening Star with a Bearish Attitude
(Source: Investopedia)

Harami, the Bearish

A bearish harami is a little real body (red) that is totally encased in the real body of the previous day. This isn’t necessarily a pattern to act on, but it’s one to keep an eye on.

The pattern reveals the customers’ indecisiveness. If the price continues to rise after that, the uptrend may continue, but a down candle after this pattern predicts a further down.

A bearish harami is a little real body
(Source: Investopedia)

Harami, the Bullish

The upside down negative harami is the polar opposite of the bullish harami. A downtrend is in effect, with a little real body (green) forming inside the previous day’s huge real body (red).

This indicates to the technician that the trend is coming to a halt. More upward could be on the way if this is followed by another up day.

The upside down negative harami is the polar opposite of the bullish harami
(Source: Investopedia)

Harami Cross with Bears

In an uptrend, a bearish harami cross happens when an up candle is followed by a doji-a candlestick with a nearly equal open and close.

The doji is contained within the previous session’s true body. The bearish harami has the same ramifications as the bullish harami.

Harami Cross with Bears
(Source: Investopedia)

Harami Cross with Bullish

In a downtrend, a bullish harami cross happens when a down candle is followed by a doji. The doji is contained within the previous session’s true body. The bullish harami has the same ramifications as the bearish harami.

Let’s take a look at some additional black and white patterns, which are very popular colours for candlestick charts.

Harami Cross with Bullish
(Source: Investopedia)

Three Bullish are Rising

A “long white day” precedes the start of this pattern. Small actual bodies then bring the price lower in the second, third, and fourth trading sessions, but they remain within the price range of the long white day (day one in the pattern). The pattern’s fifth and final day is another long white day. 

A long white day precedes the start of this pattern
(Source: Investopedia)

Despite the fact that the price has been declining for three days in a row, no new low has been reached, and bull traders are preparing for the next move up.

A little modification of this pattern occurs when the second day follows the first lengthy up day with a slight gap up. The pattern is same in every other way; it only has a slightly different appearance. A “bullish mat hold” is what happens when such variance occurs.

 

The Falling Three are Bearish

The trend begins with a significant down day. Three little actual bodies follow, making upward movement but remaining within the range of the first large down day.

When the fifth day makes another major downward move, the pattern is complete. It demonstrates that sellers have regained control of the market and that the price may continue to fall.

The trend begins with a significant down day
(Source: Investopedia)

Final Thoughts

Investors’ emotions surrounding the trading of an asset have a significant impact on that asset’s movement, as Japanese rice traders found decades ago.

Candlesticks assist traders in determining the emotions surrounding a stock or other asset, allowing them to make more accurate predictions about the stock’s future direction.

 

Candlestick Patterns: There are 35 different types of Candlestick Patterns

 

1. Hammer

2. Piercing Pattern

3. Bullish Engulfing

4. The Morning Star

5. Three White Soldiers

6. White Marubozu

7. Three Inside Up

8. Bullish Harami

9. Tweezer Bottom

10. Inverted Hammer

11. Three Outside Up

12. On-Neck Pattern

13. Bullish Counterattack

14. Hanging man

15. Dark cloud cover

16. Bearish Engulfing

17. The Evening Star

18. Three Black Crows

19. Black Marubozu

20. Three Inside Down

21. Bearish Harami

22. Shooting Star

23. Tweezer Top

24. Three Outside Down

25. Bearish Counterattack

26. Doji

27. Spinning Top

28. Falling Three Methods

29. Rising Three Methods

30. Upside Tasuki Gap

31. Downside Tasuki Gap

32. Mat-Hold

33. Rising Window

34. Falling Window

35. High Wave

 

Five of the most Effective Candlestick Chart

 

  • Strike in Three Lines
  • There are Two Black Gaps
  • Three Crows in Black
  • Star of the Evening
  • What is mean a Baby Abandoned in Candlestick Patterns?

Candlestick charts are a type of technical analysis that consolidates data from many time frames into a single price bar. This distinguishes them from standard open-high, low-close bars or simple lines connecting the dots of closing prices.

Candlesticks create patterns that, if completed, forecast price direction. This colourful technical instrument, which dates back to 18th-century Japanese rice dealers, gains depth with proper colour coding.

In his acclaimed 1991 book “Japanese Candlestick Charting Techniques,” Steve Nison introduced candlestick patterns to the Western market.

Hundreds of these patterns, with names like bearish dark cloud cover, evening star, and three black crows, are now recognised by many traders. Single bar patterns such as the doji and hammer have also been used into a slew of long- and short-side trading methods.

Candlestick patterns are technical trading indicators that have been used to predict market movement for centuries.

Three line strike, two black gapping, three black crows, evening star, and abandoned infant are some of the candlestick patterns used to identify price direction and momentum.

Many of the indications provided by these candlestick patterns, however, may not work properly in today’s computerised environment.

 

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Reliability of Candlestick Patterns

All candlestick patterns aren’t created equal. Because they’ve been evaluated by hedge funds and their algorithms, their enormous popularity has diminished their reliability.

To compete against regular investors and traditional fund managers who use technical analysis tactics accessible in popular texts, these well-funded players rely on lightning-fast execution.

Hedge fund managers, in other words, utilise software to entice participants searching for high-odds bullish or bearish outcomes. Reliable patterns, on the other hand, continue to emerge, allowing for both short- and long-term profit chances.

Here are five candlestick patterns that work very well as price direction and momentum predictors. Each predicts greater or lower prices in the context of the surrounding price bars. In two ways, they are also time-sensitive:

  • They can only function within the parameters of the chart they’re looking at, whether it’s intraday, daily, weekly, or monthly.
  • Three to five bars after the pattern is completed, their power rapidly diminishes.

 

Performance with a Candlestick

This research is based on the work of Thomas Bulkowski, who published a “Encyclopedia of Candlestick Charts” in 2008 that included performance rankings for candlestick patterns.2 He provides statistics for two types of predicted pattern outcomes:

  • Reversal – Candlestick reversal patterns foreshadow a price shift.
  • Continuation – Continuation patterns indicate that the present price trend will continue.

The hollow white candlestick indicates a closing print higher than the opening print in the following cases, while the black candlestick indicates a closing print lower than the beginning print.

 

Strike in Three Lines

 

Strike in Three Lines
(Source: Investopedia)

Within a downtrend, the bullish three line strike reversal pattern carves out three black candles. Each bar has a lower low and a close that is close to the intrabar low.

The fourth bar begins much lower, but then reverses into a wide-range outside bar that closes above the series’ initial high. The low of the fourth bar is also marked by the first print. This reversal, according to Bulkowski, predicts rising prices with an 83 percent accuracy rate.

 

There are Two Black Gaps

 

There are Two Black Gaps
(Source: Investopedia)

After a significant top in an uptrend, the bearish two black gapping continuation pattern occurs, with a gap down that gives two black bars posting lower lows.

According to this pattern, the slide will continue to lower lows, possibly sparking a broader-scale slump. This pattern, according to Bulkowski, predicts reduced pricing with a 68 percent accuracy rate.

 

Three Crows in Black

 

Three Crows in Black
(Source: Investopedia)

Three black bars with lower lows that close to intrabar lows form the bearish three black crows reversal pattern, which starts at or near the crest of an uptrend. According to this pattern, the slide will continue to lower lows, possibly sparking a broader-scale slump.

Because it traps buyers entering momentum plays, the most bearish variant starts at a new high (point A on the chart). This pattern, according to Bulkowski, predicts reduced prices with a 78 percent accuracy rate.

 

Star of the Evening

 

Star of the Evening
(Source: Investopedia)

A towering white bar initiates the bearish evening star reversal pattern, which carries an uptrend to a new high. On the next bar, the market gaps higher, but no new buyers materialise, resulting in a narrow range candlestick.

The pattern is completed by a gap down on the third bar, indicating that the slide will continue to lower lows, possibly sparking a broader-scale slump. According to Bulkowski, this pattern has a 72 percent accuracy record in predicting decreased pricing.

 

What is mean a Baby Abandoned in Candlestick Patterns?

 

Baby of the Abandoned
(Source: Investopedia)

After a sequence of black candles print lower lows, the bullish abandoned baby reversal pattern develops at the bottom of a downtrend.

On the next bar, the market gaps lower, but no new sellers materialise, resulting in a narrow range doji candlestick with the identical opening and closing prices.

The pattern is completed by a bullish gap on the third bar, indicating that the recovery will continue to higher highs, possibly initiating a broader-scale upswing. According to Bulkowski, this pattern has a 49.73 percent accuracy rate in predicting increased prices.

 

Final Thoughts

Market participants are drawn to candlestick patterns, however many of the reversal and continuation signals provided by these patterns do not work dependably in today’s computerised environment.

Fortunately, statistics by Thomas Bulkowski demonstrate that a small subset of these patterns has extraordinary accuracy, providing traders with meaningful buy and sell recommendations.

 

Candlestick Patterns that are more advanced

 

  • Pattern of an Island Reversal
  • Pattern for Reversing Hooks
  • Pattern of the San-Ku (Three Gaps)
  • Pattern of the Kicker
  • Why Are These Patterns Effective?

At a look, candlestick patterns provide insight into price action. While basic candlestick patterns might provide some insight into what the market is thinking, because they are so widespread, they frequently generate false signals.

We’ll look at some more complex candlestick patterns that are more reliable in the future. The island reversal, hook reversal, three gaps, and kicker patterns are among them.

 

Pattern of an Island Reversal

Short-term trend reversals are signalled by island reversals. A gap between a reversal candlestick and two candles on either side of it distinguishes them.

Here’s an example of a bullish scenario. The price is falling, with gaps lower, before rising again and continuing higher.

Bullish of the Island Reversal
(Source: Investopedia)

A bearish example of the same pattern is shown below.

Bearish of the Island Reversal
(Source: Investopedia)

The island reversal depicts hesitation as well as a fight between bulls and bears. After a lengthy trend, this is generally marked by a long-ended doji candle with significant volume.

A trade is entered after the gap and move in the other direction. Enter short after the gap and advance in the opposite direction for the bearish pattern. Enter long after the gap and progress in the opposite direction for the bullish pattern.

The target and stop-loss are both referred to as an exit. You want to capture the price thrust that follows this pattern with this pattern, but as that thrust starts to wane, it’s time to exit.

If the price returns to cover the gap, the reversal pattern is invalidated, and you should immediately quit. As a result, a stop-loss can be put around the “island” candle or in the gap.

 

Pattern for Reversing Hooks

Hook reversals are reversal patterns that occur over a short to medium period of time. When compared to the previous day, they have a higher low and a lower high. Here are some instances of bullish and bearish patterns.

Bullish of the Hook Reversals
(Source: Investopedia)

A bearish example of the same pattern is shown below.

Bearish of the Hook Reversals
(Source: Investopedia)

There is a downturn on the bullish pattern, followed by two up days. The first or second up day surpasses the previous down day’s peak.

A long trade should be taken on the second up day, as the pattern suggests that the price may continue to rise.

The bearish pattern consists of an uptrend followed by two down days, with the first or second down day breaking the previous up day’s low. It is the second down day, and a short trade should be taken because the pattern suggests the price may continue to fall.

Before trading this pattern, be aware of your exit points. In most circumstances, as seen in the chart above, a strong reversal will occur.

Anything to the contrary means the pattern isn’t working, therefore leave right away. As a result, for a bearish pattern, a stop-loss can be placed above the recent high, and for a bullish pattern, it can be placed below the recent low.

We can’t tell how long the reversal will last just by looking at the pattern. As a result, keep the trade open as long as the price continues to move in the expected direction. Take profit when the trend weakens or a pattern in the opposite direction emerges.

 

Pattern of the San-Ku (Three Gaps)

The San-ku pattern is a trend reversal signal that appears ahead of time. The pattern does not specify a precise reversal point. Rather, it suggests that a reversal is probable in the near future.

Three trading sessions in a row with gaps in between generate the pattern. While each candle does not have to be enormous, at least two or three of the candles should be.

Here’s an example of a three-gap pattern that indicates the end of an uptrend. The price is steadily rising. There are three gaps in a row that are higher.

The San-ku pattern is a trend reversal signal
(Source: Investopedia)

Because such momentum cannot endure indefinitely, the purchasers become fatigued and the price shifts in the opposite direction.

This pattern is based on the idea that following a large move, traders would start taking profits, causing the price to fall.

Look for extremes in the relative strength index (RSI) or a crossover of the moving average convergence divergence to see whether there’s a chance of a reversal (MACD).

A reversal is predicted by this pattern. If this does not occur, exit any trades that were entered as a result of this pattern. In order for the signal to be genuine, price must move in the expected direction.

If going short, stop-loss orders might be set above the pattern’s high. Take advantage of the current downward trend while it lasts.

Take profits when you detect a reversal signal in the opposite direction or when the selling momentum slows, as it is unknown how long the sell-off will remain.

 

Pattern of the Kicker

The kicker pattern is one of the most powerful and dependable candlestick patterns available. It is defined by a price reversal that occurs over the course of two candlesticks.

The price is trending lower in this example, but the trend is suddenly reversed by a gap and enormous candle in the opposite direction. The kicker candle is the first huge green candle.

The second bright green candle confirms that the powerful pattern has been followed through and that a reversal is underway.

Pattern of the Kicker
(Source: Investopedia)

This type of price movement indicates that one group of traders has beaten the other and a new trend is forming. Looking for a gap between the first and second candles, as well as large volume, is ideal.

Enter the market towards the close of the kicker candle (the first green candle in the chart above) or the open of the second candle.

Place a stop-loss order below the kicker candle’s low. Because kicker candles can be quite enormous, your stop-loss may be quite far away from your entry point.

In terms of a target, this pattern frequently results in a powerful trend change, which means traders can profit from the kicker’s momentum for a short-term or even medium-term trade, as the price may continue in the direction for some time.

 

Why are these Patterns Effective?

All of these patterns are defined by price movement in one direction, followed by the appearance of candles in the opposite direction that dramatically disrupt the previous trend.

Traders who were betting on the previous trend continuing are typically shaken by such events, which force them to exit their positions as their stop-loss levels are struck. This encourages us to keep moving in the right direction.

This design was inspired by a simpler candlestick concept known as thrusting lines. In an uptrend, for example, if a down candle appears but stays within the upper half of the previous upward candle, the trend is not harmed.

However, if the down candle goes more than halfway down the previous upward candle, more than half of those who bought on the previous upward day are now in a losing position, perhaps leading to more selling.

The patterns described above are much more powerful since the abrupt shift in direction traps many people in losing positions from which they must escape.

Traders also leap into deals in the new direction as soon as they notice the reversal. Prior traders exiting the market and new traders entering the market assist move the price in the new direction.

All of this being said, attempting to trade reversals in any situation is dangerous because you are trading against the current trend. Always keep the big picture in mind.

A reversal signal, for example, during a strong multi-year uptrend, may imply only a few days of selling before the larger uptrend resumes.

 

Final Thoughts

These advanced candlesticks are associated with large price movements and, in certain cases, gaps, which produce abrupt direction changes.

Traders can take part by spotting these patterns and jumping in as soon as the price moves in the desired direction. Because candlestick patterns do not have price targets, traders should avoid becoming overconfident.

Ride the wave as long as it lasts, but bail out if you see signs of disaster. Stop-loss orders or a trailing stop-loss can be used.

 

The Most Popular Forex Chart Patterns

 

  • Shoulders and Head (H&S)
  • The Triangles
  • Pattern of Engulfment
  • Cloud Bounce of Ichimoku

With so many ways to trade currencies, sticking to a few tried-and-true strategies can help you save time, money, and effort. A trader can construct a complete trading plan employing patterns that occur frequently and are easy to recognise with a little effort by fine tuning common and simple strategies.

Visual indicators on whether to trade include head and shoulders, candlestick, and Ichimoku forex patterns. While some of these approaches are sophisticated, others are straightforward and take advantage of the most often traded aspects of these patterns.

While there are a variety of chart patterns with differing degrees of intricacy, there are two popular chart patterns that appear on a regular basis and provide a reasonably simple trading approach. The head and shoulders and the triangle are the two patterns.

 

Shoulders and Head (H&S)

After an uptrend, the H&S pattern might be a topping formation, or a bottoming formation after a decline. A topping pattern consists of a price high, retracement, a higher price high, retracement, and finally a lower low.

A low (the “shoulder”), a retracement, a lower low (the “head”), and a retracement, then a higher low (the second “shoulder”) is the bottoming pattern (see below).

When the trendline (“neckline”) connecting the formation’s two highs (bottoming pattern) or two lows (topping pattern) is broken, the pattern is complete.

After an uptrend, the H&S pattern might be a topping formation
(Source: Investopedia)

Because it includes an entry level, a stop level, and a profit goal, this pattern can be traded. A daily chart of the EUR/USD is seen above, along with an H&S bottoming pattern that happened.

When the pattern’s “neckline” is broken, the entry is offered at 1.24. The stop can be put below the right shoulder at 1.2150 (conservative) or below the head at 1.1960 (riskier), but it has a lower possibility of being struck before the profit target is reached.

The profit target is calculated by multiplying the height of the formation by the breakout point. The profit target in this situation is 1.2700-1.1900 (estimate) = 0.08 + 1.2400 (breakout point) = 1.31.

The square on the far right, where the market headed after breaking out, represents the profit target.

 

The Triangles

Triangles are ubiquitous, particularly on short time scales. When prices converge, the highs and lows contract into a tighter and tighter price band, forming a triangle. They can be symmetric, ascending, or descending, though there is no difference in terms of trading.

A symmetric triangle is depicted in the diagram below. Because the pattern includes an entry, stop, and profit objective, it can be traded. When the triangle’s perimeter is penetrated – in this case, to the upside, making the entry 1.4032 – the entry is made.

The pattern’s low, 1.4025, is the stop. The profit target is calculated by multiplying the pattern height by the entrance price (1.4032). The pattern’s height is 25 pips, resulting in a profit target of 1.4057, which was immediately met and surpassed.

Triangles are ubiquitous, particularly on short time scales
(Source: Investopedia)

Pattern of Engulfment

Line, OHLC, and area charts do not provide as much information as candlestick charts. As a result, candlestick patterns may be used to gauge price fluctuations across all time frames.

There are many different candlestick patterns, but one in particular is useful in forex trading.

An engulfing pattern is a great trading opportunity because it’s easy to recognise and the price movement shows a powerful and quick change in direction.

In a downtrend, the real body of an up candle will totally engulf the real body of the previous down candle (bullish engulfing). A down candle real body will totally engulf the earlier up candle real body in an uptrend (bearish engulfing).

Because the price movement signals a powerful reversal and the prior candle has already been totally reversed, the pattern is very marketable. While establishing a stop, the trader can participate in the commencement of a prospective trend.

A bullish engulfing pattern can be seen in the chart below, indicating the emergence of an upward trend. The entrance, in this example 1.4400, is the open of the first bar after the pattern is formed.

The stop is set below the pattern’s low of 1.4157. This pattern does not have a specific profit aim.

Pattern of Engulfment
(Source: Investopedia)

Cloud Bounce of Ichimoku

Ichimoku is a chart overlaying technical indicator that overlays price data. While patterns are more difficult to spot in the actual Ichimoku drawing, we may detect a pattern of common occurrences when we combine the Ichimoku cloud with price activity.

Former support and resistance levels have been blended to produce the Ichimoku cloud, which is a dynamic support and resistance area.

Simply defined, price activity that is above the cloud is bullish, while the cloud serves as support. It is bearish when market activity is below the cloud, and the cloud acts as resistance.

The “cloud” bounce is a frequent continuation pattern, but because the cloud’s support/resistance is considerably more dynamic than typical horizontal support/resistance lines, it offers unique entry and stops.

In trending conditions, a trader may frequently capture much of the trend by using the Ichimoku cloud. There are various options for multiple entry (pyramid trading) or trailing stop levels in an upward or negative trend, as shown below.

There were eight potential entrances in a drop that began in September 2010, where the rate rose up into the cloud but could not break through the other side.

When the price moves back below (out of) the cloud, it confirms that the downtrend is still active and that the retracement is complete. The cloud can also be employed as a trailing stop, with the outer bound serving as the stop at all times.

In this example, as the rate decreases, so does the cloud; the trailing stop can be placed in the cloud’s outer ring (higher in a downtrend, lower in an uptrend). This pattern is best applied to trending pairs, such as the US dollar.

In trending conditions, a trader may frequently capture much of the trend by using the Ichimoku cloud
(Source: Investopedia)

Final Thoughts

There are a variety of trading systems that all rely on price patterns to determine entry and stop levels. The head and shoulders, as well as triangles, are common forex chart patterns that provide easy-to-see entry, stops, and profit targets.

The engulfing candlestick pattern reveals trend reversal as well as prospective involvement in that trend with a set entry and stop level.

Using several entries and a progressive stop, the Ichimoku cloud bounce allows for involvement in extended trends. As a trader gains experience, they may begin to mix patterns and strategies to construct their own personalised trading system.

 

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10 Best Forex Brokers That Give The Most Value To Traders

9 Best Forex Brokers That Are Recommended For Day Trading

9 Best Forex Brokers That Are Recommended For Scalping

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