Forex Candlestick Patterns Every Trader Should Know

August 24, 2021 15:20 UTC
Reading time: 21 minutes

Japanese candlestick charts, or Forex candlestick charts, offer traders a greater depth of information than traditional bar charts. They provide different visual cues that make understanding price action easier and allow traders to spot Forex patterns more clearly.

In this article, we will tell you everything you need to know about candlesticks, list some common Forex candlestick patterns that you should look out for when trading, provide an example of a trading strategy which utilises these candlestick patterns and much more!

Forex Candlesticks Explained

In the picture above, we can see two examples of Forex candlesticks. The 'body' comprises the difference between the opening and closing price and the lines either side (nose and tail) represent the highest and lowest prices of the time period.

Generally speaking if the Forex candle body is black, as shown above, or red, then the closing price is lower than the opening price - this is referred to as a bear candle.

On the other hand, a white or green body indicates that the closing price is higher than the opening price - this is referred to as a bull candle.

A price closing where it opened, or very close to where it opened, is called a Doji candle. Memorising Japanese candlestick names and descriptions of Japanese candlestick trading formations is not a prerequisite for successful trading. Nevertheless, it is helpful for price action traders. By looking at Forex candlesticks, traders can see momentum, direction, now-moment buyers or sellers, and general market bias.

Depicted: Admirals (formerly Admiral Markets) MetaTrader 5 - GBPUSD Daily Chart. Date Range: 26 January 2021 - 20 August 2021. Date Captured: 20 August 2021. Past performance is not a reliable indicator for future results.

How to Measure the Length of a Candle

The high of a Forex candlestick acts as a resistance, while the low acts as a support. The bigger the candle, the stronger the levels of support and resistance are (especially with the Master Candle pattern – which we will cover later in the article).

Depicted: Admirals MetaTrader 5 - AUDUSD H1 Chart. Date Range: 3 August 2021 - 6 August 2021. Date Captured: 20 August 2021. Past performance is not a reliable indicator for future results.

The window to the left of the picture above is the data window, which can be brought up in your MetaTrader 5 platform by pressing Control + D. It shows you crucial Forex candlestick data you need to know, including the high and low, as well as the open and close price.

Three Main Components of Japanese Candlestick Charts

  1. Size/length of the whole candle
  2. Correlation between open and close
  3. Shadows and correlation to the body of the candle

Size/Length of the Whole Candle

Candles that open at the low, close at the high or candles that are extremely long are a common occurrence.

If there is a long downtrend, such a candle indicates a major trend reversal is occurring. On the contrary, after a long uptrend, if an unusually long candle closes, that would show a long wick to the upside, or a strong bearish body right from the top, then we are talking about exhaustion or a 'blow off-top condition'.

In the example below, the reversal candles are highlighted in blue:

Depicted: Admirals MetaTrader 5 - USDCHF H4 Chart. Date Range: 15 June 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

Correlation Between the Open and the Close

In bullish market conditions, or during a strong uptrend, buying will usually occur on the open. The price should rise, and a hollow, green candle is formed. As the bulls control the price action in the market, the length or the distance between the open and the close reflects their dominance.

In bearish market conditions, or during a strong downtrend, a red body candle should form. This represents sellers entering the market on the open, and dominating that particular time. Forex candlestick charts allow for great analyses from the shape and colour of the body of the candle, in comparison with bar charts.

Shadows and Correlation to the Body of the Candle

The length of the wick represents the price low and/or high, when comparing with the open and close prices shown in the real body of the candle, which can also illustrate the market's denial of a support or a resistance level. If we see long tails, or shadows, formed at the bottom of the body, an important factor to consider is whether they form after a long downtrend. This indicates the potential for the trend to exhaust itself, and that the demand is increasing or that the supply is dwindling.

If we have tails, or shadows, formed at the tops of real bodies, especially after a long price rise, this indicates that the demand is drying up, and that the supply is increasing. The larger the shadow, the more important it is to analyse it in relation to the real body, as this may signify the strength of the reversal. The strongest of those are pins.

In the image above, the bullish pin bar's tail is pinning down, rejecting support. This is Indicated by the bullish pin and we should see a surge of 'now-moment buyers' and, consequently, the price would increase.

Conversely, when a bearish pin bar's tail is pinning up, and rejecting resistance, we would see a surge of 'now-moment sellers', and the price would usually decrease. The strongest reversal candles have wicks that are much longer than the bodies, and a very small nose or no nose at all.

Depicted: Admirals MetaTrader 5 - USDCHF H1 Chart. Date Range: 18 August 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

The Marubozu Candle

Strong momentum Forex candlesticks, which usually open either at a support or a resistance level are called Marubozu candles.

The Marubozu candle is a momentum candle with either a small, or no, tail. This type of Forex candlestick pattern is really powerful and means a lot in regard to price movement. The Marubozu candle defines a strong selling-off resistance or a strong buying-off support. Marubozu means 'bald head' or 'shaved head' in Japanese.

This is because such a candle does not have at least one shadow, or the shadow is very small. In modern market trading, a Marubozu candle can also have a very small wick on both sides, and may still be considered valid. That is why the term momentum candle is used.

A Bullish (green) Marubozu candle appearing in an uptrend may suggest a continuation, while in a downtrend, a Bullish Marubozu candle can signify a potential bullish reversal pattern.

Here are some examples of Bullish Marubozu candles:

Depicted: Admirals MetaTrader 5 - USDJPY H4 Chart. Date Range: 5 August 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

Conversely, the Bearish (red) Marubozu candle appearing in a downtrend may suggest its continuation, while in an uptrend, a Bearish Marubozu candle can signify a potential bearish reversal pattern.

Here are some examples of Bearish Marubozu candles:

Depicted: Admirals MetaTrader 5 - EURUSD H4 Chart. Date Range: 5 August 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

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Common Forex Candlestick Patterns

Forex candlestick patterns occur very often in the Forex market, here is a list of some of the most common ones:

  • Hammer Candle
  • Shooting Star Candle
  • Hanging Man Candlestick
  • Piercing Line
  • Dark Cloud
  • Bullish/Bearish Engulfing Candles

Of course, there are many more Forex candlestick patterns, but in this article, we will be paying attention to the most popular ones.

In the next few sections, we have compiled a cheat sheet for you to help you recognise the most common candlestick patterns!

The Hammer Candle

Depicted: Admirals MetaTrader 5 - GBPUSD H1 Chart. Date Range: 9 August 2021 - 12 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

The Hammer candle has a long lower shadow, which is usually twice the length of the real body.

It is a bullish reversal candlestick pattern which appears at the bottom of downtrends. The hammer candle body can be either bullish or bearish, but it is considered to be stronger if it's bullish.

The Shooting Star Candle

Depicted: Admirals MetaTrader 5 - USDCAD H4 Chart. Date Range: 5 August 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

The Shooting Star candle appears in uptrends, signifying a potential reversal. The wick is long, upside, and longer than the body. The Shooting Star candle body can be either bullish or bearish, but it is considered to be stronger if it is bearish.

The Hanging Man Candlestick

Depicted: Admirals MetaTrader 5 - GBPJPY H1 Chart. Date Range: 18 August 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

The Hanging Man candlestick is similar to the Hammer candle, but it occurs at the top of uptrends, and can act as a warning of a potential downward reversal.

The Piercing Line

Depicted: Admirals MetaTrader 5 - EURGBP H1 Chart. Date Range: 13 August 2021 - 18 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

The Piercing Line candle is a bullish reversal candlestick pattern. It is very common in the Forex market.

This Forex candlestick pattern occurs when the second bullish candle closes above the middle of the first bearish candle. The second candle's open is lower than the first candle's close. In the Forex market, the pattern is valid even if the second candle's open is equal to the first candle's close.

The Dark Cloud Cover

The Dark Cloud Cover candle is a bearish reversal pattern that shows in uptrends. It consists of two candles. The first one is bullish and the second one is bearish.

The Dark Cloud Cover candle is formed when the second candlestick opens above the close of the first candlestick, but then drops and closes above the open price of the first candlestick.

This pattern is the opposite of the Piercing Line. Similarly, in the Forex market, the Dark Cloud Cover candlestick is valid even when the second candlestick opens at the close of the first candlestick. The important thing, however, is that the second candle in this Forex candlestick pattern should close somewhere lower than the 50% mark of the first candle's body.

Depicted: Admirals MetaTrader 5 - USDCHF H1 Chart. Date Range: 10 August 2021 - 13 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

Bullish and Bearish Engulfing Candle

Bullish and bearish engulfing candles are reversal patterns. A bullish engulfing candle usually occurs at the bottom of a downtrend, whilst a bearish engulfing candle is spotted at the top of an uptrend.

The bullish engulfing candlestick pattern is characterised by the two candles. The first one is contained within the real body of the second candle, which is always bullish.

Here is an example of a bullish engulfing candle:

Depicted: Admirals MetaTrader 5 - EURUSD H4 Chart. Date Range: 5 August 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

The bearish engulfing candlestick pattern is also characterised by two candles. The first one is contained within the real body of the second candle, which is always bearish.

Here is an example of bearish engulfing candles:

Depicted: Admirals MetaTrader 5 - USDJPY H4 Chart. Date Range: 4 August 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

The Master Candle

Depicted: Admirals MetaTrader 5 - GBPJPY H1 Chart. Date Range: 13 August 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

The Master candle candlestick pattern is a concept known to most price action traders. The Master candle is defined by a 30-150 pip candlestick that engulfs the next four Japanese candlesticks.

The breakouts of the Master candle can be traded if the 5th, 6th, or 7th candlestick break the range in order for a breakout trade to become valid.

Depicted: Admirals MetaTrader 5 - GBPJPY H1 Chart. Date Range: 16 August 2021 - 19 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

This is a great Forex candlestick pattern formation that you should check for on a regular basis when trading. In the next section, we will provide an example of how a candlestick pattern strategy can work to trade Forex.

Forex Candlestick Pattern Trading Strategy

This Forex candlestick pattern trading strategy is suitable for all styles of trading – intraday, swing, even scalping -and, as the name suggests, is based on Forex candlestick patterns.

Let's take a look at an example:

  • Indicators: EMA (Exponential Moving Average) 30, 60, 100 set on close
  • Entry signal: Forex candlestick patterns
  • Time frame: 4H

First, we need to install three EMAs on our Japanese candlestick chart. As shown in the example in the graph below, EMA 30 is blue, EMA 60 is red and EMA 100 is green. All three EMAs need to be aligned properly in order to show a trend. When the blue EMA is below the red EMA, which is below the green EMA, the trend is bearish. When the blue EMA is above the red EMA, which is above the green EMA, the trend is bullish.

Bearish Trend

Depicted: Admirals MetaTrader 5 - AUDUSD H4 Chart. Date Range: 15 June 2021 - 23 August 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

Bullish Trend

Depicted: Admirals MetaTrader 5 - USDCAD H4 Chart. Date Range: 18 May 2021 - 24 July 2021. Date Captured: 23 August 2021. Past performance is not a reliable indicator for future results.

Please keep in mind that the EMAs need to be aligned correctly in order to show the trend. If the EMAs are intertwining, it means that we don't actually have a trend.

Once a trend is established, entries are made when the price makes a pullback towards the EMAs. When we see a pullback, the next thing that occurs is the emergence of bullish or bearish candlestick patterns, depending on the trend direction.

Entries are made on any of the Forex candlestick patterns we mentioned above - none is more reliable than the other.

  • Hammer
  • Shooting Star
  • Hanging Man
  • Piercing Line
  • Bullish/Bearish Engulfing
  • Dark Cloud

The stop-loss in this example is placed 10 pips above the entry candle. For targets, we recommend using the Admiral Pivot set on 'Weekly Timeframe'.

The Admiral Pivot is one of many additional indicators only available in the Admirals MetaTrader Supreme Edition.

Source: Admiral Pivot - Admirals MetaTrader 5 Supreme Edition

Bearish Trade Example

Depicted: Admirals MetaTrader 5 - AUDUSD H4 Chart. Date Range: 15 June 2021 - 20 July 2021. Date Captured: 24 August 2021. Past performance is not a reliable indicator for future results.

Bullish Trade Example

Depicted: Admirals MetaTrader 5 - USDCAD H4 Chart. Date Range: 11 June 2021 - 16 July 2021. Date Captured: 24 August 2021. Past performance is not a reliable indicator for future results.

It is usually best to wait for a pullback to at least touch the blue EMA before making an entry decision.

Trading with Forex candlestick patterns can be profitable if you implement proper risk management within your trading strategies. It is important to always practice any new trading strategy on a Demo trading account first before making the transition to the live markets. By doing so, you allow yourself to make mistakes and learn from these mistakes without jeopardising your capital.

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If you feel ready to start trading Forex candlestick patterns on the live markets, a Trade.MT5 account from Admirals might be more suitable for you. With Admirals, you can trade Forex 24 hours a day 5 days a week, with access to a range of Forex currency pairs! Click the banner below to open an account today!

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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