Exploring strategies and techniques that professional traders use is one way to begin your forex trading journey. Ultimately, the goal is to understand how these patterns look on a chart. Unfortunately, chart analysis is one of many pieces of adequate knowledge you need to understand the markets.
Due to the enormous numbers of purported trading experts that claim to have the perfect formula, it can take a lot of work to navigate your way around forex trading, especially as a beginner.
The perfect formula doesn’t exist. There isn’t one fixed way of successfully navigating the forex market. It is a recipe that contains several variables. Including, but not limited to
- Chart analysis
- Understanding the news
- Understanding the economic policies that drive the relationship between forex pairs
- Removing negative emotions
- Don’t become too greedy
- Read more books on the topic, expand your knowledge
Today we will be exploring a specialist area of chart analysis, the top 7 forex candlestick patterns to use in trading. Forex trading candlestick patterns can move in both directions. They can also form in other types of asset classes.
With different types of candlesticks trading available, common candle patterns are easy to find. As long as you know what you are looking for, forex candlestick patterns can help shape your strategy.
Candle patterns crypto trading is also a standard feature. Professional traders will often diversify their strategy to cover a range of assets and possibilities. With so many different types of candlesticks, knowing which ones can signal a good trade entry is ideal information you want to ascertain. Our article today includes some of the most common candlestick patterns and forex candle formations you can try to identify yourself.
#1 – Doji Forex Candlestick Patterns
As one of the most common candlestick formations, the Doji candle has a series of other formations. Candlestick pattern trading will often incorporate Doji candles as they can move up or down. Traders often refer to Doji candles as bullish (evening Doji star) or bearish (morning Doji star).
Doji candle formations can also represent a stalemate in the market as the bulls, and the bears clash horns. You can see below that a standard Doji candle forms when the shape on the chart is a cross. It is one of the most critical candlestick patterns to identify, as there are plenty of other Doji candles you will also pick up if you can establish the basic principles.
You can select our insights on more specific Doji candles to find out how they form and how some traders will factor them into their trading strategy. Forex candle patterns can develop in dozens of ways, so equipping yourself with the knowledge of how they look is advantageous and will help your strategy.
#2 – Key Reversal Forex Candlestick Patterns
Candlestick patterns trading can be a slippery surface for new traders. Therefore, even professional traders will conduct serious analysis before trading any candlestick pattern that indicates a decrease in the price of a forex currency pair.
Risk management is vital in forex trading, as with any other asset. Practical chart analysis is one way to protect yourself against some of the volatility in the market. However, you could still lose your initial investment even with ample research and a firm grasp of how chart analysis works.
This is because the market is volatile, and it is also unpredictable. As you can see on the chart below, a key reversal indicates a switch in the market sentiment. So a bullish one outweighs the bearish candlestick and vice versa.
Some traders consider this the best candlestick pattern as it poses a clear directive as to where the price of the asset is heading. However, whilst it is a decent indicator, other factors can drive the price, so you must consider these variables too.
# 3- Hammer Forex Candlestick Pattern
Forex candlestick patterns can signal all sorts of potential price action. However, a hammer candlestick is a possible sign of a bearish reversal, and the asset’s price will move upward.
As detailed above, this pattern will signal an opportunity for some traders who believe the asset price is set to increase. However, the key takeaway from this pattern is that it indicates sellers entered the market, causing a price retraction.
As a result of the retraction, buyers then enter the market and considerably drive the asset’s price up. Although top candlestick patterns are probably the wrong term, this is one forex traders would like to see. Broadly speaking, a bullish hammer forex candlestick pattern means traders can enter the market when the asset price is low and then sell it when it is high.
Even though a lot of analysts and traders like to overcomplicate the market with complex technical analysis, which can sometimes be unnecessary, the aim of any trade is to execute it at a higher price than you entered. So as long as you find a strategy that works for you where more of your trades are green than red, you are doing something correctly.
However, all types of trading often come with a steep learning curve. Crypto candlestick patterns can be even more volatile and unpredictable than forex candlestick patterns, so it is preferable to collect a wide range of data before you enter your trade.
#4 – Head And Shoulders Forex Candlestick Patterns
Many traders, particularly beginner traders looking to gain an edge in the forex market, should be able to identify a head and shoulders pattern more easily than some of the patterns we have discussed today.
Again, this pattern is considered by some traders and analysts as one of the best candlestick patterns. This is due to how easily they can identify the pattern on the chart price of an asset. We have detailed it for you in the chart below.
Points 2 and 3 on the graph are the shoulder points that signal different entry points. For example, point 1 is ideal for a long or spot position where you can execute your trade at the second point.
Alternatively, you could enter your trade at the third point and short the asset so that the forex candlestick pattern can potentially translate into a successful transaction.
We have a definitive guide that explores the head and shoulders pattern in much more depth, and it’s one of the types of candles forex traders like to see as the asset forms a precise shape and follows a specific path. This is why it is one of the most popular patterns amongst seasoned traders.
To trade candlestick patterns is one of the dozens of ways to profit whilst trading forex. It is a highly complex market, subject to massive volatility due to its size. Being prepared for every eventuality and quickly coming to terms with the fact there is no get-rich-quick scheme will start you off on a solid grounding.
#5 – Shooting Star Forex Candlestick Patterns
If you’re looking for a pattern to signal solid and positive market sentiment, you won’t be happy if you see a shooting star pattern forming. But, unfortunately, this isn’t the best candle stick for those looking to ride the crest of a wave and profit off an appreciating asset price.
As you can see above, the shooting star pattern forms an apex where the asset is at a high price and descends rapidly. However, some professionals will use this top to trade on the way down or use other risk management strategies such as dollar cost averaging. Additional risk mitigation includes effective money management and using take profit and stop loss which can control any losses or insulate you against severe market volatility.
In any event, this is one of the forex candlestick patterns to look for if you want to try and short an asset or sell your investment and wait to buy back in at a lower price.
However, as we have already discussed, other factors could drive the asset’s price, so you are not guaranteed to make money even if you believe you have correctly identified this particular pattern.
#6 – Three Black Crows Forex Candlestick Patterns
As you have probably guessed by the name, the three black crows aren’t something that should cause you to jump for joy. Unless you have opened a short position, of course. However, many beginner traders spot trade and don’t use other more complex trading instruments such as options, futures or scalping.
Therefore, if you’re looking to purchase forex in a spot trade, the three black crows are one of the candle patterns forex traders will often tell you to avoid.
#7 – Heikin-Ashi Forex Candlestick Pattern
The last of the forex candlestick patterns we will be looking at today is the Heikin-Ashi candlestick. Like with several other candlestick patterns in this list, we have comprehensive guides that delve into these types of candle trading in much more detail. First, however, as a brief overview, the Japanese translation of this term equals “average pace”.
While the traditional Japanese candlesticks patterns are derived from the specific asset price, Heikin-Ashi candlesticks work out the median price of the asset. Therefore, if you’re looking for types of candles in forex that will focus on the pinpoint value of an asset’s price, then other candle types trading would be better suited.
The Heikin-Ashi is so popular because it allows traders to take a step back and look at the bigger picture. Due to the emotions involved in trading and the high stakes, it can be challenging to ascertain the general movement of an asset or the overall market sentiment. This is one of the only forex candlestick patterns focusing on a generalised asset price compared to price movements over a much shorter period.
Having touched on the main seven forex candlestick patterns today, you would be forgiven for thinking these are the only ones you need to understand. However, dozens of other patterns operate outside the candlestick range, such as more advanced technical analysis like the diamond chart pattern.
An important point to take away from today’s article is that candlestick patterns are not some new trend. They aren’t some influencer on Instagram with shiny new teeth, sat on a yacht in Dubai, telling you you can make $100,000 in 90 days even if you’re trading around a full-time job.
If only life could be so simple. Applying these proven technical analyses to your trading psychology is one of many things you need to do. If you learn these patterns and apply the theory to your trades, you can give yourself a better chance in the market than other traders without adequate due diligence.