Candlestick Patterns – Chart Patterns Explained
The Definitive Guide to Forex Candlestick Patterns and Forex Chart Patterns
Forex candlestick patterns and forex chart patterns are a price action trader’s best friend – a price action trader with a thorough understanding of candlestick and chart patterns does not need much else on their chart.
In this definitive guide, we will cover the most popular forex candlestick patterns and forex chart patterns and how to trade them.
An introduction to forex candlesticks patterns
Before understanding forex candlestick and chart patterns, you will need to understand candlesticks themselves and how they are formed.
Forex candlesticks are composed of the Open, High, Low and Close (OHLC) data points. Of these three data points, the Open is the only one that is fixed when a new candle starts, the other three are variable until the period finishes and the final candlestick is printed.
This is extremely important as a candlestick pattern is not valid until it is final – you must wait until the final candle is printed at the end of the period before taking a trade based on a candlestick pattern.
Candlestick Patterns Components
Forex candlesticks have two parts, the body of the candle between the open and closing price and the wicks or shadows of the candle, representing the high and low of the candle. Candlesticks are the most popular way of looking at price in forex because they show you a visual representation of the OHLC data at a glance.
If a candlestick closes higher it will usually be shown as green, or if it closes down it will usually be shown as red, though this is customizable and a matter of preference for the user. Traditionally bullish candles were white and bearish ones black so some candlestick patterns are named based on this tradition.
Forex Candlestick Patterns
Now you understand how a candlestick is formed, we will move on to forex candlestick patterns.
Forex candlestick patterns are made up of 1-3 candlesticks and signal points of likely reversal in the market. Candlestick patterns can be broken up into two categories: bullish reversal candlestick patterns and bearish reversal candlestick patterns.
Doji – Candlestick Patterns
The exception to this is the Doji candlestick, where the price closes at the open, which isn’t necessarily bullish or bearish, signalling indecision.
Bullish reversal candlestick patterns
Bullish reversal candlestick patterns occur at the end of a downtrend and signal that the market could be about to turn higher.
With all bullish reversal candlestick patterns, you can either enter a long position as soon as the bullish reversal pattern is finalised or wait for further confirmation from the next candle, though the latter is not recommended for 3 candle reversals, as they already factor in confirmation.
Stops can be placed directly below the reversal pattern for an aggressive approach, or below a nearby support level for more conservative traders.
Bullish Hammer – Candlestick Patterns
The bullish hammer is a single candlestick reversal pattern that occurs when the price moves lower at the end of a downtrend but closes higher.
The candle features a short and stubby body with a long lower wick. Ideally, the low of the candle will be a new low and there will be no upper wick, with the candle closing at or very close to the period high.
Bullish Morning Star – Candlestick Patterns
The bullish morning star is a 3 candle reversal pattern characterized by a long red candle, a small bearish or bullish candlestick (better), followed by a long green candle reversing the trend. Ideally, the middle candle will be bullish and the low of that same candle will be a new low.
Morning Doji Star – Candlestick Patterns
This pattern is just a minor variation of the bullish morning star where the middle candle is a Doji – it is more bullish than the middle candle being bearish but less so than a bullish middle candle.
Bullish Dragonfly Doji – Candlestick Patterns
The bullish Dragonfly Doji is a 1 candle reversal pattern characterized by a long wick to a new low which then closes at the candle’s open forming a Doji with no upper wick.
Bullish Long Legged Doji – Candlestick Patterns
The bullish long legged Doji is a 1 candle reversal pattern characterized by a long wick to a new low and lock wick higher, with the close finishing at the open to form a Doji.
Though this is a bullish reversal pattern, there is an element of indecision, so it may be best to wait for confirmation from the following candle.
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Bullish Engulfing – Candlestick Patterns
The bullish engulfing candlestick pattern is one of the most reliable two candlestick bullish reversal patterns and occurs when you have a bullish candle that closes above the open of the final bearish candle in a downtrend, completely engulfing it.
Despite its reliability, this pattern is very common and it may indeed be the only bullish candlestick pattern you need to know to develop a profitable forex strategy.
Three White Soldiers – Candlestick Patterns
Three white soldiers is a 3 candle bullish reversal pattern characterized by 3 strong green candles.
Ideally, the first candle will have engulfed the final bearish candle of the downtrend. This is a very reliable pattern, but due to its nature, you will not be able to get a very tight stop trading this pattern.
A technique to get a tighter stop may be pre-empting the third candle, buying at the close of the second, and exiting if the pattern does not complete as expected. If the first candle did indeed engulf, you may already be long and can read this 3 bar pattern as a candlestick continuation pattern and a sign to hold long.
Piercing Line – Candlestick Patterns
Not quite as bullish or reliable as the bullish engulfing, but still a very bullish signal and reliable two candle pattern, the bullish piercing line occurs when you have a bullish candle that nearly engulfs the last bearish candle, but doesn’t quite make it.
The bullish candle should cover at close above the midpoint of the last bearish candle at a minimum – the higher it closes, the better.
Bullish Harami – Candlestick Patterns
The bullish harami is a two candle reversal pattern characterized by a small bullish candle within the body of the last bearish candle of a downtrend.
As this bullish candle doesn’t signal any meaningful strength in and of itself, it is often more prudent to wait for the following candle to confirm the reversal by breaching the harami’s high.
Bearish reversal candlestick patterns
Bearish reversal candlestick patterns occur at the end of an uptrend and signal that the market could be about to turn lower.
With all bearish reversal candlestick patterns, you can either enter a short position as soon as the bearish reversal pattern is finalised or wait for further confirmation from the next candle. One issue with waiting for confirmation after a bearish pattern is that bearish reversals can be quite violent, falling most of the move in the first few candles.
Just like with bullish reversal patterns, aggressive traders can place their stop loss directly above the bearish reversal pattern, or for more conservative traders, above a nearby resistance level
Hanging Man – Candlestick Patterns
The hanging man is a single candlestick bearish reversal pattern that occurs when the price opens at a new high, but fails to trade higher, trading significantly lower, before coming back some to close slightly lower with a small body.
This is quite a reliable topping pattern with the long lower wick tricking many traders into holding long despite the bearish reversal candle.
Shooting Star – Candlestick Patterns
The shooting star is a single candlestick reversal pattern that occurs when the price moves higher at the end of an uptrend but closes lower.
The candle features a short and stubby body with a long upper wick. Ideally the high of the candle will be a new high and there will be no lower wick, with the candle closing at or very close to the period low.
The shooting star can lead to a very rapid decline on the next candle so if you like trade, pull the trigger – if you wait for confirmation you could miss a lot of the move.
Evening Star – Candlestick Patterns
The evening star is a 3 candle reversal pattern characterized by a long green candle, a small bullish or bearish candlestick (better), followed by a long red candle reversing the trend.
Ideally, the middle candle will be bearish and the high will be a new high.
Evening Doji Star – Candlestick Patterns
This pattern is just a minor variation of the Evening Star where the middle candle is a Doji – it is more bearish than the middle candle being bullish, but less so than a bearish middle candle.
Bearish Gravestone Doji – Candlestick Patterns
The bearish gravestone Doji is a 1 candle reversal pattern characterized by a long upper wick to a high which then closes at the candle’s open forming a Doji with no lower wick.
Bearish Long Legged Doji – Candlestick Patterns
The bearish long legged Doji is a 1 candle reversal pattern characterized by a long wick to a new high and lock wick lower, with the close finishing at the open to form a Doji.
Though this is a bearish reversal pattern, just like with its bullish counterpart, there is an element of indecision, so it may be best to wait for confirmation from the following candle.
Bearish Engulfing – Candlestick Patterns
The bearish engulfing candlestick pattern is one of the most reliable two candlestick bearish reversal patterns and occurs when you have a bearish candle that closes below the open of the final bullish candle in an uptrend, completely engulfing it.
Just like its bullish counterpart, this pattern is both common and extremely reliable and may indeed be the only bearish candlestick pattern you need to know.
Bearish Three Black Crows – Candlestick Patterns
Three black crows is a 3 candle bearish reversal pattern characterized by 3 strong red candles.
Ideally, the first candle will have engulfed the final bullish candle of the uptrend. Just like its bullish counterpart, three white soldiers, this is a very reliable pattern, but you will not be able to get a very tight stop if you wait for the third candle.
A technique to get a tighter stop may be pre-empting the third candle, shorting the close of the second, and exiting if the pattern does not complete as expected. If the first candle did indeed engulf, you may already be short and can read this 3 bar pattern as a candlestick continuation pattern and a sign to hold short.
Having said that, bearish reversals can take place and exhaust quite quickly compared to bullish ones, so do take stock of how far the market has already fallen when taking a short or deciding to hold short based on this pattern.
Dark Cloud Cover – Candlestick Patterns
Just like its bullish counterpart the piercing line, dark cloud cover isn’t quite as bearish or reliable as a bearish engulfing, but is still a very reliable two candle bearish reversal pattern.
Dark cloud cover occurs when you have a bearish candle that nearly engulfs the last bullish candle of the uptrend, but doesn’t quite make it.
The bearish candle should close below the midpoint of the preceding bullish candle at a minimum – the lower it closes, the better.
Bearish Harami – Candlestick Patterns
The bearish harami is a two candle reversal pattern characterized by a small bearish candle within the body of the last bullish candle of an uptrend.
Just like with its bullish counterpart, as this small bearish candle in isolation doesn’t signal any meaningful strength in and of itself, it is often more prudent to wait for the following candle to confirm the reversal by breaching the harami’s low – this is one of the few bearish patterns where this applies.
General tips for trading forex candlestick patterns
Though candlestick patterns are very reliable in and of themselves, as a trader you should be looking for any way to increase your accuracy, reward profile and edge.
Candlestick patterns will likely yield better results when they occur around areas of key support and resistance, trend lines etc.
You can also seek further confirmation from indicators, though do a little experimenting here as many indicators will just confirm every pattern as they themselves are just derived from price.
Forex Chart Patterns
Forex chart patterns are another favourite of price action traders and combined with a good knowledge of candlestick patterns, you will have all you need to know to trade price action like a pro.
So what are forex chart patterns? Well, where a candlestick pattern is made of just 1-3 candlesticks, forex patterns are made up of hundreds of candlesticks, with patterns on a weekly or monthly chart potentially spanning a number of years.
Forex chart patterns can be used to predict continuation, reversals and ranging in the forex market so are incredibly versatile.
Forex Continuation Chart Patterns
Forex continuation patterns occur during periods of mid-trend consolidation and suggest to the trader that the trend is likely to continue once the pattern breaks.
When you spot a forex continuation pattern, there is a good chance the trend is likely to continue and you can watch and wait for the breakout, or for more aggressive and experienced traders, position yourself early in anticipation of the coming breakout in order to achieve a better reward profile.
This latter approach is obviously not recommended for new traders but is worth keeping in mind as you develop yourself as a pattern trader.
Falling Wedge – Bullish Continuation Chart Pattern
The falling wedge is a bullish continuation pattern when it occurs in an uptrend and is characterized by lower highs and relatively gentle sloping lower lows – this shows that though there is some selling interest following the recent uptrend, sellers are not committed and are taking their profits sooner rather than later.
Once the pattern breaks to the top side, a conservative target is equal to the maximum height of the pattern from the breakout point, though this really is conservative – these patterns often yield a much larger move than this and you should actively manage your trade accordingly.
Rising Wedge – Bearish Continuation Chart Pattern
The rising wedge on the other hand is a bearish continuation pattern when it occurs in a downtrend and is characterized by higher lows and relatively gentle sloping higher highs – this shows countertrend buyers lacking commitment and quickly taking profits.
Once the pattern breaks to the downside, a conservative target is equal to the maximum height of the pattern from the breakout point, though just like with the falling wedge and indeed all, this really is a conservative target – after all, continuation patterns signal continuation.
Bullish Rectangle – Chart Pattern
As the name suggests, the bullish rectangle is a bullish continuation pattern that signals the recent uptrend is going to continue.
This pattern is characterised by horizontal consolidation after an uptrend and is generally a very good sign as there hasn’t even been enough selling pressure to form lower lows and buyers are actively testing the recent highs.
As with prior patterns, the conservative/initial target from the breakout point is equal to the height of the pattern.
Bearish Rectangle Chart Pattern
The bearish rectangle is, you guessed it, a bearish continuation pattern that signals the recent downtrend is going to continue.
This pattern is characterised by horizontal consolidation following a downtrend and just like with its bullish counterpart, this is generally a very good sign – there has not been enough buying pressure to create higher highs and sellers are actively trying to push the pair to new lows.
Once again your initial target is equal to the height of the pattern.
Bullish Pennant (Bull Flag) Chart Pattern
A bullish continuation pattern, bull pennants or flags as they are often known, are a very common and popular pattern.
They appear as triangular consolidation as in the above picture, or as a gently sloping falling channel. In either case, these patterns tell a tale of minimal selling pressure, evidenced by the gentle slope of the lower highs.
Unlike previous patterns, the measured target is quite substantial, equal to the distance between the recent swing high and the previous swing high (the “flagpole”) and taking profits once reached is probably a good idea.
Bearish Pennant (Bear Flag) Chart Pattern
Similar to their bullish counterparts, bearish pennants or flags can appear as triangular consolidation as above, or as a gently sloping rising channel.
In either case, what you are seeing is a lack of significant buying pressure, evidenced by the gentle slope of the higher lows.
Just like with the bull flag, your target is equal to the length of the flagpole and similar to bearish candlestick patterns, you may reach this target quite quickly due to the violence often witnessed in downtrends.
Forex Reversal Chart Patterns
Forex reversal patterns signal just that, a reversal in the preceding trend and a sign to switch directions when the pattern breaks out as expected.
Pre-empting these patterns is much riskier than with a continuation pattern as they are less reliable, but the exception to this would be taking profits when you see a reversal pattern forming – this is something even new pattern traders should consider if they are sitting on a lot of rolling profits from the preceding trend.
Also, unlike continuation patterns, though measured targets from reversal patterns can be conservative, they are often spot on too, so you need to be careful if you’re holding a trade beyond the measured targets – taking half off or moving stops to breakeven is a good way of limiting your risk if you do decide to hold beyond the measured targets.
Double Top – Bearish Reversal Chart Pattern
The double top is a bearish reversal pattern that signals the potential end to a downtrend, the double top looks like the letter M and once price breaks below the middle point of the M, the pattern is confirmed and you can enter short.
This is very important as a double top looks a lot like a bullish rectangle continuation pattern – until it doesn’t – if you think you’re looking at a rectangle and that low goes, you were looking at a double top.
As with most chart patterns, your target from the breakout point is equal to the height of the pattern.
Double Bottom – Bullish Reversal Chart Pattern
Conversely, the double bottom is a bullish reversal pattern that signals the potential end to an uptrend and looks like the letter W.
The pattern is confirmed once the price breaks above the midpoint of the W and you enter long. Once again, this pattern can appear to be a bearish rectangle continuation pattern so watch that high point closely and trade accordingly.
Can you guess what the price target is? The height of the pattern from the breakout point.
Head and Shoulders – Bearish Reversal Chart Pattern
The head and shoulders is a bearish reversal pattern that occurs at the end of an uptrend, signalling a potential top and decline.
Though this one doesn’t look like any of our continuation patterns and it is very reliable, it is still only valid once the pattern breaks below the low point – the “neckline” – and they don’t always break lower so wait for that break.
If you do insist on shorting the right shoulder before the break, do leave some room on your stop, as these ones love to trick the early birds with a third shoulder and we’ve even seen these come out larger than the head before a massive dump.
The safest play is always waiting for confirmation. The target is of course the height of the pattern.
You may see traders simply refer to this pattern as H&S and the neckline isn’t always flat, it can be ascending or even falling – steer clear of the latter.
Inverse Head and Shoulders – Bullish Reversal Chart Pattern
A little harder to visualise without standing on your head, the inverse head and shoulders is the opposite of the standard H&S and hence occurs at the end of a downtrend, signalling the potential for a bullish reversal.
These are a little less reliable than the standard H&S topping pattern, so waiting for confirmation of the broken neckline becomes even more important.
Projecting the height of the pattern out from the broken neckline gets you your target.
Rising Wedge – Bearish Reversal Chart Pattern
Remember our rising wedge bearish continuation pattern which occurred during a downtrend?
Well, these patterns can also form at the end of an uptrend, thankfully they both suggest the price is going lower, as anything else would be a little too much for new pattern traders.
The rising wedge reversal pattern shows that even though buyers are still making new highs, they aren’t doing a very good job of it and there’s a lot of profit taking going on and new selling interest from bears.
Ignore these reversal patterns at your own peril as they are very reliable and like most bearish patterns can lead to quite violent reversals, well beyond the height of the pattern.
Falling Wedge – Bullish Reversal Chart Pattern
The final pattern we will look at should also be vaguely familiar – the falling wedge.
Like the rising wedge, it’s all about the context – this is a bullish continuation pattern when you see it in an uptrend, and a bullish reversal pattern when you see it in a downtrend – both patterns lead higher.
In line with our previous example, the falling wedge in the context of a downtrend shows the trend is running out of steam, with sellers making new lows but failing to follow through.
Once again this is a very reliable reversal pattern and it should not be ignored. It has marked long term bottoms in many a stock and forex pair, so if you’ve bought the break and hit the measured target, it may be worth leaving some of your trade on for potential follow through.
General tips for trading for forex reversal patterns and forex continuation patterns
Forex patterns are extremely reliable signals in themselves and can be traded without any further aids, but just like with forex candlestick patterns, anything you can do as a trader to improve your edge is going to mean more profits in your account at the end of the year.
Also though we only discussed trading chart pattern breakouts and encouraged new traders not to pre-empt patterns, if you can see a pattern has a long way to go before it has to break, trading the range within the pattern can be extremely reliable.
When doing this, it’s best to stick with the direction of the trend, for example, you could sell peaks in a falling wedge, or buy dips within a rising wedge, in both examples you would take profits at the other side of the pattern.
The Reliability of Forex Candlestick Patterns
The reality of forex candlestick patterns, as well as their forex chart pattern counterparts, is that they don’t work as well in real life as they do in the textbook.
It’s on very rare occasions that you will find a pattern exactly as it’s shown within this guide and as a result, you’re going to have to use some discretion.
We encourage you to try and understand the supply/demand dynamics behind each pattern and that way, you’ll be able to identify opportunities when the chart doesn’t look exactly textbook.
Another angle to the reliability of forex candlestick patterns is that their reliability may have been limited due to their sheer popularity.
When it comes down to it, chart patterns such as these in technical analysis, are self-fulfilling prophecies.
That is that they work simply because the majority of market participants think they work.
Smart money such as hedge funds and algorithmic traders can try to exploit this by using their weight to take advantage of liquidity left by retail traders waiting for high probability patterns to execute.
Just always keep in mind the old saying that if something is too good to be true, then it probably is.
Risk management is the key to not getting caught out.
Put what you’ve learnt into action
Congratulations, if you’ve got this far you now know more about trading forex candlestick patterns and forex chart patterns than the majority of losing traders.
Now it’s time to get out there in the market and put what you’ve learnt into practice. Remember no one signal is perfect by itself and the key to profitable trading over the long term is a solid strategy and responsible money management.
Everything you need to create a profitable forex patterns strategy is here, but no one can teach you the discipline required to trade it.
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