Candlestick Patterns – Chart Patterns Explained
In this article
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 candlesticks and chart patterns does not need much else on their chart. Originally, they were called the Japanese candlestick charting techniques.
That is why having a proper understanding of the candlestick pattern is beneficial for the trader in the long run. You will not only be able to read the charts but will also gain the confidence to take the trades on your own behalf.
This definitive guide 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 candlesticks 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 four data points, the Open is the only one fixed when a new candle starts. The other three are variable until the period finishes and the final candlestick is printed.
The opening of the latest candle will be at the same point at which the preceding candle closed.
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 Pattern Components
Forex candlesticks have two parts: the candle’s body 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 the price in forex because they show you a visual representation of the OHLC data at a glance.
The longer wicks will represent the volatility of the market. Because it shows the maximum and the minimum range the asset has achieved in that time frame. That is why the shadows are more important than you might think.
If a candlestick closes higher, it will usually be shown as green; 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 comprise 1-3 candlesticks and signal points of likely reversal in the market. Candlestick patterns can be broken up into two categories: bullish candlestick patterns and bearish candlestick patterns. From there, they can be further classified.
The large variety of candlestick patterns includes: bullish/bearish engulfing patterns, bullish/bearish reversal candlestick patterns, bullish/bearish long-legged Doji, and bullish/bearish baby top and bottom.
Various candle stick patterns might confuse you, but do not worry, as we will discuss some key things in the candlestick chart.
Doji – Candlestick Patterns
The exception is the Doji candlestick, where the price closes at the open, which isn’t necessarily bullish or bearish, signalling indecision. Doji sticks might not mean much on their own, but they significantly affect the reversal of a trend.
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 finalized or wait for further confirmation from the next candle. However, 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 Pattern
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. So, this candlestick is usually a green candle.
The candle features a short and stubby body with a long lower wick. Ideally, the candle’s low 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 Pattern
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. It is present at the end of a bearish run.
If you can identify the morning star, you can easily take a long position or exit your short.
Morning Doji Star – Candlestick Pattern
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. The first candle is bearish and has a long body. The second Doji candle is succeeded by a third candle that closes within the first candle’s body.
Bullish Dragonfly Doji – Candlestick Pattern
The bullish Dragonfly Doji is a 1-candle reversal pattern characterized by a long wick to a new low that closes at the candle’s open, forming a Doji with no upper wick. It resembles the shape of a dragonfly with its long wick and thin body.
Bullish Long-Legged Doji – Candlestick Pattern
The bullish long-legged Doji is a 1 candle reversal pattern characterized by a long wick to a new low and locks a wick higher, with the close finishing at the open to form a Doji. It represents that the market supply and demand are in equilibrium, and the market will probably move in the opposite direction.
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.
Bullish Engulfing – Candlestick Pattern
The bullish engulfing candlestick pattern is one of the most reliable two-candlestick bullish reversal patterns. It occurs when you have a bullish candle that closes above the opening 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 Pattern
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 be unable 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 Pattern
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. The bullish candle shows the market’s view on the support level and may indicate that an uptrend is coming.
Bullish Harami – Candlestick Pattern
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 pattern
Bearish reversal candlestick patterns occur at the end of an uptrend and signal that the market could be about to turn lower. This is the best time to exit the long positions if you have any or take short positions. In this way, you can make a profit even if the market is going down. But always remember, short positions are way riskier than long positions. So, ensure you have placed a safe exit position in case things go south.
With all bearish reversal candlestick patterns, you can either enter a short position as soon as the bearish reversal pattern is finalized 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 Pattern
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 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. It shows that the market is still not confident about taking long positions from this point on.
Shooting Star – Candlestick Pattern
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 market tried to break the resistance, but it was too strong.
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. It is the counterpart of the hammer candlestick pattern but in a downtrend.
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 Pattern
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 Pattern
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. It usually represents that the market opened almost at the same point where the previous candle closed. It is a red flag for the buyers because the trend is about to break and rally downwards.
Bearish Gravestone Doji – Candlestick Pattern
The bearish gravestone Doji is a 1 candle reversal pattern characterized by a long upper wick to a high that closes at the candle’s open, forming a Doji with no lower wick. Bearish gravestones suggest that you cash out your profits. Its shape is the inverse of the dragonfly pattern.
Bearish Long-Legged Doji – Candlestick Pattern
The bearish long-legged Doji is a 1 candle reversal pattern characterized by a long wick to a new high and a lock wick lower, with the close finishing at the open to form a Doji.
Though this is a bearish reversal pattern, 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 Pattern
The bearish engulfing candlestick pattern is one of the most reliable two-candlestick bearish reversal patterns. It occurs when you have a bearish candle that closes below the opening of the final bullish candle in an uptrend, completely engulfing it.
Just like its bullish counterpart, this bearish engulfing pattern is both common and extremely reliable and may be the only bearish engulfing 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 and not a single green candle.
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.
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
Like its bullish counterpart, the piercing line, dark cloud cover pattern isn’t quite as bearish or reliable as a bearish engulfing. However, it 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. Yes, we all know the sheer variety of candlesticks may confuse most people, and to be honest, it takes quite some time to master them.
Candlestick patterns will likely yield better results when they occur around areas of key support and resistance, trend lines, etc. They will guide you to better results in your trading endeavours and clarify the upcoming trend in the market. Even though nothing is absolute in the trading market, candlesticks still help us better grasp the market.
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. If you can apply indicators on top of candle stick patterns, then it will make your trading even more successful and predictable.
Forex Chart Patterns
Forex chart patterns are another favourite of price action traders combined with a good knowledge of candlestick patterns. You will have all you need to know to trade price action like a pro. And being able to use more than one candle to identify the market trend is always better than just one.
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 several years.
Forex chart patterns can predict the forex market continuation, reversals, and ranges. Identifying all of these actions on their own is an arduous task to do because the market is so volatile.
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. This way, you do not have to play the guessing game, and your risk-to-reward ratio will be in your favour.
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. But for more aggressive and experienced traders, position yourself early in anticipation of the coming breakout to achieve a better reward profile. Making these decisions is a hard task even for the pros, so I suggest that you stay away from these for as long as you have most things at your fingertips.
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.
It shows strong support that is holding the market. The support is tested continuously, and soon, it breaks the resistance and rallies upward.
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
On the other hand, the rising wedge 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. In this pattern, the resistance is tested again and again. This shows the validity of the resistance and shows the upcoming downtrend.
Bullish Rectangle – Chart Pattern
As the name suggests, the bullish rectangle is a bullish continuation pattern that signals the recent uptrend will continue.
This pattern is characterized by horizontal consolidation after an uptrend. It is generally a 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 pattern’s height.
Bearish Rectangle Chart Pattern
The bearish rectangle is, you guessed it, a bearish continuation pattern that signals the recent downtrend will continue.
This pattern is characterized 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 pushing the pair to new lows.
Once again, your initial target is equal to the pattern’s height.
Bullish Pennant (Bull Flag) Chart Pattern
A bullish continuation pattern, bull pennants or flags as often known, is 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 substantial, equal to the distance between the recent and previous swing high (the “flagpole”). Taking profits once reached is probably a good idea.
Bearish Pennant (Bear Flag) Chart Pattern
Like their bullish counterparts, bearish pennants or flags can appear as triangular consolidation above or as a gently sloping rising channel.
In either case, you are seeing 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 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 continuation patterns as they are less reliable. Still, 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 the 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 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 pattern’s height.
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 are 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 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 insist on shorting the right shoulder before the break, leave some room on your stop, as these 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.
Traders may 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 visualize without standing on your head, the inverse head and shoulders are the opposite of the standard H&S and hence occur 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 pattern’s height 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?
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 place 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 violent reversals well beyond the pattern’s height.
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 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. They can be traded without any further aids, but like with forex candlestick patterns, anything you can do as a trader to improve your edge will 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 from the other side of the pattern.
The Reliability of Forex Candlestick Patterns
The reality of forex candlestick patterns and 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 shown within this guide, and as a result, you’ll have to use some discretion.
We encourage you to try and understand the supply/demand dynamics behind each pattern; 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 exploit this by using their weight to take advantage of liquidity left by retail traders waiting for high-probability patterns to execute.
Always keep in mind the old saying that if something is too good to be true, it probably is.
Risk management is the key to not getting caught out.
Put what you’ve learned into action
Congratulations, if you’ve got this far, you know more about trading forex candlestick patterns and forex chart patterns than most losing traders.
Now it’s time to get out there in the market and put what you’ve learned 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.
Frequently asked questions
Which candlestick pattern is most famous?
The shooting star candle stick is traders’ most famous and successful trading strategy. In the intra-day trading strategy, the shooting star represents the bearish reversal. It is a good time if you are long in a position to cash out your profits.
The shooting star has a long wick showing how it is trying to bypass the resistance but cannot break it. This strongly implies the power of that resistance.
How credible are candlestick patterns?
The best candle stick patterns might be quite accurate. They will be correct most of the time, usually 3 times more than the regular candles. Other candles might be 2 to 1.5 times more credible. This means they will work 2 to 4 times out of 5 depending on the execution time and other factors.
But, as we have discussed earlier, relying solely on a single method in the forex market is not enough. You need to have the right knowledge of plenty of other things. You should know how the indicators work, how the support and resistances work, and how to locate the actual candle stick you are looking for.
Can we predict the next candle?
It is quite possible to predict the next candle or to be more clear to predict the flow of the market after the said candle. How? You may. In quite some detail in our article, we have already discussed all the candlestick patterns. All of them, to some extent, showed us the result of how the market would react.
For example, in the engulfing candle pattern, you know that if the last candle engulfed the body of the candle preceding it, it will be an uptrend for the market. Yes, we could tell what the immediate next candle might do, but we know how the market will move.
How many candles are formed in a day?
It is very simple to understand, but it depends on your time frame. Let’s say you are using a one-hour time frame to make things simple. So, in a day, there will be only 24 candle stick that is formed. One candle stick for one hour.
Let’s take another example; say you are using a one-day timeframe; in this case, only a single candle will be formed throughout the day.
How is a candle stick formed?
It’s very simple. You just need to understand that in a candlestick, the price of that asset fluctuates in that timeframe. As we told you in the beginning, a candle has components OHLC.
Now, looking at it as an example might clarify it a bit. Let’s say that the price of the asset on the previous candle was 100. Now when the candle forms, 100 will be the opening price. Now buyers rally and push the price to 125, its highest point. Now, if the sellers take over and reduce the price to 75, the 125 mark will be the high point showing the wick. And 75 will sow the lower wick. In the end, the candle closes at 80.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst