Candlestick Charts Explained – Trading the Patterns

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Contents

Forex Candlestick Patterns Guide

Candlesticks chart highlights

The Japanese candlestick chart is considered to be quite related to the bar chart as it also shows the four main price levels for a given time period. So, what makes them the favorite chart form among most Forex traders? The answer is that candles have a lot of qualities which make it easier to understand what price is up to, leading traders to quicker and more profitable trading decisions. Japanese candlestick charts are believed to be one of the oldest types of charts in the world. It was originally developed in Japan, several centuries ago, for the purpose of price prediction in one of the world’s first futures markets. Below you will find a dissection of 12 major signals to learn how to use Japanese candlesticks.

Live Candlestick Patterns

Trading Candlestick Patterns

Summary

2.7. Harami

HOW TO USE CANDLESTICKS?

Learning candle patterns in groups is much like recognizing family members. If a large number of relatives were disbursed in a crowd of strangers it would be easy to miss them.

However, if the relatives were all brought forward and arranged by family units it would become rather easy to spot them, even if they were dispersed back into the crowd again.

Candlesticks, like relatives, can be grouped together and learned in family groups. They can be directly related or cousins. As in any family some of the cousins can be a bit odd, but in perspective they still fit and are much easier to remember if they can be placed into a family.

Candlestick patterns have very strict definitions, but there are many variations to the named patterns, and the Japanese did not give names to patterns that were ‘really close’.

Experience and common sense allow traders to read the message even if it does not exactly match the picture or definition in the book.

News, Analysis and Education Reports on Candlesticks

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Candlesticks Video

Candlestick Trading Strategies

All about Candlesticks: Analytical Tools

A chart is primarily a graphical display of price information over time. Technical indicators and trendlines can be added to it in order to decide on entrance and exit points, and at what prices to place stops. All these charts can also be displayed on an arithmetic or logarithmic scale. The types of charts and the scale used depends on what information the technical analyst considers to be the most important, and which charts and which scale best shows that information.

If your interest is a qualitative view of the market, because you want to display data that have had a large percentage of increase or decrease in price, usually longer-term charts, then it is more appropriate to use a logarithmic chart. While the arithmetic shows price changes in time, the logarithmic displays the proportional change in price – very useful to observe market sentiment. You can know the percentage change of price over a period of time and compare it to past changes in price, in order to assess how bullish or bearish market participants feel.

However, in the Forex market, the arithmetic scale is the most appropriate chart to use because the market doesn’t show large percentage increases or decreases in the exchange rates. On an arithmetic chart equal vertical distances represent equal price ranges – seen usually by means of a grid in the background of a chart. The arithmetic scale is also the most appropriate to apply technical analysis tools and detect chartist patterns because of its quantitative nature. Besides the arithmetic scale, the Forex world has also adopted the Japanese candlestick charts as a medium to access a quantitative as well as a qualitative view of the market. They were chosen among other types of charts – the two most common being the “line chart” and the “bar chart” – because of their attributes as we shall see throughout this chapter.

1. A Way To Look At Prices

The line chart is the simplest form of depicting price changes over a period of time. The line is graphed by depicting a series of single points, usually closing prices of the time interval. This simple charting method makes easier the assessment of the direction of a trend, or the comparison of the prices of multiple instruments on the same graph.

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The Japanese candlestick chart is considered to be quite related to the bar chart as it also shows the four main price levels for a given time period. Candles have a lot of qualities which make it easier to understand what price is up to, leading traders to quicker and more profitable trading decisions. Japanese candlestick charts are believed to be one of the oldest types of charts, developed in Japan several centuries ago for the purpose of price prediction in one of the world’s first futures markets. In the 18th century, Munehisa Homma become a legendary rice trader and gained a huge fortune using candlestick analysis. He discovered that although supply and demand influenced the price of rice, markets were also strongly influenced by the emotions of participating buyers and sellers. Homma realized that he could capitalize on the understanding of the market’s emotional state. Even today, this aspect is something difficult to grasp for most aspiring traders. Homma’s edge, so to say what helped him predict the future prices, was his understanding that there is a vast difference between the value of something and its price. The same difference between price and value is valid today with currencies, as it was with rice in Japan centuries ago. Compared to the line and bar charts, candlesticks show an easier to understand illustration of the ongoing imbalances of supply and demand. They also speak volumes about the psychological and emotional state of traders, which is an extremely important aspect we shall cover in this chapter.

One advantage is that in Forex candlestick charts, candles are colored accordingly to the direction of price movement: when the open rate is higher than the closing rate the candlestick is colored with a “filled-in” body, and when the candlestick shows a “hollow” body, that means the closing rate exceeds the opening rate. The body of the candlestick, also called the “real” body, represents the range between the open and closing prices. In a quick view, you notice in which direction, if any, the price is heading. This is just one of the multiple conventions and the one we will use here, as each charting service may color the bullish and bearish candles differently. Below is an example of candlesticks and a definition for each candlestick component. The solid part is the body of the candlestick. The lines at the top and bottom are the upper and lower wicks, also called tails or shadows. The very peak of a candle’s wick is the highest price for that time period, while the bottom of the wick is the lowest price for that particular time period. Another advantage of using a candlestick chart is that you may combine them with conventional market indicators such as moving averages and trendlines. But the most outstanding advantage these charts offer are the early warning signs when changes in trends occur.

Forex candlestick patterns

Forex candlestick patterns are a popular tool to analyse price charts and confirm existing trade setups. They have been used for hundreds of years by Japanese rice traders and have made their way to the West through Steve Nison’s books. In this article, we’ll cover what Forex candlestick patterns are, how they’re formed, and how to trade on them.

Forex candle formations

Before we dig deeper into candlestick patterns, it’s important to understand how Forex candles are formed. Forex candles, or the candlestick chart, are OHLC charts, which means that each candle shows the open, high, low, and close price of a trading period. This is represented by the following picture.

The solid body of a candlestick shows the open and close prices of a trading period, while the upper and lower wicks of the candle represent the high and low prices of that trading period.

What are Forex trading candlestick patterns?

Forex Japanese candlestick patterns are specific candlestick patterns that can signal a continuation of the underlying trend, or a trend reversal. These patterns can be single candlestick patterns, which means that they’re formed by a single candlestick, or multiple candlestick patterns which are formed by two or more candlesticks.

Candlestick formations in Forex truly represent the psychology and sentiment of the market. They represent pure price action, and show the fight between buyers and sellers in a graphically appealing format.

While Forex candle patterns are a great way to confirm an existing trade setup, traders should be cautious when trading solely on candlestick patterns as there can be a significant number of false signals.

The most important candlestick patterns

  • Bullish and bearish engulfing patterns

Bullish and bearish engulfing patterns are one of the best Forex candlestick patterns to confirm a trade setup. A bullish engulfing pattern forms when a green candlestick’s body completely engulfs the previous red candlestick, signalling strong buying momentum which breaks above the previous candlestick’s high. Bullish and bearish engulfing patterns are reversal patterns which include two candlesticks.

A bullish engulfing pattern is shown on the following chart.

Similar to bullish engulfing patterns, bearish engulfing patterns form when a large bearish candlestick completely engulfs the previous bullish candlestick’s body, signalling large selling momentum which goes beyond the previous candlestick’s low. A bearish engulfing pattern is shown on the following chart.

  • Hammer and hanging man patterns

Hammer and hanging man patterns are also reversal patterns which form at the tops and bottoms of uptrends and downtrends. A hammer pattern forms at the bottom of a downtrend, with a small solid body and long lower wick, signalling that buyers had enough power to push the price back close to the opening price, hence the long lower wick. A hammer pattern is shown on the following chart.

A hanging man pattern looks similar to a hammer pattern, with the only difference being that it forms at the top of an uptrend. In this case, a hanging man pattern shows that selling pressure is growing – represented by the long lower wick – despite the uptrend. A hanging man pattern is shown on the following chart.

  • Three inside up and three inside down patterns

Three inside up and down patterns are triple candlestick patterns, which means that they’re formed by three candlesticks. A three inside up pattern begins with a bearish candlestick, followed by a bullish candlestick which forms inside the first candlestick, and followed by a third bullish candlestick which closes well above the high of the first candlestick. A three inside up pattern is shown on the following chart.

Similarly, a three inside down pattern begins with a bullish candlestick, followed by a bearish candlestick which lies inside the first candlestick, followed by a second bearish candlestick which closes well below the first candlestick’s low. A three inside down pattern is shown on the following chart.

The final candlestick pattern which we are going to cover, and also one of the most important Forex chart candlestick patterns, is the doji pattern. The doji pattern is a specific candlestick pattern formed by a single candlestick, with its opening and closing prices at the same, or almost the same level.

A doji pattern signals market indecision. Neither buyers nor sellers managed to move the price far away from the opening price, signaling that a price reversal may be around the corner. A doji pattern is shown on the following chart.

As you can see, a doji pattern can form both during an uptrend and downtrend.

How to trade Forex based on candlestick patterns

Candlestick patterns are a great tool used by many Forex traders to confirm a trade setup. They should not be used to trade on their own, as they can produce a large number of false signals along the way. That’s why you need a trade setup already in place, based on tools such as chart patterns, channels, or Fibo levels, which is then only confirmed with a candlestick pattern, such as an engulfing pattern or hanging man pattern.

Forex candlestick strategy

As we’ve previously stated, the best Forex trading candlestick strategy is to use candlestick patterns for trade setup confirmations. Let’s take a look at the following charts, which show how to use candlestick patterns for day trading Forex the correct way.

1) Trading bullish pennants with engulfing patterns

The chart above shows a bullish pennant pattern which is confirmed by a bullish engulfing pattern. Once the engulfing pattern forms, a trade could enter in the direction of the pennant breakout.

2) Trading double bottoms with engulfing and hanging man patterns

The next chart shows a common double top pattern, followed by a pullback signalled by a hanging man pattern. Once the pullback is completed, a bullish engulfing pattern confirms the opening of a trade in the direction of the breakout. Bear in mind that these are only two examples of how to use candlestick patterns. You can combine them with all types of chart patterns and trading strategies.

Final words

Candlestick patterns are a great tool for trade confirmations. They represent the psychology of the market and the psychology of buyers and sellers who fight to move the price up and down. As such, candlestick patterns shouldn’t be used to trade on their own, but only to confirm existing trade setups.

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Candlesticks should provide different visual cues that make understanding price action easier. Time-frame trading with Japanese candlestick charts allows traders to understand market sentiment better. Thanks to Steve Nison, candlestick charts offer a greater depth of information than traditional bar charts.

On bar charts, highs and lows are emphasised more than anything else, while Japanese candlesticks place emphasis on the relationship between the open price and the close price. Candlestick charting provides traders with a detailed depiction of a price graph, with an almost three-dimensional effect.

What stands out most is that a chartist can see patterns more clearly and distinctly compared with other types of charts. Traders who use different candlestick patterns should identify different types of price action that tend to predict reversals, or the continuations of trends. Additionally, when we combine them with other technical analysis tools, we should get an accurate estimate of possible price movements.

Candlesticks Explained

As we can see from the image above, a price closing higher than where it opened will produce a white candle (bullish). A price closing lower than where it opened creates a black candle (bearish). The boxes that are formed by price action are called ‘the body’. The extremes of the daily price movement which are represented by lines extending from the body are called the tail (wick or shadow). The small part of the candle that is left behind is called the nose.

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

Depicted: EURUSD H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

How to Measure the Length of a Candle

The candle is a kind of measure from its high to its low. The high of the candle 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 during Master Candle Trading – see paragraph below).

Depicted: AUDUSD H1 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The window to your left – the data window – shows you the crucial candlestick data you need to know, including the high and low, as well as the open and close price. This is the default data in the MetaTrader 4 (MT4) platform.

Three Main Components of 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 also 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: EURUSD H4 chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Correlation Between the Open and the Close

As the coloured body of the candle represents either a positive or a negative reading during uptrends, or in bullish market conditions, buying will usually occur on the open. The price should rise, and a hollow, white 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 dark body candle should form. This represents sellers entering the market on the open, and dominating that particular time. 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, shadows, or wicks, an important factor to consider is whether they form after a long downtrend, as 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, shadows, or wicks 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”, thereafter, and we would 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 usually decreases in this instance. The strongest reversal candles have wicks that are much longer than the bodies, and a very small nose, or simply no nose at all.

Depicted: GBPJPY H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Strong Momentum Candles

Strong momentum candles, 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 tail, or no tail, or a shadow. This type of candlestick pattern is really powerful and means a lot in regard to price movement. Marubozu 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 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 white Marubozu candle appearing in an uptrend may suggest a continuation, while in a downtrend, a white Marubozu can signify a potential bullish reversal pattern. Here are some examples of White Marubozus (momentum):

Depicted: GBP/JPY H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Conversely, the Black Marubozu appearing in a downtrend may suggest its continuation, while in an uptrend, a Black Marubozu can signify a potential bearish reversal pattern. Here are some examples of Black Marubozus (momentum):

Depicted: GBP/JPY H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Common Candlestick Patterns

Candlestick patterns show up very often in Forex, CFDs, stocks, and indices (equity) markets. Some of the most popular ones are :

  • Hammer candlestick
  • Shooting Star candlestick
  • Hanging Man candlestick
  • Piercing Line candlestick
  • Bullish/Bearish Engulfing candlestick
  • Dark Cloud candlestick
  • Spinning Top candlestick
  • Three Black Crows candlestick
  • Morning Star candlestick

Of course, there are many more patterns. If you would like to learn more about candlestick patterns, why not read our articles on advanced patterns?

Now let’s take a look at some of these candlesticks in more detail:

The Hammer

Depicted: GBPUSD H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

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, usually appearing at the bottom of downtrends. The body can be either bullish or bearish, but it is considered to be stronger if it’s bullish.

The Shooting Star

Depicted: GBP/USD H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

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

The Hanging Man

Depicted: EUR/USD D1 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

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

The Piercing Line

Depicted: EUR/USD D1 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The Piercing Line candle is a bullish reversal candlestick pattern. It is very common in the Forex market. This pattern occurs when the second bullish candle closes above the middle of the first bearish candle. The second candle’s low is lower than the first candle’s low. In the Forex market, the pattern is valid even if the second candle’s low is equal to the first candle’s low.

Bullish and Bearish Engulfing Candle

Bullish and bearish engulfing candles are reversal patterns. Bullish candles usually occur at the bottom of a downtrend, while bearish candles are spotted at the top of an uptrend. The Bullish engulfing pattern is characterized by the two candles. The first one is contained within the real body of the second candle, which is always bullish. The Bearish engulfing pattern is also characterized by the two candles. The first one is contained within the real body of the second candle, which is always bearish.

Here an example of a bullish engulfer:

Depicted: EUR/USD H1 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Here is an example of a bearish engulfer:

Depicted: GBP/USD H1 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The Dark Cloud Cover

Depicted: AUD/USD H1 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

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 high of the first candlestick, but then drops and closes above the open price of the first candlestick.

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

Master Candle Concept

Depicted: AUDUSD H1 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

The Master candle 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 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: GBP/USD H1 – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Depicted: Source: NZDUSD H1 – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

This concept is goes in perfect synergy with the Admiral Pivot, for profit taking and placing stop loss orders. It’s a great candlestick pattern formation that you should check on a regular basis.

Candlestick Pattern Trading Strategy

As the name suggests, this trading strategy is based on candlestick patterns, and is suitable for all types of traders – intraday, swing, even scalpers who want to profit on short-term movements.

Let’s take a look at an example:

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

First, we need to set up the EMA to correspond to the general trend direction. We also need to install three EMAs on the chart. As shown in the example in the graph below, EMA 20 is blue, EMA 60 is red, and EMA 100 is green. Three EMAs need to be aligned properly in order to show a trend. When the blue EMA is below the red and green EMA, the trend is bearish. When the blue one is above the red and green ones, the trend is bullish.

Bearish Trend

Depicted: GBP/JPY H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Bullish Trend

Depicted: GBPJPY H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

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. 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 either a bullish or a bearish candlestick, depending on the trend direction. Entries are made on any of the candlesticks we mentioned above.

  • 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 Admiral Pivot set on ‘Weekly Timeframe’.

Source: Admiral Pivot – MetaTrader 4 Supreme Edition

Bearish Trade Example

Depicted: GBP/JPY H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Bullish Trade Example

Depicted: GBP/JPY H4 Chart – Admiral Markets Platform – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Tip: It is always best to wait for a pullback to at least touch the blue EMA before making an entry decision. Candlestick trading can be very profitable if you implement risk management within your trading strategies, and effectively manage the risks involved. Always practise on a Demo trading account first before moving to a live trading account. By doing so, you allow yourself to make mistakes and learn within a risk-free trading environment, before you take your strategies into the live markets.

Trading With Admiral Markets

If you’re ready to trade on the live markets, a live trading account might be more suitable for you. Admiral Markets offers professional traders the ability to trade with 80+ currencies, with access to a range of Forex majors, Forex minors, and exotic currency pairs. To open your live account, click the banner below!

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.

How to Read a Candlestick Chart

Candlestick charts have enjoyed continued use among traders because of the wide range of trading information they offer, along with a design that makes them easy to read and interpret.

This centuries-old charting style was developed in the rice markets of Japan. The style’s name refers to the way each time period is represented by a rectangle with lines coming out of the top and the bottom. This shape resembles a candle with a wick. The Japanese market watchers who used this style referred to the wick-like lines as shadows.

On the chart, each candlestick indicates the open, high, low, and close price for the time frame the trader has chosen.   For example, if the trader set the time frame to five minutes, a new candlestick will be created every five minutes. For an intraday chart like this one, the open and close prices are those for the beginning and end of the five-minute period, not the trading session.

Candlesticks also show the current price as they’re forming, whether the price moved up or down over the time frame, and the price range the asset covered in that time. 

Open Price

The top or bottom of the candle body will indicate the open price, depending on whether the asset moves higher or lower during the five-minute period. If the price trends up, the candlestick is often either green or white and the open price is at the bottom. If the price trends down, the candlestick is often either red or black and the open price is at the top.

High Price

The high price during the candlestick period is indicated by the top of the shadow or tail above the body. If the open or close was the highest price, then there will be no upper shadow.

Low Price

The low is indicated by the bottom of the shadow or tail below the body. If the open or close was the lowest price, then there will be no lower shadow. 

Close Price

The close is the last price traded during the candlestick, indicated by either the top (for a green or white candle) or bottom (for a red or black candle) of the body. 

As a candle forms, it constantly changes as the price moves. The open stays the same, but until the candle is completed, the high and low prices are changing. The color may also change as a candlestick forms. It may go from green to red, for example, if the current price was above the open price but then drops below it.

When the time period for the candle ends, the last price is the close price, the candle is completed, and a new candle begins forming.

Price Direction

You can see the direction the price moved during the time frame of the candle by the color and positioning of the candlestick. If the candlestick is green, the price closed above where it opened and this candle will be located above and to the right of the previous one, unless it’s shorter and of a different color than the previous candle. If the candlestick is red, the price closed below where it opened and this candle will be located below and to the right of the previous one, again unless it’s shorter and of a different color than the previous candle. 

Price Range

The distance between the top of the upper shadow and the bottom of the lower shadow is the range the price moved through during the time frame of the candlestick.   The range is calculated by subtracting the low price from the high price.

Interpreting Patterns

You can practice reading candlestick charts by opening a demo trading account or playing around with candlesticks on free web-based charting platforms. Set the chart type to candlestick and select a one-minute time frame so you’ll have lots of candles to look at.

Once you understand what each candle is indicating, you can start looking for trading opportunities based on candlestick patterns, such as the three black crows and the abandoned baby. 

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