Five Powerful Candlestick Patterns

Candlestick patterns are one of the key analysis strategies in forex trading that can help assist with your trading decisions. There are various forms of forex candlestick patterns which contain price action within them. This means that they tend to give a more reliable outlook of the current market conditions compared to potentially lagging technical indicators. Here we will take a look at some of the most powerful candlestick patterns.

1. Pin Bar candlestick pattern

Pin bars are candlestick patterns frequently used for price action analysis when trading forex. A pin bar candlestick can be a great indication of the reversal of price at support and resistance levels. Pin bars feature a long upper or lower tail with a small body equivalent to the size of the tail with minimal or zero upper shadows.

Pin Bar Candlestick Patterns
Pin Bar Candlestick Patterns

A bullish pin bar is depicted by long lower tails and a bearish pin bar is depicted by long higher tails no matter that direction the body of the candlestick closes. When the pin bar is formed at the right place, it is referred to as a valid pin bar. I would look for pin bars that form around important price levels and use them as confirmation that the price is going to reverse from these levels.

Pin Bar Trading Signal
Pin Bar Trading Signal

Important price levels can include support and resistance, pivot points and Fibonacci levels. The longer the chart time frame, the more price data that is included within the pin bar formation.

Pin Bar Ranging Market
Pin Bar Ranging Market

Pin bars can be used in trending and ranging markets. You can conduct additional analysis to determine the current market conditions and then look for pin bars as potential entry/exit signals.

2. Engulfing candlestick pattern

The engulfing candlestick patterns can either be bullish or bearish. They are one of the candlestick reversal patterns that are most easy to spot and occur on a regular basis. Due to the fact that these candlestick patterns are double-candlestick patterns, they are pertinent and are commonly seen as reversal patterns.

Engulfing Candlestick Patterns
Engulfing Candlestick Patterns

Engulfing candlestick patterns can easily be identified with just two candlesticks. For the engulfing patterns to be valid during trading, the high and low of the engulfing candle must engulf the high and low of the candle pattern before it. A bullish engulfing pattern is depicted by a bullish candle whose body engulfs the body of the preceding candle. A bearish engulfing pattern is depicted by a bearish candle whose body engulfs the body of the preceding candle. When this happens, it can be a signal that the market is reversing or a trend is correcting following a pullback. I would confirm all engulfing candlestick patterns with additional analysis.

3. Doji candlestick pattern

Doji candlestick patterns are primarily used to represent uncertainty of price action in the forex market. This normally occurs when the bulls and bears start to fight and are struggling for direction with each other. There are three main types of Doji candlestick patterns which vary depending on the location of the opening and closing prices in connection to the candlestick’s range.

Doji Candlestick Patterns
Doji Candlestick Patterns

The doji candle is commonly made up of an undersized body with a closing next to the opening price. It can consist of extended wicks created to the high and low, which were tested but wrestled back from the opposite sides. Doji candles can frequently occur when a trend is almost exhausted or in ranging markets where the bulls and bears are in an even battle for control.

Long-legged doji

This doji candle pattern has elongated higher and lower candle wicks. This shows that prices ebb and flow on either side in a particular trading period. This doji type of doji signifies uncertainty in the market. There is no market winner. Neither the buyers nor sellers dominate the market.

Dragonfly doji

This candle pattern is represented by an extended lower candle wick that hasn’t got any upper wick or the one with small upper wick. It comes with a nearly equivalent opening, high, and closing price actions. What this means is that the entire price action during a trading period falls close to the lower side of the opening price action. This usually indicates a reversal in the bearish trend.

Gravestone doji

This candle pattern comes with an extended upper wick and doesn’t contain lower weak or comes with very small lower wick. The opening and closing prices are equivalent or roughly the same as the low price. It signifies that the entire price action during the trading period falls on the upper side of the opening price. This pattern frequently shows the reversal of a bullish trend.

Four-price

This doji candle pattern happens infrequently in the forex market. Here, the opening price, closing price, together with the high and low prices is identical. This scenario is rare and witnessed when trading is floating for a specific time period.

4. Bullish rejection pattern

The bullish rejection pattern comes with a more elongated wick on the lower part of the body. The bullish pattern occurs when price action tries to move towards the lower trend and meets up with a support level. When this happens, the prices are forced back towards the open price. The bullish rejection pattern signals that the market may continue going up.

Bullish Rejection Pattern
Bullish Rejection Pattern

5. Bearish rejection pattern

A bearish rejection pattern comes with an elongated wick at the higher section of the body. When this occurs, it shows that the prices tried to rise but met with resistance. Therefore, a bearish rejection pattern can be a signal that the market will continue to go down.

Bearish Rejection Pattern
Bearish Rejection Pattern

Candlestick patterns conclusion

Overall, candlestick patterns can be a great resource to forex traders if they are able to correctly identify them on charts. They can be a useful way to help gauge the market direction and as entry/exit signals. However, the trader must be able to understand these signals to be able to make use of them effectively.

The methods of implementing candlestick patterns into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with candlestick patterns, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!