Candle sticks Forex patternsCandle sticks Forex patterns are single or multi bar patterns showing price strength or weakness. The big advantage with Candlesticks patterns are they are easily identified (once learned) visually with a clear bearish or bullish interpretation. In FOREX I have found Candle sticks Forex not to be as useful as with Stocks or commodities Futures. The reason for this is that FOREX data generally is smooth, even at news announcements, and therefore seldom contains gaps (at least my feed has very few gaps). Many commonly used patterns make use of gaps, like the Morning Star pattern for example. Also, some patterns seems to work better in some markets than others. What is true for the Stock market might not be true for the FOREX market. I have not conducted any research on which patterns are the most profitable in the FOREX markets yet, but the patterns I present below are the ones that I have found profitable. Each individual Candle stick is formed by using the four price data fields we have at hand. Usually patterns with a close lower than the open has a black body and Candle sticks with a close higher then open has a white (or hollow) body. The small thin lines above and below the body are called shadows. Candle sticks Forex
Nowadays any color can be used, many using red instead of black and green instead of white. Candle sticks Forex I will not elaborate on all Candle sticks Forex patterns here, I will just mention the most common and useful for FOREX Traders. If you are interested in knowing more about Candlesticks, the should purchase a book dedicated to Candle sticks only (try Steve Nison). One thing that I have never seen anyone comment on is the way these patterns work. What I mean is that in a downtrend you will see a majority of bullish patterns and in an uptrend a majority of bearish patterns. It quite obvious if you think about if for a minute. By the very nature of these patterns it couldn't be otherwise. If you don't understand this, take the time to study charts with Candle sticks Forex applied. Please keep this in mind when trading with the use of Candle sticks Forex patterns.Candle sticks Forex Personally I don't suggest you use Candle sticks Forex patterns on their own, it is better to combine with an other indicator. In this way you can filter out the fake signals and gain a higher winning percent.Candle sticks Forex As usual I have tried to be as concise as possible. Pattern Strength refers to how much energy the pattern has to reverse the market (I present only reversal patterns). Just because a pattern has High Pattern Strength doesn't mean it is infallible. The best patterns have a 80 to 85% success rate. Type is obvious and Trend refers to in which environment the pattern occurs. Interpretation is also obvious. In order for you to understand why these patters are formed and what to expect from them I have included Cause and Effect. The patterns that I find useful are:Candle sticks Forex
Doji Pattern Strength: Low Type: Single bar Trend: Any Interpretation: Neutral Cause: The Doji is a bar with the same (or almost the same) Open and Close, i.e no or very small body. Since there is no body, it signals either indecisiveness or a market pause. Either the bulls or bears are exhausted and need a rest – which one will take charge afterwards? Effect: Generally prices either stall (pauses) for a few bars and then continues in the previous direction or reverses. Seldom price direction change that fast – it usually takes at least a few bars to complete a top or bottom. Look for other patterns for confirmation. Hammer Pattern Strength: Low Type: Single bar Trend: Downtrend Interpretation: Bullish Cause: The Hammer is known in the West as a Key Reversal. What the market is doing is to test if there is more selling coming in at lower prices. The fact that it is not finishing on the Low but rather close to the High, signals strength. Prices went down but then the bulls came in and pushed prices higher. But will it hold? Effect: Generally prices either stall (pauses) for a few bars and then continues in the previous direction or reverses. Seldom price direction change that fast – it usually takes at least a few bars to complete a major top or bottom. Look for other patterns for confirmation. Shooting Star Pattern Strength: Low Type: Single bar Trend: Uptrend Interpretation: Bearish Cause: This is a Hammer put on it's head. What the market is doing is to test if there is more buying coming in at higher prices. The fact that it is not finishing on the High but rather close to the Low, signals weakness. Prices went up but then the bears came in and pushed prices lower. But will it hold? Effect: Generally prices either stall (pauses) for a few bars and then continues in the previous direction or reverses. Seldom price direction change that fast – it usually takes at least a few bars to complete a major top or bottom. Look for other patterns for confirmation. Belt Hold Pattern Strength: Low Type: Single bar Trend: Uptrend (bullish) or downtrend (bearish) Cause: Since the Open and the Low are the same (bullish Belt Hold, reverse for Bearish), bulls (bears) are displaying that there is no more interest in lower (higher) prices, not even to test. Effect: The bears or bulls seems to have left the arena. Look for other patterns for confirmation. Bullish Harami Pattern Strength: Low Type: Dual combo Trend: Downtrend Cause: A Bullish Harami pattern is made up of a wide body down bar (black) followed by a narrow body up bar, contained inside the down bar showing that the bulls are coming in, but not enough to push beyond the open of the previous bar. Effect: We have bulls coming in but even the bulls are hesitating. Kind of a half-hearted effort of the bulls. Some kind of confirmation is therefore needed. Bearish Harami Type: Dual combo Trend: Uptrend Cause: A Bearish Harami pattern is made up of a wide body up bar (white) followed by a narrow body down bar, contained inside the up bar showing that the bears are coming in, but not enough to push below the close of the previous bar. Effect: We have bears coming in but even the bears are hesitating. Kind of a half-hearted effort of the bears. Some kind of confirmation is therefore needed. Bullish Engulfing Pattern Strength: Medium Type: Dual combo Trend: Downtrend Cause: A Bullish Engulfing pattern consists of a narrow body down bar (black) engulfed by a wide body up bar (white), which indicate that the bar started out in the previous direction reaching new lows but reversed and closed above the open of the previous day due to heavy buying. Effect: The pattern signals bulls coming in. If prices continue up, we have a confirmation that the bulls are serious. Bearish Engulfing Pattern Strength: Medium Type: Dual combo Trend: Uptrend Cause: A Bearish Engulfing pattern consists of a narrow body up bar (white) engulfed by a wide body down bar (black), which indicate that the bar started out in the previous direction reaching new highs but reversed and closed below the open of the previous day due to heavy selling. Effect: The pattern signals bears coming in. If prices continue down, we have a confirmation that the bears are serious. Piercing Line Pattern Strength: Medium Type: Dual combo Trend: Downtrend Cause: A Piercing Line pattern is a wide body down bar (black) followed by a up bar (white) with an open below previous bars close, but finishing above mid-point. Since the white bar opens with the bears in command and the reverses finishing with white bar's close penetrating beyond the previous bars mid-point, the bulls are displaying that they are ready for action. Effect: The bulls are showing their strength. If prices continue up, we have a confirmation that the bulls are serious. Dark Cloud Cover Pattern Strength: High Type: Dual combo Trend: Uptrend Cause: The name say pretty much what it is all about. A down bar (black) is covering a wide body up bar (white) and finishing below the mid-point of the up bar. The bar open strongly with the bulls in charge, but then falters and falls below mid-point of the previous bar. The bears are ready for action. Effect: The bears are showing their strength. If prices continue down, we have a confirmation that the bears are serious. Morning Star Pattern Strength: High Type: Triple combo Trend: Downtrend Cause: A down bar followed by a small body bar gapping down. The third bar is a long up bar (white) that move into the body of the black down bar. In other words, the bears were fully in charge until the small body appeared (hesitation) and then the bulls came charging in with a long up bar, demonstrating strength. Effect: Bulls are coming in, thinking the prices have moved to far down. A reversal is in the works. Evening Star Pattern Strength: High Type: Triple combo Trend: Uptrend Cause: An up bar followed by a small body bar gapping up. The third bar is a long down bar (black) that move into the body of the white up bar. In other words, the bulls were fully in charge until the small body appeared (hesitation) and then the bears came charging in with a long down bar, demonstrating weakness. Effect: Bears are coming in, thinking the prices have moved to far up. A reversal is in the works. Three White Soldiers Pattern Strength: High Type: Triple combo Trend: Downtrend Cause: Three consecutive long up bars (white) appearing in a downtrend is a showcase for the bulls. We want the bars to have no or small shadows, signaling that the bulls have a firm commitment to reverse the trend. Effect: Such a strong showing from the bulls indicate that they are not playing around, but are ready for a new uptrend. Three Black Crows Pattern Strength: High Type: Triple combo Trend: Uptrend Cause: Three consecutive long down bars (black) appearing in an uptrend is a showcase for the bears. We want the bars to have no or small shadows, signaling that the bears have a firm commitment to reverse the trend. Effect: Such a strong showing from the bears indicate that they are not playing around, but are ready for a new downtrend. I will be adding more Candlestick patterns here, when I have more experience trading them. Check out this space a couple of months from now. Go to the next part, Forex Pivot Points Return from Candle sticks Forex to Technical Analysis
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