Forex Candlestick Patterns

Candlestick patterns are used extensively in Forex trading and here are descriptions of a few that are the most popular:

Hanging Man

This pattern occurs at the end of a bull run and appears with a small body. Traders do not consider the color of the body to be of much importance. They are more interested in the fact that the long lower shadow is at least twice the length of the body and that there is little or no upper shadow. This pattern is considered a bearish sign indicating that there has been a strong attempt to sell off long positions that was only reversed towards the end of the candlestick time period.

Shooting Star

This pattern is formed when the open, close and low are very close to each other. The other main feature is that there is a long upper shadow that is usually twice the size of the body. This is a significant bearish sign as it indicates that a bull movement was strongly rejected by the market.

Doji

This pattern is formed when it opens and closes at its average price in its middle of its structure. There are both upper and lower shadows that can be quite long and are both close to equal in length. On its own, the Doji is neither a bullish nor bearish indicator. As such, this pattern is generally analyzed as part of a three-candlestick pattern.

Morning Star

This pattern is created by a three day candlestick formation that identifies a strong bullish reversal.  The first day is normally a long bearish candle, the second drops slightly lower whilst the third is a bull candle that closes above the midpoint of the first candle.

Dark Cloud Cover

This is a bearish reversal pattern comprising a large bear candle that casts a shadow over a preceding bullish trend. To create this pattern, the final day candle in the sequence must open at a new high and must close below the midpoint of the body of the preceding day.

Hammer

This pattern is created at the end of a strong downtrend and signifies a bullish reversal. The hammer has a very small body that is formed towards the end of the current day’s trading. There is no upper shadow to speak about, but a significant lower one, which is at least twice the size of the body. Basically, the Hammer shows that the market price has bounced higher after hitting a possible support level.

Inverted Hammer

This pattern is a bullish reversal sign and occurs at the end of a strong downtrend. The day candle has an open and close very close to each other with a non-existent lower shadow, but an upper one that is at least twice the size of the body.