For those who find it hard to use technical indicators in doing technical analysis of the markets, there are simpler ways of predicting what the markets are up to just by using the candlesticks. If you are such kind of a trader, you should choose to use candlestick chart rather than the line and the bar charts. Candlestick normally give very distinct patterns that trader can use to predict future mart movements without using the technical indicators.
However, it would still be very much profiting if you combined the candlestick patterns with at least one or two indicators. This would provide very accurate trading signals.
The structure of a Forex candlestick
There two main types of candlesticks in any trading chart and these are the bullish and bearish candlesticks. To understand the candlesticks patterns, you will have to understand the features of these candlesticks.
The price at which a candlestick starts to form is called the opening price while the price and which the candlestick formation is called the closing price. The part between the closing and the opening prices is referred to as the body.
There are usually two tail like protrusions on both sides of the body. This two tails represent the highest price and the lowest prices that the markets reached during the formation of the candlestick.
For the bullish candlesticks, the opening price is usually lower than the closing price since the markets are rising. Also, the lowest price is below the opening price while the highest price is above the closing price.
Fig. bullish candlstick
For the bearish candlesticks, the opening price is usually higher than the closing price sincethe markets are dropping. Also, the lowest price is below the closing price while the highest price is above the opening price.
Fig. bearish candlstick
For ease of trading, a trader should ensure that the colors of the bearish and bullish candlesticks are different so that it can be easy to tell when there is a bearish or bullish trend without requiring an indicator.
5 common candlestick patterns
There are different types of candlesticks depending on the length of the body and the two tails. Candlestick patterns refers to the patterns formed by different types of candlesticks.
- Hammer bar
This is also referred to as pin bar. It is formed when the body of the candlestick is smaller and one tail is extremely longer than the other tail and the body. Depending on the type of candlestick (bearish or bullish) the hammer bar can be bearish or bullish too.
A bullish hammer indicates that the forces pushing the trend up are unsuccessful in pushing the prices further upwards. Therefore, it implies a change of trend to a bearish trend.
A bearish hammer on the other hand indicates that the forces pushing the prices down are no longer able to push the prices any further downwards. Therefore the trend is changing to a bullish trend.
The hammer is a very good indicator of when to close your trade. If you have a profitable trade in the market, you should close it at ones when a hammer is formed.
A doji is a candlestick whose body is almost absent. The closing price is at the same level with the opening price. Since the body didn’t form, it can’t be classified as bearish or bullish. A doji simply implies that the forces causing a certain trend in the market have become weaker.
There are different types of doji candlsicks depending on the position of the body. These are: gravestone doji, dragonfly doji, traditional doji and the Long-legged doji.
The Gravestone doji has a long tail on top oof the body and it shows that the buyers had the controll of the market at the opening of the candlsick but then the opposing forces pushed the prices down back to close at the openinng.
The dragonfly on the other hand shows that the selller controlled the akerts at the opining of the candlsick but then the opposint forces forced the prices up to close at the opening price.
The tradigitional doji is when the body is placedat the middle and the tails on either sides are short.
The long legged is just a traditional doji with longer legs (tails).
- Evening star and Morning star
An evening star candlestick pattern is when there is a small candlestick formed in the middle of a bullish and bearish candlestick with the bearish candlestick forming after the small candlestick. This pattern indicates that the pattern is changing from a bullish pattern to a bearish pattern. Called ‘evening’ since after the setting of the sun since the market is starting to go down just like the sun does at the evening as it sets.
The morning start on the other hand is when theere is a small candlstick patter thatforms in the middle of a bearish and a bullish dcandlstick with the bullish candlstick frming after the samll candlsick. This pattern indicates that the trend is changing froma bearish to a bullish trend.