Candlestick Patterns to Look Out for When Trading

Technical analysis is a great way to find the right trading setups and signals. It requires you to examine price action and learn the patterns that suggest a specific outcome in the forex market. These patterns can be chart patterns, candlestick patterns, or other patterns suggested by technical analysis theories. Candlestick patterns are powerful forex trading patterns used to forecast price movement on a candlestick chart. You can find these patterns on forex charts available on brokerage platforms like Oanda.com. These patterns are an excellent addition to your arsenal as a new or experienced trader. In this article, you will learn four of the most profitable candlestick patterns in the financial market. Let’s begin! 

4 Candlestick Patterns Every Trader Should Know

Candlesticks are indicators of pure price action. They show the interaction between buyers and sellers in the forex market at different time frames and intervals. They indicate the opening price, closing price, and the highest and lowest prices for each time interval. The nature of the candlesticks can be used to forecast price movement, and over time, they have repeatedly formed specific patterns that suggest the most likely direction of price. 

Doji Candlestick Pattern

The Doji candlestick is also known as an ‘indecision’ candle. It is commonly used to confirm the reversal of a trend. The candlestick has a small body and long wicks. The small candle body shows equal buying and selling pressure at that price point. 

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If the Doji appears at a resistance level, it could mean the end of an uptrend and the beginning of a downtrend. This shows that the buying pressure has declined, and sellers are beginning to enter the market. The small candle body shows that sellers could not move the price higher. 

When the Doji appears at a support level, it could mean the end of the downtrend and the beginning of a new uptrend. This indicates that the selling pressure wasn’t enough to break through the key level, and buyers are beginning to enter the market. 

There are two main variations of the Doji; the gravestone Doji and the dragon Doji. 

The gravestone Doji often occurs at a resistance level, while the dragon Doji occurs at a support level.

The Doji is a powerful reversal pattern that you should watch out for at key levels. 

Engulfing Candles

Engulfing candlesticks are characterized by a large body that engulfs the preceding candle’s body. The candle body is an indicator of the trading volume at that time. Engulfing candles are usually large and conspicuous and appear at key price levels. There are two types of engulfing candlesticks; bullish engulfing candles and bearish engulfing candles. 

The bullish engulfing candles are bullish candles with large bodies that engulf the preceding candle. This usually occurs at a key level and indicates that an uptrend is likely to begin or continue. 

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The bearish engulfing candles are bearish candles with large bodies that engulf the preceding candle. They indicate the presence of buyers, and the large candle body shows high selling pressure. This usually occurs at a key level and suggests that a downtrend will likely begin or continue. 

Pin Bar Candlestick Pattern

The pin bar is a candlestick pattern that is characterized by a small body and a long wick in one direction (unlike the Doji, which has a wick in both directions). A pin bar shows that the price has rejected a level and is about to move away from the rejected price level. 

A bullish pin bar usually occurs at key support levels when a candlestick opens, trades into a key level, and rejects it by closing very close to its opening price, leaving a long lower wick. This suggests that an uptrend is likely to begin or continue. 

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A bearish pin bar mostly occurs at key resistance levels when a candlestick opens, trades into a resistance level, and rejects this level by closing close to its opening price. This leaves a small candle body and a wick that shows rejection, with a high probability of continuing the downtrend. 

Morning and Evening Star Patterns

These candlestick patterns are patterns used to confirm a reversal or change in market trend. They are both powerful three-candle patterns used in bullish or bearish scenarios. 

The morning star is a bullish reversal pattern used to confirm the beginning of an uptrend. It consists of three candles; 

• The first candlestick is usually a bearish candle
• The second candlestick can be bullish or bearish, with a small candle body. 
• The third candlestick is a bullish candle with a body that closes above the preceding candle. 

These three candles show the exhaustion of a downtrend followed by the increase in buying pressure and the beginning of a new uptrend. 

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The evening star is a bearish pattern used to confirm the reversal of an uptrend and the beginning of a new downtrend. This candlestick pattern consists of three candles; 

• The first candlestick is usually a bullish candle
• The second candlestick can be bullish or bearish with a small candle body. 
• The third candlestick is a bearish candle with a body that closes above the preceding candle. 

Candlestick patterns are great technical analysis tools that help you understand the interaction of buyers and sellers and forces of demand and supply in the financial market. While trading these patterns, ensure you have other confirmations to support your trade idea. This increases your win rate and helps you make better trading decisions.