Candlestick charting is one of the most popular methods of technical analysis used in the forex market. It involves analyzing the price movements of currency pairs on a chart that displays the open, high, low, and close prices of each trading session in the form of candlesticks. Candlestick charts are preferred by forex traders because they provide a clear visual representation of price action, making it easier to identify trends, patterns, and reversal signals. In this article, we will discuss the various candlestick setups used in forex trading.
1. Bullish and Bearish Engulfing Patterns
The bullish engulfing pattern occurs when a small bearish candle is followed by a larger bullish candle that completely engulfs the previous candle. This pattern indicates that buyers have taken control of the market and are likely to push prices higher. The bearish engulfing pattern is the opposite of the bullish engulfing pattern and occurs when a small bullish candle is followed by a larger bearish candle that completely engulfs the previous candle. This pattern indicates that sellers have taken control of the market and are likely to push prices lower.
2. Hammer and Hanging Man
The hammer and hanging man are both reversal patterns that occur after a downtrend. The hammer is a bullish reversal pattern that occurs when the price opens lower than the previous day’s close but then rallies and closes near or above the opening price. The hanging man is a bearish reversal pattern that occurs when the price opens higher than the previous day’s close but then falls and closes near or below the opening price.
3. Doji
The doji is a candlestick pattern that indicates indecision in the market. It occurs when the opening and closing prices are very close or the same, resulting in a candlestick with no body. This pattern can be bullish or bearish depending on the preceding trend and the location of the doji on the chart.
4. Morning and Evening Star
The morning and evening star patterns are three-candle reversal patterns that occur at the end of a trend. The morning star pattern is a bullish reversal pattern that occurs when a long bearish candle is followed by a small-bodied candle (either bullish or bearish) that gaps down from the previous day’s close, and then a long bullish candle that closes near the opening price of the first candle. The evening star pattern is the opposite of the morning star pattern and occurs at the end of a bullish trend.
5. Three Inside Up/Down
The three inside up/down pattern is a bullish/bearish reversal pattern that occurs after a downtrend. The three inside up pattern occurs when a long bearish candle is followed by a small-bodied candle that is completely engulfed by the next bullish candle. The three inside down pattern is the opposite of the three inside up pattern and occurs after a bullish trend.
6. Shooting Star and Inverted Hammer
The shooting star and inverted hammer are both reversal patterns that occur after an uptrend. The shooting star is a bearish reversal pattern that occurs when the price opens higher than the previous day’s close but then falls and closes near or below the opening price. The inverted hammer is a bullish reversal pattern that occurs when the price opens lower than the previous day’s close but then rallies and closes near or above the opening price.
In conclusion, there are many candlestick setups used in forex trading, each with its own unique characteristics and implications. By understanding these patterns and their meanings, traders can make informed decisions about when to enter or exit a trade. It is important to note that candlestick patterns should be used in conjunction with other technical analysis tools and should not be relied upon as the sole basis for trading decisions.
