Understanding Candlestick Charts for Forex Trading: A Beginner's Guide

When you decide to enter the Forex trading industry, you’ll find that candlestick chart analysis is an indispensable skill. This tool is available on all trading platforms, and many traders can generate significant profits solely by understanding candlestick patterns. This article will guide you through candlestick chart analysis in Forex trading in detail.

What is a candlestick chart: components and structure

A candlestick chart is a tool that displays price movements consisting of candles indicating the opening price, closing price, highest, and lowest prices within a specified period.

Candlestick charts can be used across various timeframes, whether it’s 15 minutes, 1 hour, or 1 week. Recognizing different patterns on candlestick charts helps traders better understand market behavior.

Key components of a candlestick:

• White candlestick (Bullish): appears when the closing price is higher than the opening price. A long body indicates strong buying pressure.
• Black candlestick (Bearish): appears when the closing price is lower than the opening price. A long body indicates strong selling pressure.
• Wick (Wick): shows the battle between buyers and sellers. Long wicks indicate higher volatility; short wicks suggest limited price movement.

Why candlestick charts are important to traders

Most Forex traders prefer using candlestick charts for the following reasons:

◆ Indicating market sentiment Candlestick charts reflect traders’ emotions toward currency pairs through buying and selling pressure, providing clearer insights than line or bar charts.

◆ Clarity and ease of understanding Candlestick patterns are straightforward, making trend prediction easier. When combined with tools like trendlines or support-resistance levels, accuracy is further enhanced.

◆ Proven effectiveness Candlestick charts have a long history, dating back over 200 years in Japan, where rice traders used them to analyze rice prices. They have proven effective in predicting price movements.

Basic candlestick pattern types

Traders should learn the three most common pattern types:

Pattern 1: Doji

Doji is a candlestick where the open and close prices are the same or very close, reflecting a balance between buying and selling forces. It often indicates a potential trend reversal.

Doji has four subtypes:

• Standard Doji: Price moves up and down before closing at the open price.
• Gravestone Doji: Buying pressure pushes prices up but is pushed down by selling pressure; may signal the end of an uptrend.
• Dragonfly Doji: Selling pressure pushes prices down but is supported by buying; may signal the end of a downtrend.
• Four Price Doji: Very little price movement; trading is generally discouraged.

When a Doji appears after a large white candle, it may indicate weakening buying momentum. Similarly, a Doji after a black candle suggests weakening selling pressure.

Pattern 2: Marubozu

Marubozu is a candlestick with no or very little wick (, indicating strong momentum.

• When a Marubozu is white: the open is at the lowest point, and the close is at the highest, showing complete dominance of buying.
• When a Marubozu is black: the open is at the highest point, and the close is at the lowest, showing complete dominance of selling.

) Pattern 3: Spinning Top

Spinning Top has a short body with long wicks on both ends, reflecting indecision between buyers and sellers.

• When appearing in an uptrend: buying momentum weakens, suggesting a potential reversal downward.
• When appearing in a downtrend: selling momentum weakens, indicating a possible reversal upward.

Single-candle patterns: trend reversal signals

Hammer & Hanging Man

Hammer appears in a downtrend, with a long lower wick. It shows that selling pressure attempted to push prices down, but buying pressure pushed the price back up to close higher, possibly signaling a trend reversal to the upside.

Hanging Man appears in an uptrend, with a long lower wick. It indicates that buying pressure has waned, and sellers are starting to dominate, possibly signaling a reversal downward.

However, confirmation from the next candle is recommended.

Inverted Hammer & Shooting Star

Inverted Hammer appears in a downtrend, with a long upper wick. Buying pressure tries to push prices higher, and despite selling attempts, the close remains high, possibly indicating a reversal upward.

Shooting Star appears in an uptrend, with a long upper wick. Selling pressure pushes prices down, and despite buying attempts, the close remains low, possibly signaling a reversal downward.

Two-candle patterns: reversal strength

Bullish Engulfing & Bearish Engulfing

Bullish Engulfing consists of a small black candle followed by a large white candle that completely engulfs the previous candle’s body. It is a strong signal of a reversal from downtrend to uptrend.

Bearish Engulfing consists of a small white candle followed by a large black candle that completely engulfs the previous candle’s body. It indicates a reversal from uptrend to downtrend.

Tweezer Tops & Tweezer Bottoms

Tweezer Tops occur when a bullish candle is followed by a bearish candle with similar or nearly equal upper wicks, indicating rejection of higher prices and potential reversal downward.

Tweezer Bottoms occur when a bearish candle is followed by a bullish candle with similar or nearly equal lower wicks, indicating rejection of lower prices and potential reversal upward.

Three-candle patterns: advanced trend reversal signals

Morning Star & Evening Star

Morning Star consists of three candles:

• First: a downtrend candle
• Second: a Doji or small-bodied candle indicating uncertainty
• Third: an uptrend candle, longer than half of the first candle

This pattern signals a reversal from downtrend to uptrend.

Evening Star consists of three candles:

• First: an uptrend candle
• Second: a Doji or small-bodied candle indicating uncertainty
• Third: a downtrend candle, longer than half of the first candle

This pattern signals a reversal from uptrend to downtrend.

Three White Soldiers & Three Black Crows

Three White Soldiers is a strong bullish reversal pattern, consisting of three consecutive bullish candles:

• First: a bullish candle indicating the start of reversal
• Second: larger than the first, confirming buying strength
• Third: equal or larger than the second, showing continued buying momentum

Three Black Crows is a strong bearish reversal pattern, consisting of three consecutive bearish candles:

• First: a bearish candle indicating the start of reversal
• Second: larger than the first, confirming selling strength
• Third: equal or larger than the second, showing continued selling momentum

Three Inside Up & Three Inside Down

Three Inside Up indicates a reversal from downtrend to uptrend:

• First: a long bearish candle at a low point
• Second: a smaller bullish candle, about 50% of the first
• Third: closes above the first candle, confirming buying pressure

Three Inside Down indicates a reversal from uptrend to downtrend:

• First: a long bullish candle at a high point
• Second: a smaller bearish candle, about 50% of the first
• Third: closes below the first candle, confirming selling pressure

Important notes about candlesticks

Basic principles:

• White candles indicate buying pressure; black candles indicate selling pressure.
• Long wicks show ongoing battle between buyers and sellers; short wicks suggest market calm.
• Patterns can be categorized into single, two-candle, and three-candle formations.

Practical warnings:

• Avoid trading when patterns have a “success rate” below 50%. Consider macroeconomic factors and fundamental data.
• Practice with demo accounts before applying real funds.

Investment results are not guaranteed. Trading involves risks and may not be suitable for everyone.