Forex trading using candlestick patterns

The 5 Most Powerful Candlestick Patterns.

Candlestick charts are a technical tool that pack data for multiple time frames into single price bars. This makes them more useful than traditional open-high, low-close bars (OHLC)​ or simple lines that connect the dots of closing prices. Candlesticks build patterns that predict price direction once completed. Proper color coding adds depth to this colorful technical tool, which dates back to 18th century Japanese rice traders.

Steve Nison brought candlestick patterns to the Western world in his popular 1991 book, "Japanese Candlestick Charting Techniques." Many traders can now identify dozens of these formations, which have colorful names like bearish dark cloud cover, evening star and three black crows. In addition, single bar patterns including the doji and hammer have been incorporated into dozens of long - and short-side trading strategies. (For related reading, see Candlestick Charting: What Is It? )

Candlestick Pattern Reliability.

Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they've been deconstructed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail and traditional fund managers who execute technical analysis strategies found in popular texts. In other words, hedge fund managers use software to trap participants looking for high-odds bullish or bearish outcomes. However, reliable patterns continue to appear, allowing for short - and long-term profit opportunities. (See also: The Multiple Strategies of Hedge Funds .)

Here are five candlestick patterns that perform exceptionally well as precursors of price direction and momentum. Each works within the context of surrounding price bars in predicting higher or lower prices. They are also time sensitive in two ways. First, they only work within the limitations of the chart being reviewed, whether intraday, daily, weekly or monthly. Second, their potency decreases rapidly three to five bars after the pattern has completed.

Top 5 Candlestick Patterns.

This analysis relies on the work of Thomas Bulkowski, who built performance rankings for candlestick patterns in his 2008 book, "Encyclopedia of Candlestick Charts." He offers statistics for two kinds of expected pattern outcomes: reversal and continuation. Candlestick reversal patterns predict a change in price direction, while continuation patterns predict an extension in the current price direction.

In the following examples, the hollow white candlestick denotes a closing print higher than the opening print, while the black candlestick denotes a closing print lower than the opening print. (See The Basic Language of Candlestick Charting for more information.)

Three Line Strike.

The bullish three line strike reversal pattern carves out three black candles within a downtrend. Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar. According to Bulkowski, this reversal predicts higher prices with an 84% accuracy rate.

Two Black Gapping.

The bearish two black gapping continuation pattern appears after a notable top in an uptrend, with a gap down that yields two black bars posting lower lows. This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 68% accuracy rate.

Three Black Crows.

The bearish three black crows reversal pattern starts at or near the high of an uptrend, with three black bars posting lower lows that close near intrabar lows. This pattern predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. The most bearish version starts at a new high (point A on the chart) because it traps buyers entering momentum plays. According to Bulkowski, this pattern predicts lower prices with a 78% accuracy rate. (For related reading, see How Do I Build a Profitable Trading Strategy When Spotting a Three Black Crows Pattern? )

Evening Star.

The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high. The market gaps higher on the next bar, but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts that the decline will continue to even lower lows, perhaps triggering a broader-scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 72% accuracy rate. (See also: How Is an Evening Star Pattern Interpreted by Analysts and Traders? )

Abandoned Baby.

The bullish abandoned baby reversal pattern appears at the low of a downtrend, after a series of black candles print lower lows. The market gaps lower on the next bar, but fresh sellers fail to appear, yielding a narrow range doji candlestick with opening and closing prints at the same price. A bullish gap on the third bar completes the pattern, which predicts that the recovery will continue to even higher highs, perhaps triggering a broader-scale uptrend. According to Bulkowski, this pattern predicts higher prices with a 70% accuracy rate. (For more, see Using Bullish Candlestick Patterns to Buy Stocks .)

The Bottom Line.

Candlestick patterns capture the attention of market players, but many reversal and continuation signals emitted by these patterns don't work reliably in the modern electronic environment. Fortunately, statistics by Thomas Bulkowski show unusual accuracy for a narrow selection of these patterns, offering traders actionable buy and sell signals. (To learn more, take a look at Advanced Candlestick Patterns .)

GET STARTED.

Open a demo account to fine tune your trade strategies.

Apply for a live account now and you could be trading in minutes.

Losses can exceed investment.

GETTING STARTED.

New to trading or to OANDA? Learn the basics here.

TOOLS AND STRATEGIES.

Develop your trading strategy and learn to use trading tools for market analysis.

CAPITAL MANAGEMENT.

Learn to apply risk management tools to preserve your capital.

BASICS OF TRADING.

Learn the skills necessary to open, modify and close trades, and the basic features of our trading platform.

TECHNICAL AND FUNDAMENTAL ANALYSIS.

A trading strategy can offer benefits such as consistency of positive outcomes, and error minimization. An optimal trading strategy reflects the trader’s objective and personal approach.

Fundamental traders watch interest rates, employment reports, and other economic indicators trying to forecast market trends.

Technical analysts track historical prices, and traded volumes in an attempt to identify market trends. They rely on graphs and charts to plot this information and identify repeating patterns as a means to signal future buy and sell opportunities.

PROTECT YOUR CAPITAL INVESTMENT.

Leveraged trading involves high risk since losses can exceed the original investment. A capital management plan is vital to the success and survival of traders with all levels of experience.

Learn risk management concepts to preserve your capital and minimize your risk exposure. Seek to understand how leveraged trading can generate larger profits or larger losses and how multiple open trades can increase your risk of an automatic margin closeout.

Execution speed numbers are based on the median round trip latency measurements from receipt to response for all Market Order Fills executed between June 1st and Sept 1st 2016 on the OANDA legacy and OANDA v20 execution platforms, excepting MT4 initiated orders.

Contracts for Difference (CFDs) or Precious Metals are NOT available to residents of the United States.

MT4 hedging capabilities are NOT available to residents of the United States.

The Commodity Futures Trading Commission (CFTC) limits leverage available to retail forex traders in the United States to 50:1 on major currency pairs and 20:1 for all others. OANDA Asia Pacific offers maximum leverage of 50:1 on FX products and limits to leverage offered on CFDs apply. Maximum leverage for OANDA Canada clients is determined by IIROC and is subject to change. For more information refer to our regulatory and financial compliance section.

This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. It is not investment advice or an inducement to trade. Past history is not an indication of future performance.

© 1996 - 2017 OANDA Corporation. All rights reserved. "OANDA", "fxTrade" and OANDA's "fx" family of trademarks are owned by OANDA Corporation. All other trademarks appearing on this Website are the property of their respective owners.

Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and may not be suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. You may lose more than you invest. Information on this website is general in nature. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks. Refer to our legal section here.

Financial spread betting is only available to OANDA Europe Ltd customers who reside in the UK or Republic of Ireland. CFDs, MT4 hedging capabilities and leverage ratios exceeding 50:1 are not available to US residents. The information on this site is not directed at residents of countries where its distribution, or use by any person, would be contrary to local law or regulation.

OANDA Corporation is a registered Futures Commission Merchant and Retail Foreign Exchange Dealer with the Commodity Futures Trading Commission and is a member of the National Futures Association. No: 0325821. Please refer to the NFA's FOREX INVESTOR ALERT where appropriate.

OANDA (Canada) Corporation ULC accounts are available to anyone with a Canadian bank account. OANDA (Canada) Corporation ULC is regulated by the Investment Industry Regulatory Organization of Canada (IIROC), which includes IIROC's online advisor check database (IIROC AdvisorReport), and customer accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at cipf. ca.

OANDA Europe Limited is a company registered in England number 7110087, and has its registered office at Floor 9a, Tower 42, 25 Old Broad St, London EC2N 1HQ. It is authorised and regulated by the Financial Conduct Authority, No: 542574.

OANDA Asia Pacific Pte Ltd (Co. Reg. No 200704926K) holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore and is also licenced by the International Enterprise Singapore.

OANDA Australia Pty Ltd  is regulated by the Australian Securities and Investments Commission ASIC (ABN 26 152 088 349, AFSL No. 412981) and is the issuer of the products and/or services on this website. It's important for you to consider the current Financial Service Guide (FSG), Product Disclosure Statement ('PDS'), Account Terms and any other relevant OANDA documents before making any financial investment decisions. These documents can be found here.

OANDA Japan Co., Ltd. First Type I Financial Instruments Business Director of the Kanto Local Financial Bureau (Kin-sho) No. 2137 Institute Financial Futures Association subscriber number 1571.

3 Forex Candlestick Patterns That’ll Boost Your Trading Profits.

Last Updated November 11, 2016.

There is a special section in every good price action trader’s toolbox reserved for Forex candlestick patterns, and for good reason.

Aside from technical chart patterns such as the head and shoulders or bull and bear flags, these candlesticks can offer you a chance to understand the sentiment that’s driving a particular market.

Exclusive Bonus: Download the Forex candlestick patterns PDF cheat sheet to learn the characteristics that lead to profitable trades.

In this lesson, we’re going to cover three of my favorite Forex candlestick patterns. I’m going to assume that you’re familiar with Japanese candlesticks. If not, you may want to visit this post and then come right back.

By the time you finish this lesson, you’ll know how to identify these formations, what makes them so lucrative as well as the price structures to stay away from.

I’ll be using the terms “candlestick” and “bar” interchangeably throughout this lesson. A pin bar or an inside bar can technically be called a pin candlestick and inside candlestick , but these aren’t nearly as common.

1. The Pin Bar and Its Ability to Signal Turning Points.

Let’s begin with my favorite candlestick called a pin bar. Like most formations, these can form as either a bullish or bearish signal.

So what exactly qualifies as a pin bar?

I hope the video above cleared up any questions you may have had about the pin bar.

Here’s an illustration of the characteristics we just discussed.

Before we get into why these are so powerful, let’s first break down the components of the structure.

The tail of a pin bar is also called a “wick” or “shadow” and represents the most critical element of the pattern. As a general rule, the tail should make up at least two-thirds of the entire pin bar. Notice how the tail on the two pin bars in the illustration above are much more pronounced than the rest of the structure.

Next is the body . The body represents the open and close of a pin bar and can vary in size. However, there shouldn’t be much space between the open and close.

The first rule about the tail should help keep you in line. After all, if the tail is at least two-thirds of the candlestick, then the body should be relatively small.

The nose of the pin bar , which is sometimes nonexistent, is important only as it relates to the tail and body. If the tail follows our rule of being at least 2/3 of the entire pin bar, and the open and close are close together, then the nose shouldn’t be a make-or-break characteristic.

Just know that the nose should be as small as possible, much like the image above.

Why do I trade it?

When it comes to Forex candlestick patterns, the pin bar is by far my favorite.

It’s easy to spot when you have your chart setup to trade Forex price action It provides a favorable place to hide your stop loss The pin bar can be extremely profitable when correctly utilized They are effective on both the daily and 4-hour time frames.

Now that you have a firm grasp on the characteristics to look for let’s get into a couple of examples.

The first is a bullish pin bar that occurred on the NZDJPY daily chart.

Notice how after an extended move lower, the NZDJPY found support and subsequently formed a bullish pin bar.

This pattern triggered a sharp move higher back to previous swing lows, which acted as resistance.

Next up is a bearish pin bar that occurred on the EURUSD daily time frame.

In this case, the EURUSD had carved out an ascending channel. On the second retest of resistance, sellers came out in force and eventually formed a bearish pin bar.

This particular candlestick formation triggered a 400 pip drop over the next eighteen sessions.

I wrote a more detailed lesson on the pin bar where I get into what makes a tradable setup as well as where to place your stop loss and target.

2. Nothing Says Continuation Like the Inside Bar.

The inside bar is one of the more misinterpreted Forex candlestick patterns simply because they aren’t hard to find. This observation is especially true for those trading anything less than the daily charts.

Take a peek at the video below where I explain the characteristics of the inside bar and an easy way to determine if one is bullish or bearish.

To recap, here’s an illustration showing the attributes of an inside bar:

The inside bar’s range (high to low) should be engulfed entirely by the previous bar’s range, also called the “mother bar.”

Another way of saying it is that the mother bar should completely engulf the range of the inside bar.

So what makes the inside bar so lucrative?

When it comes to Forex candlestick patterns, the inside bar is my second favorite pattern to trade.

It can act as a profitable continuation pattern if it occurs during a strong trend It provides a favorable place to hide a stop loss A tradable inside bar doesn’t occur often, but when it does it can be a highly effective Forex candlestick pattern.

Here is an excellent example of the inside bar in action:

Notice how the inside bar in the chart above formed during a strong uptrend. An established trend is a requirement for trading this particular candlestick pattern.

The reason for this is that the inside bar is nothing more than consolidation. So we have a strong trend followed by consolidation which leads to a breakout in the prevailing direction.

Pretty simple stuff, right?

The next chart shows two bearish inside bars that formed on the EURUSD daily chart. Note that the pair had been in a downtrend for several months, therefore these are bearish continuation patterns.

You could make the case that the first signal in the chart above was also a pin bar, and I would agree. The combined rejection of former support and consolidation made for an incredibly profitable trade setup.

To learn more about inside bars, including which ones to trade and which ones to avoid, check out my detailed lesson on trading the inside bar pattern.

3. The Misunderstood Engulfing Bar Reversal.

Last but not least is the engulfing candlestick. Unlike the inside bar that we just studied, this formation most often signals a reversal in the market.

Why do I call it a misunderstood pattern?

Because it takes more than an engulfing candle to warrant a position. To be considered tradable, an engulfing candle must develop at a key support or resistance level and after an extended move up or down .

Here’s a brief video that explains what I look for…

While the video above only addresses the bearish engulfing candle, the same rules apply for its inverse, the bullish engulfing.

For it to be profitable, an engulfing pattern must form at a swing high or low . Only then can it be used to formulate a trade idea.

Notice how the range of the engulfing bar completely engulfs the previous bar’s range . Hence the name, this is the most prominent and significant feature of this pattern. It’s also what makes it such a lucrative signal.

While the engulfing bar pattern is my third favorite in this lineup, it can be extremely telling if properly utilized.

Here are a few things to keep in mind when trading them…

They typically signal a forthcoming reversal These patterns should only be utilized on the daily time frame and after an extended move up or down If used as an entry signal, your stop loss should be placed above the engulfing bar high for a bearish pattern and below the engulfing bar low for a bullish pattern For a higher probability setup, always combine them with other favorable methods or techniques.

The bearish engulfing pattern below occurred on the AUDUSD daily chart.

In fact, there were two back-to-back formations at key resistance.

As you can see, the pair had carved out a wedge pattern. The two bearish signals formed at resistance, creating two profitable opportunities.

Know that the first candlestick in the chart above is also a bearish pin bar or at the very least a bearish rejection. It’s rare, but these two patterns can sometimes overlap.

Always remember that a bullish engulfing pattern at a swing low is a sign of potential strength . It signals that the current downward momentum is likely coming to an end.

Alternatively, a bearish engulfing pattern at a swing high is a sign of potential weakness . If you see one form in this manner, the chances are good that an increase in selling pressure is on its way.

Last but certainly not least, both candlestick patterns must form at a key level to be tradable. Otherwise, you may find yourself trading a lot of false positives.

Final Words.

Whether you trade using raw price action or some other means of identifying favorable setups, the three candlestick patterns above will surely improve your trading.

As lucrative as these formations can be, always remember that there are never any guarantees. Just like any other Forex trading strategy, the three above can and do fail, so always protect yourself.

Last but not least, the pin bar, inside bar and engulfing pattern are most useful when combined with other confluence factors. By doing this, you greatly increase the odds of a successful trade.

Now I've Got a Question For You.

Are you ready to begin using these patterns in your trading?

Then you definitely want to download the free Forex candlestick patterns PDF that I just put together.

It contains all three formations above and shows you the exact characteristics I look for when developing a trade idea.

Click the link below and enter your to download the cheat sheet.

I notice you talk about inside bars and pin bars do you trade the engulfing pattern as well or no?

It isn’t something I currently trade. I get plenty of setups between pin bars and inside bars, which I’ve found to be more reliable than engulfing patterns. When traded properly of course.

In my opinion, You are better Teacher than Al Brooks. You can explain this all shit in simple way.

Mlotek, thank you for the compliment. Although, I’m not too familiar with Mr. Brooks or how he teaches.

thanks alot will be happy if i may have the book u help me alot.

My pleasure. I haven’t written any books, yet. 😉

thanks again…i enjoy reading your articles…n i learn a lot from you…now i know trading with price action is very power full than other…may i know if i have tree open trade setup all with price action open together…now 1 is hit SL and other 2 is still runing …so what can i do now..is it sitll wait for they hit sl/tp or i should close the trade? thanks…

Pleased to hear that, Alex. You’re very welcome. As for the trades, that’s really up to you. I don’t advise folks on what they should do with their money.

justin you are great.

Thanks for the kind words. 🙂 Feel free to reach out with any questions.

Justin, thank you once again for all your honest effort and depth of knowledge trying to educate us to be and do better in fx trading. Please can you talk a little bit of Moving Averages next time . Thanks and I appreciate.

You’re very welcome. Here are a couple of lessons on moving averages for you:

Hello. Very well explained. I’d like to ask, for how long can a candlestick pattern be valid?

Panagiotis, glad you enjoyed the lesson. As long as the candlestick formation is not invalidated. For example, the tail of a pin bar being breached.

Hi Justin, I read somewhere you were considering removing inside bars from the course material, is this true? Are you finding you don’t trade many inside bars these days?

Mike, I don’t trade inside bars nearly as much as I used to. I wouldn’t say they’ve become less effective, just not something I favor right now especially when volatility picks up.

Your method of teaching is understable and straight foward and I like that . A great mentor.

Cagn, I’m pleased to hear that. Thanks for the feedback.

If there is a brearish pin bar just below support. Green not red. Could this indicate a breakthrough ?

Rachel, I would need to see an example to answer that question.

I was thinking the same thing as Rachel as well. Basically, your lesson above shows two types of bearish and bullish pin bars – ones where the body is “filled in” and ones where the body is “empty”. The question I had in mind was, does it matter whether it is filled in or not?

So for the bearish pin bar example, you have it filled in with black. What if it is the same shape but not filled in? I’m thinking that it doesn’t matter. If the body is formed below a resistance level, the tail still shows lots of selling – whether the selling was greater than the opening price of the body or if it was less shouldn’t matter; it’s still indicating a lot of selling above the resistance line. But I’m not 100% sure since I’m just learning this…

Hai justin……can you tll me which broker can trust to trade?

Thanks for most of your analysis. I would like to know what retail forex broker is and their list. Also the names of parent forex companies that are not brokers.

Great articles man. The simplicity yet value of the concepts and the clarity in your thought and teaching make this a superb site.

Disclaimer: Any Advice or information on this website is General Advice Only - It does not take into account your personal circumstances, please do not trade or invest based solely on this information. By Viewing any material or using the information within this site you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general advice provided here by Daily Price Action, its employees, directors or fellow members. Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures, spot forex, cfd's, options or other financial products. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any material on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.

High Risk Warning: Forex, Futures, and Options trading has large potential rewards, but also large potential risks. The high degree of leverage can work against you as well as for you. You must be aware of the risks of investing in forex, futures, and options and be willing to accept them in order to trade in these markets. Forex trading involves substantial risk of loss and is not suitable for all investors. Please do not trade with borrowed money or money you cannot afford to lose. Any opinions, news, research, analysis, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results.

Copyright 2017 by Daily Price Action, LLC.

Please log in again. The login page will open in a new window. After logging in you can close it and return to this page.

Candlestick Patterns Graph.

How to use this graph.

Click the Update button to refresh the chart with the latest candlesticks. Mouse over any candlestick to see opening, high, low, and close values (in the upper right of the chart). Mouse over a pattern to identify it by name. (Our online tutorial provides candlestick formation definitions.) Draw a box on the graph to zoom in. Double-click (or click the Update button) to zoom back out. Use the check boxes under the graph to include or filter out patterns. When you click to include SMA or EMA overlays, you can then modify their period settings. Note that patterns are easier to spot when the market is moving quickly, rather than when the market is slowly ranging.

Contracts for Difference (CFDs) or Precious Metals are NOT available to residents of the United States.

This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. It is not investment advice or an inducement to trade. Past history is not an indication of future performance.

© 1996 - 2017 OANDA Corporation. All rights reserved. "OANDA", "fxTrade" and OANDA's "fx" family of trademarks are owned by OANDA Corporation. All other trademarks appearing on this Website are the property of their respective owners.

Leveraged trading in foreign currency contracts or other off-exchange products on margin carries a high level of risk and may not be suitable for everyone. We advise you to carefully consider whether trading is appropriate for you in light of your personal circumstances. You may lose more than you invest. Information on this website is general in nature. We recommend that you seek independent financial advice and ensure you fully understand the risks involved before trading. Trading through an online platform carries additional risks. Refer to our legal section here.

Financial spread betting is only available to OANDA Europe Ltd customers who reside in the UK or Republic of Ireland. CFDs, MT4 hedging capabilities and leverage ratios exceeding 50:1 are not available to US residents. The information on this site is not directed at residents of countries where its distribution, or use by any person, would be contrary to local law or regulation.

OANDA Corporation is a registered Futures Commission Merchant and Retail Foreign Exchange Dealer with the Commodity Futures Trading Commission and is a member of the National Futures Association. No: 0325821. Please refer to the NFA's FOREX INVESTOR ALERT where appropriate.

OANDA (Canada) Corporation ULC accounts are available to anyone with a Canadian bank account. OANDA (Canada) Corporation ULC is regulated by the Investment Industry Regulatory Organization of Canada (IIROC), which includes IIROC's online advisor check database (IIROC AdvisorReport), and customer accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of coverage is available upon request or at cipf. ca.

OANDA Europe Limited is a company registered in England number 7110087, and has its registered office at Floor 9a, Tower 42, 25 Old Broad St, London EC2N 1HQ. It is authorised and regulated by the Financial Conduct Authority, No: 542574.

OANDA Asia Pacific Pte Ltd (Co. Reg. No 200704926K) holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore and is also licenced by the International Enterprise Singapore.

OANDA Australia Pty Ltd  is regulated by the Australian Securities and Investments Commission ASIC (ABN 26 152 088 349, AFSL No. 412981) and is the issuer of the products and/or services on this website. It's important for you to consider the current Financial Service Guide (FSG), Product Disclosure Statement ('PDS'), Account Terms and any other relevant OANDA documents before making any financial investment decisions. These documents can be found here.

OANDA Japan Co., Ltd. First Type I Financial Instruments Business Director of the Kanto Local Financial Bureau (Kin-sho) No. 2137 Institute Financial Futures Association subscriber number 1571.