Trading Forex With Candlestick Charts
Trading Forex With Candlestick Charts
Trading Forex Candlesticks
This forex blog explains trading forex with candlestick charts, what specific candlestick patterns I look for to make some very profitable trades.
What is a candlestick pattern?
In technical analysis, a candlestick pattern is a movement in prices shown graphically on a candlestick chart that some believe can predict a particular market movement. The recognition of the pattern is subjective and programs that are used for charting have to rely on predefined rules to match the pattern.
Candlestick charts are one of the most powerful technical analysis tools in the trader’s toolkit. They are also one of the most prevalent. Most technical analysis programs use candlesticks as the default mode of charting. Used correctly, candlesticks can give a signal in advance of much other market action.
There are many Forex trading strategies a trader could use to profit in this business.
The Forex market is the largest financial market in the world and allows traders the opportunity to capitalize on currency trends to yield profits. There are many Forex strategies a trader could use to profit in this business.
Candlesticks in Forex Trading – There are a few things you need to know when trading candlesticks. In my experience, the 15 minute charts to 4 hour charts are the best ones to use when trading candlestick patterns. You must always wait for the candles to complete to make sure the candlestick pattern is complete. Do not guess where the candle will close and try to get into a trade early.
Which candlestick pattern is most reliable?
Top 5 Most Consistent Candlestick Patterns
- Doji Formations. Doji formations, such as dragonfly and tombstone, are widely regarded as strong indicators of a probable reverse. …
- Piercing and Cloud Cover Formations. …
- Engulfing Formations. …
- Hammer and Shooting Star Formations. …
- Harami Formations.
There are many other candlestick patterns, however some are more dependable than others. The ones I use are called engulfing patterns. Specifically “Bullish Engulfing” and Bearish Engulfing”. Both of these are reversal patterns and are considered to be some of the most profitable candlestick patterns to trade. When the candle body engulfs the previous candles body, this is called an “engulfing” pattern. Bullish engulfing patterns are found at price bottoms and bearish engulfing patterns are found at price tops.
How to Trade Engulfing Candles – To trade engulfing candlestick patterns, we’re looking for an end of an uptrend or downtrend. This does not have to be a strong trend but it does need to have some momentum that appears to be coming to an end. A good indication of a trend coming to an end is when the bodies of the candles are getting smaller in size. That means the momentum may be running out and this is when you should be looking for a reversal in price action. This could also be the beginning of a consolidation period, so we need to be aware of that.
In an uptrend, we look for an “up” candle immediately followed by a “down” candle, where the body of the “down” candle engulfs the previous “up”‘ candle. This is the setup we want to see so we take the short trade immediately following the close of this candlestick. Next, we count how many pips away the top of the highest last 2 candles are, including the wick, and add 5 pips. This is our Stop Loss. Our Take Profit target should be set to twice this value.
For example, if our stop loss is 40 pips away, then our take profit should be at least 80 pips. Money management/risk to reward ratio, are key in this business. A long trade would be similar to a short trade except we’re looking for a downtrend reversal to get into a trade.
You can search around the web for forex candlestick patterns and learn all you need to know about them, but remember there are so many of them, you need to just focus on a few. As I mentioned, the engulfing patterns are some of the best ones to trade so if you stick with those, you’ll do very well.