Candlestick insights and the secrets of three vital patterns

Candlestick patterns allow traders to forecast future price movements, enabling them to make effective and profitable trading decisions. They can indicate trend reversals, signal trend continuations, and show potential price changes. The most basic three candlestick patterns are the Hammer, Engulfing, and Doji. These typical patterns are most commonly used by traders on and are considered the most reliable.

Explanation of candlestick patterns

Price levels form a candlestick at the open, high, low, and close of a trading session. It consists of a body and wick (shadow), which extends either upwards or downwards depending on the price, high or low, formed on the timeframe.

Pay attention not only to the shape of the candlestick but also to its color. The body of the candlestick can be green or white, indicating a price increase. If the candlestick is red or black, it signals a price decrease. Let’s discuss the triple candle, which is the most popular and widely used.

Pattern 1: Hammer

Among the typical 3 candle patterns, the Hammer is the most recognizable. This figure has a small body and a long lower shadow, with the upper shadow being almost imperceptible or very short. When a Hammer appears on the timeframe, it warns that during the session, the price was actively pushed down, but buyers intervened, causing the price to shift slightly upwards. The Hammer indicates a decrease in selling pressure and positions the market more toward buying.  

Pattern 2: Engulfing

Engulfing is a pattern consisting of two candles, where the larger one completely engulfs the smaller one. The figure can be bullish or bearish. In the case of a bearish Engulfing, the second candle is larger and closes above the previous one. When you see this on a chart, it signals a possible bullish reversal. Conversely, if the second candle is larger and closes below the previous one, there is a possibility of a bearish reversal. These patterns are particularly useful when you notice them at key support or resistance levels. This information is useful even when trading manually or when using Forex EA that works. Trading robots, like traders, rely on indicator signals before opening or closing positions. Relying on technical analysis allows the system to act as cautiously and wisely as a human.

Pattern 3: Doji

When a candlestick with a small body and long upper and lower shadows appears on the chart, it means that the market sentiment is neutral. Indecision or market equilibrium means that neither buyers nor sellers have enough pressure to control the market. It also means that the trend is likely to reverse, and prices may change significantly in the near future. A Doji is formed when the opening and closing prices are almost the same. To assess where the price will move next, consider surrounding candles and market conditions and confirm this signal with other indicators.

Using candlestick patterns in trading

To effectively integrate candlestick patterns into a trading strategy, you need to know how to use and interpret them correctly. When you see a candlestick on the chart, you should be interested not only in its type but also in additional nuances.

• The size of the candlestick indicates the level of market volatility and trading momentum. The larger the body of the candlestick, the stronger the buying or selling pressure. Small candlesticks mainly indicate a potential trend reversal or that the market remains indecisive. So, for example, when you notice that previous candles were larger and the current one sharply differs, a trend reversal is highly likely.
• Pay attention to the color of the candlestick. Green and white are bullish colors – buyers are active and continue to push the price up. A black or red candlestick is bearish. If you see a candlestick of this color following a series of green ones, interpret it as a signal that the upward price movement is slowing down, and a trend reversal may occur soon.
• The location of the candlestick on the chart also matters. When the candlestick is near support or resistance lines, the reliability of the signal you see is highest.

How to effectively use all this knowledge?

It’s impossible to become adept at manipulating data obtained through candlestick patterns if you don’t practice it regularly. Theory is never as strong as personal experience, so the best thing you can do is practice. The more you observe candlestick patterns and compare them with what you see in the market, the better you will understand how to interpret each micro signal.

If you still doubt your analysis’s correctness and forecast accuracy, look for confirmation. Confirm candlestick signals with other technical indicators or price action analysis. Also, consider the timeframes on which you conduct your analysis. Certain candlestick patterns may be more meaningful on longer timeframes, while others may be more relevant on shorter timeframes.

Conclusion

Candlestick patterns provide very deep and valuable information about potential price changes, market sentiments, and trends. However, when a candlestick forms on the chart, you have to pay attention to almost every detail: the candlestick’s color, the length and placement of the wick, the candlestick’s location on the chart, and much more. All of this may seem too complicated.

Nevertheless, candlestick patterns are considered some of the most accurate because they provide maximum information at once. All that’s left is to verify and confirm these forecasts using one or two additional indicators and make informed decisions. But even considering the reliability of candlestick patterns, don’t forget to use all available risk management tools. This will protect you from unwanted losses and help you trade Forex profitably and effectively.

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