Three Most Important Candlestick Patterns In Forex Trading
What is a Candlestick
A candlestick is a way of displaying information about an asset’s price movement, the opening of the price and the closing of the price, it is the most important aspect of the technical analysis, it is made up of the body, wick and color in which all signifies something as far as movement is of concern.
Importance of reading candlestick
Candlesticks are very important to master as they pose both as indictors and price movement itself. Once you have learned several important candlestick patterns, you will feel eager to try them out in your Forex trading. Though this must be done with a lot of caution because it is easy to try too hard to spot them and start finding them everywhere, which can lead to overtrading and massive loses. The best thing to do is back test the patterns in the market historically, scroll backwards and try to notice what happens just after the formation of the patterns, master time frames and how long will the trades run.
Patterns you must Know
The morning star candlestick pattern is considered a sign of hope in a bleak market downtrend. It is a three-stick pattern: one short-bodied candle between a long red and a long green. Traditionally, the ‘star’ will have no overlap with the longer bodies, as the market gaps both on open and close. It signals that the selling pressure of the first day is subsiding, and a bull market is imminent, when you spot it then prepare yourself for a buy.
The Evening Star pattern is a three-candle, bearish reversal candlestick pattern that appears at the top of an uptrend. It signals the slowing down of upward momentum before a bearish move lays the foundation for a new downtrend.
Head and Shoulders
The very first part of a head and shoulders pattern is the uptrend. This is the extended move higher that eventually leads to exhaustion. As a general rule, the longer the uptrend lasts, the more substantial the reversal is likely to be. The market moves down to form a higher low. At this point, things are starting to come together, but we don’t quite have enough to draw the neckline. Now that the left shoulder has formed, the market makes a higher high which forms the head. But despite the bullish rally, buyers are unable to make a substantially higher low. At this point, we have the left shoulder and the head of the structure. The neckline is also beginning to take shape, but we need the right shoulder before we can draw the neckline on our chart. The right shoulder is where things come together. It’s an indication that buyers are tiring and that the market may be gearing up for a reversal. As soon as the right shoulder begins, we have enough to start plotting the neckline. But because the pattern isn’t yet complete, it’s best to think of it as a rough draft rather than a final version
Double bottom and Double top
Double top and bottom patterns are chart patterns that occur when the underlying investment moves in a similar pattern to the letter “W” (double bottom) or “M” (double top). Double top and bottom analysis is used in technical analysis to explain movements in a security or other investment, and can be used as part of a trading strategy to exploit recurring patterns commonly known as Price action strategy.