And while the world may be a vastly different place and the world of trading a whole different ball game, little has changed about the make-up of a candlestick, as our handy little diagram shows to the right.
No doubt you’ll have your own favourites, but it’s always healthy to get another opinion, right? Good. Because below we’ve outlined our top four candlestick patterns. If you keep a keen eye out for this lot, you won’t go far wrong.
Hot on the heels of our intro regarding the Japanese history of candlesticks, our first is named after the Japanese word for “fool” or “blunder”. Which we guess only emphasises why you shouldn’t miss this common pattern, which resembles a cross or plus sign.
This is due to the fact that its closing price that is nigh on the same as its opening price. This is a clear representation of indecision in the market, with an equal number of buyers and sellers. This is of course fairly common in a non-trending market. If a Doji appears when the market is trending, however, this can offer a significant sign that the market is turning. Thus, don’t be a “Doji” and miss out on the opportunity for breakouts.
3. The Engulfing Pattern
This shows a pure rejection of the previous price action and is a definite sign that the market did not take kindly to the previous move. The Engulfing Pattern can therefore be both a Bearish reversal signal (if spotted at the top of an uptrend) or a Bullish one (if at the bottom of a downtrend).
2. The Inside Bar
Another simple two-day candlestick, the Inside Bar is often referred to as a Harami and is near enough the inverse of the Engulfing Pattern. It’s therefore another great pattern for spotting breakouts.
A large body on the first day is followed by a much smaller body of opposite colour the day after, showing that the momentum has stopped. Following a large move, the market here looks to consolidate before setting off in its new direction. In a low trading volume this pattern can prove particularly effective in trading breakouts from the initial bars high or low, although be careful of false breaks.
1. The Pin Bar
Finally, we get to the Pinocchio Bar, or the Pin Bar for short. Regular readers here at Littlefish FX will know all about this pattern, given that we’ve come up with a Pin Bar Indicator to spot these patterns and written up a whole Pin Bar Strategy in our Forex Trading Course. Both of which you can purchase at our Forex Shop of course.
Pin Bars are formed when price ‘rejects’ a strong move in one direction, to reverse in the opposite direction. This can be down to significant news events and will highlight a change in trend, or a continuation of the current trend. Noticeable because it has a long wick on one side, the resemblance to a certain long nose gives it its nickname, though traders will also refer to these patterns as Shooting Star or Hammers.
But don’t be immediately fooled, like Pinocchio, Pin Bars could be “lying” about the direction it’s going in, so when looking for signals, the key is often not the exact size of the wick but how it looks in relation to the candles around it.