Candlestick analysis can be called the main type of graphical analysis, in which the object of study is a Japanese candle - a structural unit of a candle chart
The candles themselves were invented a long time ago, so the candle analysis of the market has a very long history. The main idea is to understand by the appearance and parameters of a candle or a combination of several candlesticks alone what can be expected in the future and what prospects are opening up in trading. The main parameters that we are interested in are the following:
- The general shape of the candle
- The relationship between body and shadows
- The ratio between adjacent candles
These are the three key points that we will evaluate in the candlestick analysis of the market. There are certain criteria that have appeared over the years of observation, and later they were described in particular in Neeson's book "Japanese Candles". For example, one candle may indicate that the market is likely to turn around, while the other suggests that the trend will continue. Of course, this is not an absolute option, but the statistics on the development of candle models are quite convincing.
The only thing that can distort it to some extent is the use of candle analysis of the forex market. This is due to the fact that initially the observations were carried out on the securities market, and only then on a relatively young forex. Very high volumes and the use of an order of magnitude of large financial levers leads to the fact that sometimes there is a deviation from the reference form, but the model itself does not lose its operability at all.
The only conditional disadvantage is the fact that the candlestick analysis of the forex market is applicable on fairly large time frames, that is, less than H4 is not even worth considering. And the ideal option that will bring the greatest benefit is the analysis of daily and weekly charts.
Consider a simple example. The Asian session is taking place calmly, no serious publications are planned for the period of the European one. But during the American session, some event occurs and prices begin to fall. Since any such events lead to the fact that subsequent trading sessions support the emerging trend, it turns out that a fall in America will give a certain shape of a candle for a trading day and in the future it can serve as a signal to enter. Then there will be another fall in Asia, which will continue in Europe.
As a result, we get that the candle signal is working out. At the same time, we are not at all interested in what happened inside the day, only the final shape of the daily candle is important to us. Due to the fact that many prefer short-term trading, forex candle analysis is not so popular, but for those who have decided to trade in the medium term, candle market analysis can become a very good assistant.
All models from the candlestick market analysis are divided into two main categories:
- Reversal models. As it is not difficult to guess, this is a special form that indicates a possible change in the direction of the market.
- Continuation of the trend. Here, too, everything is simple - these models, as a rule, describe consolidations, that is, periods of horizontal or slightly inclined movement against the trend.
Undoubtedly, those who have watched the chart, but are not familiar with the candlestick analysis of the market, will see very familiar combinations in the list of models. They occur quite often, given the variety, almost every day you can find the resulting patterns on the daily charts. And the more instruments are tracked, the more signals there will be. In addition, weekly candles are added here, of which, of course, there are fewer, but the signals are very reliable. So, let's look at the main forex candlestick patterns:
Each candle model has its own name. Moreover, the bullish model often has a completely different name than the bearish one. For example, a "Shooting Star" is a candle that forms at the end of a bullish trend, and its opposite is called a "Hammer". They look absolutely identical, only they are directed in different directions. Accordingly, reversal patterns are divided into pairs with a few exceptions - "Absorption" can be bullish or bearish.
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The reversal pattern itself in the candlestick analysis of the market usually consists of one, two or three candles. There are more complex combinations, but they do not always work out exactly on forex, besides, it is easy to get confused in a large number of candles in unaccustomed situations. In this regard, it is better to start getting acquainted with forex candlestick analysis with the following patterns:
This is a model consisting of a single candle that appears at the end of an upward trend, that is, it is assumed that growth ends there. Surely many have seen it, it is often formed on daily charts. It is a candle with a long upper shadow and a not very large body. The ratios are approximately the following: the size of the shadow exceeds the size of the body by about two to three times. This is a fairly large range, so many candles fall into the category of "Shooting Stars".
If the shadow is smaller, then it is a weak signal and does not fall under the description of the pattern. If it is much longer, then it will be a completely different model - a pin bar, which we will talk about in the Price Action section. It is also worth noting that the color of the candle body plays a rather important role - if it closes below the opening point, then this is a good and strong signal, if the closing occurs with an increase, then there is a lower probability of a reversal.
In any case, it is recommended to trade only after its minimum is broken. The advantage of a shooting star in forex candle analysis is that it is only one candle and you can enter the market literally on the next one. As already mentioned, on a downtrend, this candle will be symmetrical and is called a "Hammer".
Another "star pattern" after the bullish trend, but only this time consisting of three candles. It is not very common, but at the same time there is an interesting property - it often appears on a four-hour chart and performs well. But if you follow the canons of candle market analysis, it is better to focus on the daily time frame. It is a long candle with a short upper shadow, followed by a very small candle with also short shadows.
After that, the key moment comes - if the market starts to decline and a third candle with a sufficiently large body comparable to the first candle turns out, then this confirms the reversal. Just as in the case of a shooting star, it is very easy to identify, trading is conducted on the fourth candle. Some enter the market even in the process of forming a third, but it is better to do this when there is already some experience in the candlestick analysis of the forex market. The bearish version is called "Morning Star" - just inverted. It can also be noted that often such a combination is part of a more complex one, formed, for example, on a weekly time frame.
One of the few models in the candlestick analysis of the market, which is also used on the four-hour chart. It consists of only two candlesticks that form a reversal combination. Consider the example of a bullish trend. The first candle is growing, it is also the last in this trend. The second candle closes with a decrease, and the closing point of the candle is lower than the opening point of the first one. Hence the name - the second candle seems to absorb the entire body of the first.
At the same time, the shadows of the first candle should be short, for the second it is not so important. The best option is if the second candle covers not only the body, but also the entire range, that is, the lower shadow of the first candle is also included here. In this case, the signal is very strong.
Read more: Technical analysis on the forex market
With a downward trend, everything is the same, only in the opposite direction. Sometimes there are situations when there are 4 such candles in a row, that is, each previous one is absorbed. Usually the original meaning is not violated, that is, such a structure still implies a reversal. Absorption usually ends with sharp accelerations in the last waves of the trend, so it is important to enter the deal in time, that is, not to miss the opening of the next candle.
A fairly reliable reversal model for a growing trend. The increase in the market ends with growth in the form of a candle, in a form completely identical to "Hammer". That is, in fact, Hung in the forex candle analysis is a hammer that only appears on a growing trend. The idea is that the market could not continue the movement it started and does not draw a new extreme.
Read more: Wave Analysis in Forex
In this regard, a similar candle of a daily or weekly time frame is obtained, which signals a very likely reversal. The trading rules are the same as for other models from one candle. In the case of a downward market movement, such a pattern is called an "Inverted Hammer" - it is a shooting star, only at the end of a bear market. At first it is easy to get confused, but over time all these names are well stored in your head, literally after the first transaction on them.
Continuation of the trend
There are not so many models of candle market analysis suggesting a continuation of the trend. For beginners, it is reasonable to pay attention to one of the main ones used in forex candlestick analysis - "Three White Soldiers" and the reverse bearish "Three Black Crows". They are well remembered and do not contain the complex structure that others have. The main idea is that the market is gaining momentum by drawing three candlesticks of the same direction in a row. In the first case, these are three growing (white) candles, in the second — three falling ones. Such a combination demonstrates the mood of the market for a trend, they can be formed both in the initial stage of formation and in the middle of a trend.
In these models, attention should be paid to how candles look. It is important that there are no long shadows directed against the trend, otherwise it may just be a gradual advance in the resistance or support zone, which will end in a reversal. It is also desirable that the candle bodies do not decrease, that is, they are either approximately the same or slightly increased with the development of the model. The best option is a smooth increase in the ranges of candle bodies with short shadows. As a rule, such a combination can be seen on strong and stable trends.
The rest of the models are complicated, because they were originally developed for the stock market, where there are gaps between candles. Gap is a gap formed between the closing price of one candle and the opening price of another. This happens because, unlike forex, the stock market is not traded around the clock, or rather, each trading instrument has a limited trading time.