Candlestick patterns are one of those things that everyone in forex thinks they understand but most people are reading them completely wrong.. or at least not reading them in context which amounts to the same thing really. The basics are simple enough youve got your bullish candles your bearish candles and a load of formations with fancy Japanese names that are supposed to tell you what price is about to do next.
The Patterns That Actually Matter
The ones worth paying attention to are honestly fewer than most courses would have you believe. Dojis are useful when they appear at key levels because theyre showing you indecision right where it matters.. a doji in the middle of nowhere means absolutely nothing though. Engulfing patterns are probably the most reliable signal youll get from candlesticks alone especially when they form at support or resistance that youve already identified on a higher timeframe. A bullish engulfing at a level where price has bounced three times before is telling you something worth listening to.
Hammer and shooting star patterns work on the same principle.. rejection of a level. The long wick shows you that one side tried to push through and got absolutely stuffed. Pin bars which are basically the same thing with a different name are what most popular chart patterns guides will point you towards and for good reason they work.
The mistake people make is trading candlestick patterns in isolation. A hammer on its own means very little.. a hammer at a major support level with RSI showing oversold and price sitting on the 200 EMA thats a different story entirely. Context is everything and if youre not combining what the candles are telling you with proper technical analysis youre basically just gambling with a slightly prettier interface.
Morning and evening stars are decent reversal signals too but they take three candles to form which means by the time youve confirmed the pattern a chunk of the move has already happened. Thats the trade off with the more complex formations.. more confirmation but less reward. Some traders get around this by entering on the second candle and using the first as their stop which gives you a tighter risk but you will get faked out more often.
The three white soldiers and three black crows patterns are useful for spotting momentum shifts but again only at levels that matter. Three big green candles in the middle of a range isnt telling you much.. three big green candles breaking through resistance that has held for weeks now thats something you want to be paying attention to. Confluence is the word that keeps coming up and thats because its the single most important concept in technical analysis whether youre using candlesticks or anything else.