Candlestick Reading Techniques in Forex Trading - A Guide Every Trader Must Know

The ability to analyze candlestick charts is a fundamental skill that cannot be overlooked for those seeking success in the Forex market. This tool is available on all trading platforms, and many professional traders can generate significant profits simply by reading candlesticks alone. This article will guide you to a deep understanding of how to read candlesticks proficiently and apply this knowledge effectively in Forex trading.

Basic Components of Candlesticks and Their Role in Price Analysis

Candlesticks are the basic units of price information consisting of four key data points: opening price (Open), closing price (Close), highest price (High), and lowest price (Low) during a specified period. These four data points are visually presented in a clear format, allowing traders to easily observe price behavior.

Candlesticks are highly versatile in application, suitable for analysis across short-term (15 minutes), medium-term (1 hour), and long-term (1 week) timeframes.

Characteristics and Meaning of Candlestick Color Changes

The color of a candlestick indicates the direction and strength of buying and selling pressure

When the closing price is higher than the opening price, the candlestick appears as a bullish white candle (Bullish). This reflects strong buying momentum, especially when the white candle is long and prominent, showing buyers dominate the market.

Conversely, when the closing price is lower than the opening price, the candlestick appears as a bearish black candle (Bearish). This signals that selling pressure is clearly overpowering buying, particularly when the candle is long.

Wicks (Wick), the thin lines on the top and bottom of the candlestick, provide information about the intensity of the battle between buyers and sellers. Short wicks indicate that trading prices during the period stayed close to the open and close prices. Long wicks reflect high volatility and intense struggle between the two sides.

Why Candlesticks Are Crucial in Forex Analysis

Forex trading platforms offer various price display tools, but candlesticks remain the most popular for several reasons:

Ability to convey market sentiment - Candlesticks present both buying and selling pressures visually in each candle, unlike line charts that only provide primary data.

Simplicity in learning and application - Candlestick patterns clearly indicate trends, making it easier to predict price directions. When combined with other tools such as trend lines or support and resistance levels, analysis accuracy improves.

Historical credibility - The candlestick analysis method originated in Japan over 200 years ago. Japanese rice traders used this tool to study rice price behaviors in Osaka markets, which has since become widely accepted in trading circles and legendary in trading history.

Basic Candlestick Patterns Every Trader Should Know

After understanding the basics, let’s look at common patterns that appear on candlesticks, mainly Doji, Marubozu, and Spinning Top.

Doji - Market Indecision Signal

Doji is a candlestick where the open and close prices are equal or very close, indicating a balance between buying and selling forces. It warns that the current trend may change due to weakening momentum.

There are four main types of Doji:

• Standard Doji: Price moves up and down significantly before closing at the open price, showing a struggle between two sides.
• Gravestone Doji: Long upper wick and short lower wick, indicating buyers attempted to push prices higher but were pushed back down by sellers, possibly signaling a reversal from uptrend to downtrend.
• Dragonfly Doji: Long lower wick and short upper wick, showing sellers tried to push prices down but buyers regained control, possibly signaling a reversal from downtrend to uptrend.
• Four Price Doji: Open, close, high, and low are all the same, indicating very little trading activity; trading should be avoided during such periods.

Maximize Doji signals by observing the preceding candle. A Doji following a long white candle may suggest weakening buying pressure, while a Doji after a long black candle may indicate waning selling pressure. Confirmation from subsequent candles is recommended.

Marubozu - Strong Indication of Market Control

Marubozu is a candlestick with little to no wicks (or very minimal), indicating that one side has full control from open to close.

A white Marubozu (closing higher) signifies strong buying dominance, with the open at the low and close at the high, indicating a robust bullish trend.

A black Marubozu (closing lower) indicates strong selling dominance, with the open at the high and close at the low, signaling a strong bearish trend.

Spinning Top - Market Hesitation

Spinning Top features a small body with long upper and lower wicks, resembling a spinning top toy (Spinning Top). This pattern reflects market indecision; trading is vigorous but neither side has clear control.

The significance of a Spinning Top depends on context. If it appears after an uptrend, it may suggest weakening buying pressure. After a downtrend, it may indicate waning selling pressure.

Single Candle Reversal Patterns

Beyond basic patterns, certain single-candle formations signal potential reversals, including Hammer & Hanging Man and Inverted Hammer & Shooting Star.

Hammer and Hanging Man - Key Reversal Points

Hammer appears during a downtrend, characterized by a small body and a long lower wick, indicating sellers attempted to push prices down but buyers managed to recover, suggesting weakening bearish momentum. Confirmation from the next candle is advised.

Hanging Man appears during an uptrend, similar in shape to Hammer but with opposite implications. Buyers tried to push prices higher but sellers forced a close near the open, with a long lower wick showing selling pressure. It may signal a reversal to a downtrend, pending confirmation.

Inverted Hammer and Shooting Star - Failed Attempts

Inverted Hammer appears during a downtrend, with a small body and long upper wick, indicating buyers attempted to push prices higher but sellers pushed back, yet the candle closes with buying strength, hinting at potential bullish reversal.

Shooting Star appears during an uptrend, with a small body and long upper wick, showing sellers tried to push prices down but buyers managed to stay in control initially. The candle closes with selling pressure, possibly indicating a bearish reversal.

Two-Candle Patterns - Clearer Reversal Signals

Understanding two-candle patterns enhances analysis accuracy.

Bullish/Bearish Engulfing - Complete Reversal Signals

Bullish Engulfing occurs when a small black candle is followed by a larger white candle that completely engulfs the previous one, indicating strong buying momentum and a potential reversal from downtrend to uptrend.

Bearish Engulfing occurs when a small white candle is followed by a larger black candle that engulfs it, signaling strong selling pressure and a possible reversal from uptrend to downtrend.

Tweezer Tops and Bottoms - Resistance and Support Tests

Tweezer Tops consist of two candles with matching highs, indicating price tested the same resistance level twice but failed to break through, suggesting a potential reversal from uptrend to downtrend.

Tweezer Bottoms consist of two candles with matching lows, indicating support level tests that failed to break lower, hinting at a reversal from downtrend to uptrend.

Three-Candle Patterns - Strong Trend Confirmations

Building on two-candle patterns, three-candle formations provide stronger trend signals, including Evening Star & Morning Star, Three White Soldiers & Three Black Crows, and Three Inside Up & Three Inside Down.

Evening Star and Morning Star - Reversal Indicators

Morning Star appears after a downtrend, comprising three candles: a long black candle, a Doji indicating indecision, and a larger white candle closing above the midpoint of the first, signaling a bullish reversal.

Evening Star appears after an uptrend, with a long white candle, a Doji, and a large black candle closing below the midpoint of the first, indicating a bearish reversal.

( Three White Soldiers and Three Black Crows - Power Signals

Three White Soldiers: three consecutive long white candles, each closing near or at the high, indicating strong bullish momentum and potential trend reversal upward.

Three Black Crows: three consecutive long black candles, each closing near or at the low, indicating strong bearish momentum and potential trend reversal downward.

) Three Inside Up and Three Inside Down - Confirmation of Reversal

Three Inside Up: a long black candle, followed by a smaller candle (or Doji) within its range, then a large white candle closing above the first candle’s high, confirming a bullish reversal.

Three Inside Down: a long white candle, followed by a smaller candle within its range, then a large black candle closing below the first candle’s low, confirming a bearish reversal.

Summary and Practical Application of Candlestick Analysis

Basic characteristics:

• White (Bullish): close > open, indicates buying pressure.
• Black (Bearish): close < open, indicates selling pressure.
• Short wicks: prices stayed close to open and close.
• Long wicks: high volatility and intense battle.

Main pattern groups:

• Single candles: Marubozu, Doji, Spinning Top, Hammer, Hanging Man, Inverted Hammer, Shooting Star.
• Two candles: Engulfing, Tweezer Tops/Bottoms.
• Three candles: Morning/Evening Star, Three White Soldiers/Black Crows, Three Inside Up/Down.

Practical use: Successful candlestick analysis depends on experience and combining with other tools. The success rate of pattern recognition alone is often below 50%. Therefore, traders should consider market context, fundamental factors, and situational analysis before making trading decisions.

Deep understanding of candlestick charts, combined with proper risk management, will increase your chances of success in Forex trading.