Forex is popular in South Africa, but many retail traders lose money because they fail to follow a consistent strategy. If a technical analysis is your preferred method, consider these candlestick patterns. They will show you when the market is likely to reverse or continue moving in the same direction.
1. One-White Soldier/One-Black Crow
The first pattern is bullish, and the second one bearish. Essentially, they represent the same price trajectory and reversal signals, but in the opposite directions and colours. One-Black Crow is when a big black/red candle gaps down at open from a large white/green one (at or near resistance) following a bullish swing. To spot the gap, traders need to look at an intraday chart.
One-White Soldier is the same forex trading pattern, only bullish. It also shows that the trend has faded. When you notice either pattern, tighten your stop loss and exit your open trades. Look for confirmation of reversal before moving forward.
2. Bullish/Bearish Engulfing Patterns
Engulfing is easy to identify. It is reliable, and works better in bullish markets, as they reverse more slowly. Either pattern includes two candles. The first one in a Bearish Engulfing is normally a modest white/green candle referred to as a spinning top. It is followed by a bigger-than-average black/red candle. The latter opens with a gap higher, moves down and closes below the opening of the first candlestick.
It is usually observed at resistance or after a bullish movement. The Bullish Engulfing is the same pattern inverted in terms of position and colours. When you see these patterns, take the steps described above.
3. Dragonfly/Tombstone Doji
These are also stronger reversal patterns. The former is a doji candlestick with a long lower shadow, and the latter has a long upper shadow. At resistance, The Tombstone Doji is similar to a Shooting Star. At support, its meaning changes — it may or may not belong to bearish candlestick patterns.
The opposite pattern is bullish and usually occurs at support. ForexTime experts recommend checking the location first. Then, tighten your stops in either case and find more confirmation.
4. Evening Star/Morning Star Reversals
Both reversals are just as popular and consistent as engulfing. Here, you will be looking at three candles. The Evening Star is a bearish pattern, while Morning Star sends a signal to buyers. Here is what the first movement looks like.
The pattern is observed at a resistance following a bullish upswing. First, you see a strong white (or green) candle. It is followed by a modest spinning top (its colour does not matter). The candle which concludes the pattern is black (or red). In perfect conditions, the candle in the middle gaps up, down, or in both directions.
The Evening Star reversal marks the end of a bullish move — bearish volatility may follow. The Morning Star looks the same, but inverted. You see three candles with a spinning top, but their colours and location are the opposite. The candle in the middle may have any colour.
When you spot either of these movements, you should do three things. First, tighten your stop loss, secondly, consider finalizing any existing traits, thirdly, find additional confirmation of trend emergence.
5. Rising Three/Falling Three Methods
Both patterns indicate continuation. The Rising Three is bullish, and the Falling Three is bearish. The first method comprises five candles. It is opened by a long white/green one, followed by 3 spinning tops, and another white/green candle.
As you may have guessed, the term derives from the three candles in the middle. When you notice a Rising Three, you should place a trigger just above the last candle and enter a long position. When the three smaller candles in the middle are black/red, some traders may mistakenly believe a reverse trend has emerged. Therefore, the pattern may be deceiving, and it requires caution.
The Falling Three is the same in reverse. You will see two strong black/red candles with three spinning tops in the middle. The mid-section never closes higher than the initial candle. The concluding candle shows that the bearish movement has resumed.
So, what should you do when you spot either pattern? If it is a Rising Three, your bullish trigger must be located just above the last candle. Open a long position once the price goes higher. If it is the opposite pattern, position a bearish trigger just under the last candle, and sell once the price goes lower.
The Top 5
These are the most popular pairs of candlestick patterns that will help you trade more efficiently. Try spotting them in the demo mode to get accustomed. Candlestick patterns are strong indicators of movement, and they must be taken seriously.