In this section, we are going to take a look at trading off forex candles on your MT4 charts. There are many different forex candle patterns – we will have a look at some of the more common and reliable ones here. Candle patterns often indicate a turning point or reversal in the forex market, so we will break this section up into 'Bearish reversal candles' and 'Bullish reversal candles'.
Bearish reversal candles
Shooting Star:
The Shooting Star is a single candle bearish reversal pattern that occurs at the end of an uptrend. Price initially moves higher, before eventually closing near the open, leaving a long wick with a short body. Wick should be at least 1.5x the length of the body. Note in the above example, this forex candle leads to a decline of nearly 1000 pips in less than two weeks.
Bearish Engulfing:
The Bearish Engulfing is one of the more common bearish reversal and continuation patterns. The candle will close lower, with a body that completely engulfs the body of the relatively smaller previous candle. Note this candle continues to occur frequently throughout the downtrend, signaling continuation (we have only circled two which occur at peaks).
Hanging Man:
The Hanging Man is another relatively common bearish reversal candle that occurs at peaks. Price will move significantly lower at the start of the period but will come back to finish near the open, leaving a long wick and small body (similar to the Shooting Star, but the wick is below the candle not above). If this Forex candle occurs in the lows of a downtrend it is a bullish candle known as a hammer.
Bullish Reversal Candles
Bullish Hammer:
The Bullish Hammer is a common reversal pattern that looks identical to the Hanging Man candle but occurs in the bottoms of downtrends. Price will move significantly lower at the start of the period but will come back to finish near the open, leaving a long wick and small body. Note in this example, the following candle breaches the Hammer’s low – Forex traders should always set their stop a reasonable distance from any reversal candle.
Bullish Engulfing:
The Bullish Engulfing is identical to the Bearish Engulfing but it is an up candle occurring at the end of a downtrend. The body of the new candle will completely engulf the body of the previous candle signaling a major shift in sentiment.
These are just a few of the more common forex candle patterns with high success rates. Remember some candles appear identical so you have to then determine whether the candle is appearing at a peak in an advance (Hanging Man) or at a trough in a decline (Bullish Hammer)?
Do not forget to set your stops a safe distance from the relevant candle's high/low – though many reversals are immediate, there is sometimes noise that you should adjust for.
Go back to your MT4 charts and see how many of each forex candle patterns you can find and come up with a trading strategy around them.