How Do Candlesticks Work?
The diagram above shows a bullish candle (white) , and a bearish candle (black). The candles have bodies and shadows. In the diagram the shadow is the skinny line that goes out of body. This means highest or lowest price for that period. White candles open at the bottom and they close at the top, and the black candle open at the top and close at the bottom.
There are different types of candles and I will list what they mean.
- This candlestick is called a big white body. It is a very strong positive candle. You would usually experience these types of candles when a breakout happens. This type of candle gives you a more certain direction of where the trend or breakout will be going.
- This candlestick is called a big black body. It signifies a strong bearish direction, and just like the big white body it gives you an idea of which way the trend or breakout will be going.
- A positive candle with a large shadow above it means that rising power is starting to decrease. This means that the next candles could be bearish.
- With a long shadow at the bottom this candle shows that rising power is increased and falling power is decreased
- Falling power is increased and rising power is decreased.
- It is a negative candle with a decrease in falling power. This could mean that the next candle could be positive.
- This is a spinning top which means that a direction has not been decided. The buyers and sellers are canceling each other.
- Bearish spinning top which also means the buyers and sellers have are equal and no aggresive trading has occured to change the direction.
- Dragonfly Doji gives you a signal that a reversal could happen. Also Dojis could mean that the market has retested which can confirm the direction of a breakout.
- Doji Star means reversal or breakout confirmation
- Gravestone Doji tested a high zone and this could mean signs of reversal.
- Long-legged Doji reversal or retest of a trend.
- Four Price Doji Reversal or be on stand by something may happen soon.
- Hammer which means reversal so bullish
- Reverse hammer which is a reversal so the trend will be going down.
Now we can start analyzing the market for common candle patterns that you may not have noticed.
In the diagram above you can see that there are multiple Doji's. When the market is consolidating(No major movement) and Doji's start to form that usually means that the market has not made any major decision yet. This could also mean the Doji's are attempting to test a break out. If you draw a trend line from the top of the first Doji and the top of the 3rd Doji the 4th Doji tested successfully and remained above the trend line which confirms that the break out will be bullish.
The Morning Star looks very similar to a Doji but the body is bigger. At the bottom of a trend a Morning Star usually means reversal.
Evening Star Reversal Pattern - Bearish
An Engulfing Bearish happens when the body of a bearish candle completely overlaps the body of a bullish candle. This is a sign of a bearish direction. The polar version of this candle formation is called Bullish Engulfing where the candle after a bearish candle completely engulfs the first candle.
The examples that I have shown are usually the most common and known types of candle stick patterns that are usually looked at. There are many other candlestick patterns that I would recommend studying for more knowledge in the market place. I would not recommend trading only what the candle sticks are telling you. I recommend incorporating this strategy to the other strategies that I have talked about in my previous blog posts. This will only benefit you to better understand Forex.
Candlestick Pattern Cheat Sheet
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