One of the questions that I get quite often is, how do I know when the market will reverse? The simple answer is that I don’t, but I can use candlestick patterns to help me decide when If I should place a trade or not. This week I will be discussing how to spot reversals using candlestick patterns, in greater detail.
Can Candlestick Patterns Help To Identify Reversals?
I primarily use four candlestick patterns in my trading. Two bullish patterns and two bearing patterns. These four patterns are the same except that you flip the patterns upside down to see the bearish price patterns. When I first started trading over ten years ago, I bought two books by Steve Nison to help me attempt to learn how to read price charts. In his books, Steve goes over the many candlestick patterns. However, I have found that as a Forex trader, I only use four basic candle formations at specific levels on the chart.
Two Bullish Candlestick Patterns
The two bullish patterns that I use are the hammer and the engulfing type candles. I have found that these are two of the most powerful candles when trading Forex. The first type of candlestick that I use is the bullish hammer. With this candle, I do not care if the candle closes green or red. What I mean by this, is if the close is lower than the open I will still treat this as bullish. The psychology behind this is that traders pushed prices lower, but could not keep the price at these levels. So buyers step in and push prices higher because they believe the price was too low at those levels.
The second bullish pattern is an engulfing candle. Engulfing is a candle that opens at or near the low and closes near the high. The textbook definition is that the open must be below the candle body of the last candle and the close must be above the candle body. For me, this is not as important. As long as the candle’s body is larger than the previous candle’s body and the close is higher than the body of the last candle body then I consider this an engulfing candle.
Two Bearish Candlestick Patterns
The two bearish candlestick patterns I use are just the opposite of the bullish patterns. The first pattern is what I call an inverted hammer. An inverted hammer is the same as a hammer, but it’s turned upside down. I only look for this pattern when the price is rising. If this candle shows up when the price is trending down it could be an early warning sign that the trend is about to end.
The second bearish candle that I look for is a bearish engulfing candle. Once again, I use this pattern slightly different than the books states. The book states that the open must be above the prior candle’s body and close below the previous candle’s body low. I like to see the body of the candle larger than the last candle and close lower than the previous candle’s body.
Remember trading is like real estate it’s all about location, location, location. All candlestick patterns should be at or near key levels before placing trades. Forex trading is about combining multiple techniques that allow a trader to minimize risk and maximize profits.
Forex Video: How to Use Candlestick Patterns to trade Reversals.
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