A Candlestick Pattern for FX Reversals.
by Walker England.
Candle Analysis can be Worked into any Strategy Evening Stars can Validate Points of Resistance Day Traders can Plan Entries Around Candles.
Interpreting candle patterns is an important technical trading skill to master for any day trader. While these patterns may seem foreign at first, their recognition can confirm values of support and resistance, and even give traders confirmation of the markets direction. What is even better is, that since candles are already being displayed on your charts, with a little work you add candle analysis into any active trading strategy. With this idea in mind, today we will review the bearish evening star for trading market reversals.
What is a bearish evening star?
So what is a bearish evening star? A bearish evening star is a three candle reversal pattern normally found at the end of a period of bullish buying pressure. Pictured above you will see an example of the pattern , and while the primary focus is on the center candle known as the “star” in the center the other two candles play an important role as well . The first candle will depict a surge in price on the underlying currency pair or CFD . T he size of this first candle can vary , but it is important for this candle to close creating a new swing high .
Next traders will look at the second candle of the pattern to identify a bearish evening star. Price should attempt to again breakout out to the upside here and create a slightly higher high relative to our first candle. However, any rallies seen in this position should be capped with a long candle wick with price trading back down toward the open price. Normally a doji or inverted hammer candle will act as the “Star”, but it is important to remember that the candle color in this position is not ultimately important. This doji or long wick from an inverted hammer suggests that bullish price momentum is concluding. The last candle should show the beginning of fresh bearish momentum. Since this is the critical reversal candle, this candle must close lower.
Learn Forex – USDCAD with Bearish Evening Star.
(Created using FXCM’s Marketscope 2.0 charts)
Uses in Trading.
Above we can see the bearish evening star at work on the USDCAD currency pair prior to today’s NFP news announcement. First notice how price tested resistance at the R3 pivot , but the failed to break higher. Our candle pattern, helped confirm resistance, while our third candle suggests that momentum had indeed shifted downward. Knowing this, traders could have potentially taken this as a signal to sell the USDCAD prior to today’s NFP announcement.
Secondarily, the bearish evening star could be used to create a directional trading bias for future positions. Traders not wishing to trade immediately, who didn’t enter the market before the news, could use the evening start to begin identifying future selling opportunities. This way after the event itself, traders can enter the market on the side of price momentum using a variety of strategies. Above, you will find a potential breakout highlighted after the creation of the bearish evening star.
Practice with Candles.
Interpreting candle patterns is like any other trading skill and will take time and practice. To help you analyze the market using live charts, register for a FREE Demo account with FXCM. This way you can practice your candle trading skills while following the market in real time!
---Written by Walker England, Trading Instructor.
To contact Walker, instructordailyfx . Follow me on Twitter at WEnglandFX.
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Candle Patterns for Forex Price Reversals.
by Walker England.
Candlestick analysis can be used to spot market reversals and resumptions of trends. The bullish engulfing pattern can spotted inside the Three Outside Up pattern. Candles can be used as a confirmation tool, and used for Forex entries.
Understanding candlestick charts and their patterns allow traders to work price action into an existing Forex trading strategy. Normally candle patterns such as the Bullish Three Outside Up can be used to confirm a change of trend, or even validate a market entry. With this idea in mind we will focus on recognizing and trading one of the markets most clear candle patterns.
The Three Outside Up.
A Three Outside Up candle pattern may sound complicated at first, but it is actually a derivation of the bullish engulfing pattern. Pictured above we can see the Three Outside Up pattern is comprised of three individual candles. The first candle should close down and will depict the end of a currency pair’s current weakness . T h is first candle can close with a variety of body and wick sizes and can vary from chart to chart. While it is not directly related to the next engulfing pattern , this candle should denote the end of the markets current decline.
The second and third candle s in the pattern are arguably the most important. As seen above, the second candle is expected to engulf the first with a large blue candle . This large bullish engulfing candle signifies new strength in the market as price attempts to break to higher highs. To be considered a complete bullish engulfing candle price of the second candle should close well above the high of the first candle . Lastly, candle number three is used to validate the current change in market direction. This candle should open immediately higher, creating as small a wick to the downside as possible. Upon closing above candle two, candle three will validate the new bullish market bias.
Let’s look at a current example.
Learn Forex – GBPUSD Daily Trend.
(Created using FXCM’s Marketscope 2.0 charts)
Uses in Trading.
Above we can see the Bullish Three Outside Up in action on the GBPUSD currency pair. The daily graph has been in a long standing established uptrend, but notice there has been dips along the way. There have been three candle patterns, which have been highlighted in the chart, showing prices return back in the direction of the trend. The last of which signaled the August 2013 bottom for the pair, before rallying as much as 1158. So how can this be worked into a trading plan?
Traders looking to take advantage of the Bullish Three Outside Down pattern can add it into any existing trending market plan . Most traders will use it as a confirmation tool such as SSI to signal a change in market direction. If the market has a bias upward, like the GBPUSD chart above, traders can use this candle pattern to establish new buying positions.
---Written by Walker England, Trading Instructor.
To contact Walker, instructordailyfx . Follow me on Twitter at WEnglandFX.
To be added to Walker’s e-mail distribution list, CLICK HERE and enter in your information.
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Bullish and Bearish Candlestick Reversal Patterns.
There are also several types of reversal candlestick patterns within Forex trading, as defined below.
Dark Cloud Cover Engulfing Evening Star Harami Morning Star Doji Piercing Line Three Black Crows Three White Soldiers.
Dark Cloud Cover Pattern.
During an upward trend in the market gaps will begin to open, but they are not stable and will lose ground falling below the midpoint of the market the previous day. This pattern indicates the opportunity for investors to capitalize at the opening of the market the next day. This is actually a warning sign for bullish investors. This candlestick pattern is the exact opposite of the Piercing Line pattern. This pattern indicates a bullish trend and has a high reliability rate.
A white body followed by a black body. The black body passes the midpoint of the prior white body. This candlestick pattern occurs in an uptrend.
Engulfing Pattern.
This pattern occurs when a candle body of the days market completely engulfs the body of the previous day. There are also several engulfing patterns, white engulfing candles are bullish, black engulfing candles are bearish. A bullish engulfing commonly occurs when there are short term bottoms and a bearish engulfing will occur when the market is at the top. Many of the other candlesticks, such as Dojis, Hammers and Hanging Man, require the confirmation that a trend change has occurred that follows an engulfing pattern. This pattern indicates a bullish trend and has a high reliability rate.
When engulfing occurs in a downward trend, it indicates that the the trend has lost momentum and bullish investors may be getting stronger.
The first day's color indicates the trend of the trading day. The second real body should have the opposite color of the first real body. The second day's body should completely engulf the previous day's body.
When engulfing occurs during an upward trend, it indicates the market will open with a new high. This high will be followed by a high volume of sell-offs, that result in the day closing at or below that of the previous days opening. This indicates that the upward trend has suffered and became weak and the bearish investors may be gaining some strength in the market. This pattern indicates a bullish trend, but has only a moderate rate of reliability..
The first day's color indicates the trend of the trading day. The second real body should have the opposite color of the first real body. The second day's body should completely engulf the previous day's body.
Evening Star Pattern.
When an upward trends occurs the market will get stronger, but as it gets stronger on a long white day, gaps will begin to open on the second day. Second day trading on Forex, stays withing a small range and will close at or near what it opened at. This pattern generally indicates that confidence in the current trend has eroded. When this trend reversal is confirmed, the third day will be a black day. This pattern indicates a bullish trend and has a high rate of reliability..
The first day is a long white day. The second day, gaps begin to open higher from the first day. The third day is a long black day and the close of market will be below the midpoint of the first white day.
Harami Pattern.
At the end of an upward trend which has a long white day, a black candlestick opens that is lower than what the previous day closed at. Market trading is generally light and the day will close lower than what it opened at. This signals that the current upward trend is losing strength and this indicator is confirmed with the next trading day seeing candlesticks following the reversal trend. This pattern indicates a bullish trend, but it has a low rate of reliability..
When a long black day occurs at the ending of a downward trend, a white candlestick will open that is higher than what the previous day closed at. Prices will rise and many shorts are covered, this will encourage even more investors to buy. This pattern is usually confirmed when the next trading day's candlestick follows the reversal trend.
A long body followed by a short body with opposite color. A short body is completely within the previous day's long body. The color of the second candle is not important.
Morning Star Doji Pattern.
In a downward trend, the market will support the bearish investing trend with a long black day; gaps will begin to open on the second day of trading. The Forex market will see trades that stay within a small range and it will close at or near where it opened. This pattern generally indicates the potential for a rally since many of the positions have changed. Confirmation of this trend reversal is marked by the third day being a white day. This pattern also indicates a bullish trend and has a high rate of reliability.
The first day is a black day which indicates the trend of the market. The second day must be a Doji day. The third day is a white day and supports the reversal of the trend.
Piercing Line Pattern.
This pattern occurs when gaps open in the market during a downward trend, but the market gains enough strength to close above the midpoint of the previous day. This pattern is a good indication that the opportunity for the bullish investors to enter the market and help support the trend reversal. It's also the opposite of the Dark Cloud Cover pattern . It's a bullish trend that only has moderate reliability.
A long black body followed by a white body. The white body peaks above the midpoint of the prior white body. This pattern occurs in a downward trend.
Three Black Crows Pattern.
This pattern is indicated by three long black days that each end with consecutively lower closing rates. It generally indicates that the market rates have been too high for too long of a period and the investors are slacking off to compensate. This pattern is a bearish trend and has a high reliability rate.
Three black days occur, each with a close below the previous day. Each day opens within the body of the previous day. Each day closes near or at the low of the day.
Three White Soldiers Pattern.
With this pattern, there will be three long white days in a downward trend; each day will close at consecutively higher rates. This usually reflects fortitude in the future market, since a trend reversal is in progress that is building on moderate increases in the market. This bullish trend offers a high reliability rate.
Three long white days occur, each with a higher close than the previous day. Each day opens within the body of the previous day. Each day closes near or at the high of the day.
Reversal Candlestick Patterns.
Reading Candlestick Patterns in the Forex Market.
If this were any other site right now you would probably get a very long (or sometimes short) list of generic candlestick patterns with names like ‘hanging man’, ‘shooting star’ and ‘hammer’. However, this is not any other site. There are a few flaws with how candlestick patterns are taught on other Forex websites:
Candle patterns are taught as they work in the stock market and that differs from how they work in Forex. Traders are taught to view candles as generic patterns but it is much more efficient to learn to read candles.
All Reversal Candlestick Patterns Are The Same.
Essentially all reversal patterns are the same. When they form in a trend they always mean the same thing. They mean that a transition of power has occurred. This is not the easiest concept to understand. It will be explained here but bookmark this page and come back to it after you finished the entire education section.
Reading candles is all about thinking about the candles you see on your chart in terms of the battle between the bulls and the bears. In the first section on candles, you learned the difference between a bullish and bearish candle. Now it’s time to look a little deeper into what a bullish or bearish candle means, in relation to the battle between the bulls and the bears.
So this is a bearish candle, it forms when the bears have more power than the bulls. When the bears have more power than the bulls you get bearish candlestick patterns If the bears have more power for a long period of time you get a bearish trend.
Now imagine a spinning top type pattern forms in the trend. That would indicate that the pair has reached a period of indecision.
This is clearly an indecision pattern. The sliders have numbers from 0 to 10. When the bulls are at 10 it means they have a lot of power when they are at 0 it means they have no power. The same goes for the bears. So what happens when they are closely matched in terms of power? That’s right, an indecision candlestick forms. So when the bulls and bears have equal amounts of power you will get indecision. As soon as one side gains power the candle will show who has gained power.
Learning a bunch of different patterns is not as useful as understanding what reversal patterns actually mean.
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