Reading Candle stick in Forex. . .The Origin of Profitable Trades

Online forex trading is simply about buying and selling. All technicalities and fundamentals about forex boil down to buying and selling of currency pairs to make gain. This article and subsequent ones shall focus on these two. The articles shall summarize trading in its simplest form. The way I have taken trading despite all its intricacies is that am either buying or selling to make gain and leave the rest. Going long means to buy in Forex trading while going short means to sell in Forex trading.

With these articles you can get the essence of forex trading and remove fear of what you see on your computer screen that looks complicated. This week’s article is on buy or going long signals with candlestick charting/formation as the basis of decision. In as much as new comers in forex will want to have an in-depth (which is good), on the long run it will be surprising that forex trading is simply about what am about to discuss. Success in forex trading is not measured by how many books you have read, nor how many courses you have attended, or by how many market tools in your arsenal but by that apt decision to buy and sell and ultimately make profit.

I will onwards from here give four candlestick patterns and their characteristics for a buy decision or to go long.

Hammer

The hammer has or it’s characterized by a small real body (black or white), long lower shadow and short or non-existent upper shadow. The length of the lower shadow must be at least twice that of the real body. The hammer is a bullish reversal pattern that forms after a decline (meaning there must be an existing or previous downtrend). In addition to a potential trend reversal, hammers can mark bottoms or support levels. After a decline, hammers signal a bullish revival. The use of hammer also goes with periodicity. The formation of a hammer on a higher time frame will give more potent result.

Inverted hammer

The inverted hammer is the opposite of hammer. It has all the characteristics of a hammer but it is like a hammer turned upside down (inverted), hence instead of a long lower shadow, it has a long upper shadow. The Inverted Hammer forms after a decline or downtrend. Inverted hammers represent a potential trend reversal or support levels. After a decline, the long upper shadow indicates buying pressure during the session.

However, the bulls were not able to sustain this buying pressure and prices closed well off of their highs to create the long upper shadow.

Because of this failure, bullish confirmation is required before action. An inverted hammer followed by a gap up or long white candlestick with heavy volume could act as bullish confirmation. The application of an inverted hammer also goes with periodicity. The formation of an inverted hammer on a higher time frame will give more potent result.

Bullish engulfing

This requires an existing or previous downtrend or decline. The last candle before the engulfing candle must be bearish. The engulfing candle must be bullish and must ‘swallow’ the previous bearish candle in a manner that the previous candle can completely fit into it. A bullish confirmation may be required. The formation of the pattern on a higher time frame will give more potent result.

Bullish Piercing

This requires an existing or previous downtrend or decline. The last candle before the piercing candle must be bearish. The piercing candle must shoot/pierce/cover the over or at least fifty percent of the previous candle. The piercing candle must be bullish.  The piercing candle must open lower than the close of the previous candle, then closes above the midpoint of the body of it. A bullish confirmation may be required. The formation of this pattern on a higher time frame will give more potent result.

Given an array of candlestick formations, the four above could simply be looked for on your Meta trader platform and any which supports candlestick charting taking into cognisance the periodicity. I am of the positive opinion that you could be trading profitably based on the fact that you can actually recognize these patterns.