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Forex Candlestick Patterns That’ll Boost Your Trading Profits

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Forex Candlestick Patterns That’ll Boost Your Trading Profits

There is a special section in every good price action trader’s toolbox reserved for Forex candlestick patterns, and for good reason.

 

Aside from technical chart patterns such as the head and shoulders or bull and bear flags, these candlesticks can offer you a chance to understand the sentiment that’s driving a particular market.

 

 

The tail of a pin bar is also called a “wick” or “shadow” and represents the most critical element of the pattern. As a general rule, the tail should make up at least two-thirds of the entire pin bar. Notice how the tail on the two pin bars in the illustration above are much more pronounced than the rest of the structure.

 

Next is the body. The body represents the open and close of a pin bar and can vary in size. However, there shouldn’t be much space between the open and close.

 

The first rule about the tail should help keep you in line. After all, if the tail is at least two-thirds of the candlestick, then the body should be relatively small.

 

The nose of the pin bar, which is sometimes nonexistent, is important only as it relates to the tail and body. If the tail follows our rule of being at least 2/3 of the entire pin bar, and the open and close are close together, then the nose shouldn’t be a make-or-break characteristic.

 

Just know that the nose should be as small as possible, much like the image above.

 

It’s easy to spot when you have your chart setup to trade Forex price action

It provides a favorable place to hide your stop loss

The pin bar can be extremely profitable when correctly utilized

They are effective on both the daily and 4-hour time frames

 

 

In this case, the EURUSD had carved out an ascending channel. On the second retest of resistance, sellers came out in force and eventually formed a bearish pin bar.

 

 

The inside bar’s range (high to low) should be engulfed entirely by the previous bar’s range, also called the “mother bar.”

 

Another way of saying it is that the mother bar should completely engulf the range of the inside bar.

 

So what makes the inside bar so lucrative?

When it comes to Forex candlestick patterns, the inside bar is my second favorite pattern to trade.

 

Here’s why…

 

It can act as a profitable continuation pattern if it occurs during a strong trend

It provides a favorable place to hide a stop loss

A tradable inside bar doesn’t occur often, but when it does it can be a highly effective Forex candlestick pattern

 

Here is an excellent example of the inside bar in action:

 

 

Notice how the inside bar in the chart above formed during a strong uptrend. An established trend is a requirement for trading this particular candlestick pattern.

 

The reason for this is that the inside bar is nothing more than consolidation. So we have a strong trend followed by consolidation which leads to a breakout in the prevailing direction.

 

 

3. The Misunderstood Engulfing Bar Reversal

Last but not least is the engulfing candlestick. Unlike the inside bar that we just studied, this formation most often signals a reversal in the market.

 

Why do I call it a misunderstood pattern?

 

Because it takes more than an engulfing candle to warrant a position. To be considered tradable, an engulfing candle must develop at a key support or resistance level and after an extended move up or down.

 

For it to be profitable, an engulfing pattern must form at a swing high or low. Only then can it be used to formulate a trade idea.

 

 

Notice how the range of the engulfing bar completely engulfs the previous bar’s range. Hence the name, this is the most prominent and significant feature of this pattern. It’s also what makes it such a lucrative signal.

 

While the engulfing bar pattern is my third favorite in this lineup, it can be extremely telling if properly utilized.

 

Here are a few things to keep in mind when trading them…

 

They typically signal a forthcoming reversal

These patterns should only be utilized on the daily time frame and after an extended move up or down

If used as an entry signal, your stop loss should be placed above the engulfing bar high for a bearish pattern and below the engulfing bar low for a bullish pattern

For a higher probability setup, always combine them with other favorable methods or techniques.

 

 

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