If you are a trader, even a newbie, you probably have heard of such thing as a candlestick. These days, a great number of charts are based on this tool. For this reason, it is vital to get to know what candlestick is, how it is utilized in a chart, what candlestick trading strategy is and what patterns it has.
First of all, it is important to get an answer to the first question. Candlestick is a graphic image placed on a chart. Every candlestick consists of two parts: a real body and a wick. The first part has a form of a rectangle, while the second one has a form of a line above or/and below this rectangle. Every typical candlestick is supposed to demonstrate changes of a market price and contains data for a certain period of time – a minute, 10 minutes, an hour, and so on.
Every part of a candlestick plays its crucial role. The real body shows whether the closing price of an asset was higher/lower than the opening price. The wick serves to present the maximum and minimum price for this period. In the chart, there are candles of two colors - usually green and red, or white and black. However, there are charts that use different pairs of colors. Colors are also very important because they bring the useful information about the price. Their function is to show whether the open price is above the close price or not.
In comparison with other bars that show price data, candlesticks are the most beneficial and convenient. However, there are too many different variations of candlesticks patterns these days, unfortunately, not every candlestick pattern strategy is reliable.
Every candlestick trading strategy is based on some pattern. According to the experience of some professional traders, there are many candlesticks patterns that work well. This article is focused on three of them. They are engulfing candlestick pattern strategy, Doji strategy, and Marubozu strategy. The patterns that are presented below can be devided into two groups: bullish and bearish. Both of them are reversal patterns. However, Bullish appears after a pullback, when Bearish appears after a rally.
The first forex candlestick strategy is based on the engulfing pattern. It is also called engulfing candle day trading strategy. It is a system that allows getting into trend movements right when momentum is rising. Engulfing candlestick trading strategy can be either bullish or bearish. On its own, this strategy is rarely used, because it works better when combined with a trend. To apply this candlestick pattern strategy successfully, it is vital to identify what direction a trend picks as it has a direct impact on the purchasing and selling actions. When the trend goes up, a trader needs to take long positions, which means purchasing. When the trend goes down, the trader needs to take short positions. When you have determined the trend, you need to wait for a pullback. Also, it is better not to use this strategy if the trend is not clear.
The pullback can occur in two situations - when a trend moves down or up. In the first case, a pullback should not increase higher than the preceding pullback. In the second case, it should not decline lower than the preceding pullback.
After this, a trader awaits a signal. When you notice that it goes up right after bullish pattern, you need to wait for the following candlestick and establish your position. The stop is to be at the low of a candlestick. The situation with a bearish pattern is opposite.
The next forex candlestick strategy is called Doji, and it is very popular among both professional and beginning traders. This candlestick does not have a real body like others. Such situation is possible when open and close positions are identical. In the chart, Doji candles look like two lines that cross each other. The first line is horizontal, and it represents the real body. The second line is vertical, and it represents the wick. The cross does not have a certain color as the other candlesticks. When looking at it, it is impossible to define whether it is bearish or bullish because you never know whether the price will rise or decline. Therefore, the candlestick pattern strategy is based on the indecision signals that are received from the Doji candlesticks.
Sometimes, there are cases when the opening positions are not identical to the closing positions, but they are very close to each other. Yet, this little difference is not enough to create a candlestick with a real body, as it would look like a line in the chart. For this reason, such candlesticks also called Doji.
Anyway, it does not matter what type the Doji candlestick is, because it still requires confirmation. There are a few types of candles of this pattern.
- Rickshaw man – is shown in the chart as a cross. Both lines (wicks and real bodies) are crossed in the middle. When your candlestick looks like this, there are little changes to predict the next price changes.
- Gravestone – is shown as a “T” letter, but the letter is turned upside down. In this situation, there are high chances that the price will move up.
- Dragonfly – is shown as a “T” letter. In this situation, there is a possibility that the price will decline.
According to the Doji forex candlestick strategy, when a Doji candle appears in the chart, there are only two possible decisions that a trader can make - to take a profit or to wait for the next candlestick to choose entering the trade. This candlestick pattern system is not simple too use, but there is a possibility to get a great profit when working with it.
Another interesting candlestick trading strategy is Marubozu. While the Doji candles do not have the real body, in Marubozu the candlesticks without wicks are involved, and it looks like a rectangle of a green, white, red, or black color without any lines above the top or bottom part of the rectangle. The name of this candlestick trading strategy means a shaved head, which reflects the way candlesticks look like in the chart.
This candlestick pattern strategy has either bearish or bullish patterns. Every bullish candle has identical opening position points and the minimum price for a certain period, when the closing point is identical to the maximum price. In other words, the amount of purchasing activities is great. The size of the rectangle also plays an important role. The larger the candlestick of the Marubozu is, the stronger the purchasers are.
There are a few important things that every trader who uses this candlestick pattern strategy should know. When you see a bullish pattern of Marubozu candlestick trading strategy, it is a bad idea to take a short position, and vice versa. It is also vital to pay attention to the situations when a bullish pattern candle is at the lowest part of the downtrend, as it gives you a signal that the market price may increase. The situation with the bearish pattern candlesticks is the opposite. However, if you want to use this candlestick pattern strategy successfully, you need to get more information.
Every candlestick trading strategy is unique, but some of them can have many similar things. And they are very popular among traders for sure. Of course, there are lots of other popular strategies that are worth seeing, such as “evening start”, “hammer”, “hanging man”, “three line strike”, “two black gapping”, “mother candle strategy”, “downturn strategy”, “harami”, and so on. Each of those methods is able to boost your profit up.
Either way, try not to pick the forex candlestick strategy relying on its popularity only. It is also crucial to take into account your personal qualities and trading style. If you really want to work with the best candlestick trading strategies, you should test it by your own and decide which one works better for you.