Forex Chart Patterns that Print Money: Top Candlestick Setups

Trading the foreign exchange (forex) market can be extremely lucrative for those who know how to identify and profit from chart patterns. Certain candlestick formations provide traders with high-probability setups that can lead to consistent gains if traded correctly. Mastering these high-probability patterns is key to trading success.

In this comprehensive guide, we will explore the most profitable candlestick patterns for forex trading. Whether you are a beginner looking to get started or an experienced trader seeking to improve your strategy, this article will provide you with the knowledge to boost your forex trading performance.

Introduction to Forex Chart Patterns

Before we dive into specific candlestick patterns, let’s first cover some basics about chart pattern trading.

A chart pattern is a distinct formation on a price chart that creates a trading signal or signifies a potential trend change. Chart patterns form through the interaction of price, time and volume. They emerge across all timeframes and markets.

In the forex market, chart patterns play a crucial role in technical analysis. Traders utilize them to identify trading opportunities, confirm market bias and establish entry/exit points. The most common chart patterns are reversal and continuation patterns.

Reversal patterns signal that the ongoing trend is about to change direction. They mark potential trend reversals and exhaustion.

Continuation patterns imply that the existing trend will continue. They represent consolidation before further movement in the overall trend.

Candlestick patterns are one of the most vital chart patterns in forex trading. Candlestick charts originated in 18th century rice trading in Japan. They visualize price action through the relationship between the open, high, low and close prices for a specific period.

Candlestick patterns derive their power through multiple candle analysis. The sequence of candles and their formations create context for traders to recognize high-probability opportunities.

Now let’s examine some of the best candlestick patterns for profiting in forex trading.

Top Candlestick Patterns for Forex Trading

Here are some of the most reliable candlestick chart patterns for trading forex:

1. Engulfing Candlestick Patterns

Engulfing patterns are powerful reversal candlestick formations. One candle completely engulfs or “swallows” the previous candle, signifying a potential trend flip.

There are two types of engulfing patterns:

• Bullish Engulfing – Occurs in a downtrend when a green candle engulfs a preceding red candle. Indicates buying momentum and upside breakout potential.
• Bearish Engulfing – Forms in an uptrend when a red candle engulfs a previous green candle. Signals potential trend reversal to the downside.

Bullish and Bearish Engulfing Candlestick Patterns (Source: ForexCharts.com)

Engulfing patterns work excellently with other technical indicators like the moving average (MA) for confirmation. Traders watch for engulfing candles to close decisively above or below key MA levels to trigger entries.

2. Harami Candlestick Patterns

The Harami formation consists of two opposite colored candles. The body of the first candle completely engulfs the second, smaller candle.

There are two versions of the Harami pattern:

• Bullish Harami – In a downtrend, a small green body candle contained within a preceding long red body candle. Hints at an upward reversal.
• Bearish Harami – In an uptrend, a small red candlestick engulfed by a prior long green candle. Foreshadows a potential downturn.

Bullish and Bearish Harami Candlestick Patterns (Source: Trading Strategy Guides)

The predictive power of Harami patterns improves with confirmation from other indicators. Volume confirmation is also important.

3. Doji Candlestick Patterns

Doji candles have virtually no body since the open and close are equal. They signify market indecision and potential reversal. Key Doji patterns include:

• Dragonfly Doji – The open, high and close are at the same top level with a long lower shadow. Appears at the bottom of downtrends signaling a potential up move.
• Gravestone Doji – The open, low and close align at the bottom with a long upper shadow. Forms at the top of uptrends indicative of a downturn.
• Long-Legged Doji – The open and close are centered in the middle of the candle with very long shadows on either side. Indicates strong market indecision and potential reversal after an extended move.

Dragonfly Doji, Gravestone Doji, and Long-Legged Doji (Source: StockCharts.com)

Doji candles signify potential trend exhaustion, but require confirmation from other signals for trade entry. Volume and momentum indicators are commonly used for confirmation.

4. Morning and Evening Star Patterns

The Morning and Evening Star candlestick patterns consist of three candles that mark potential trend reversals.

• Morning Star – A strong downtrend, followed by a Doji star, completed by a large bullish candle. Signals potential bottoming.
• Evening Star – An uptrend,Doji star candle, and large bearish candle in sequence. Indicates a potential market top.

Morning Star and Evening Star Patterns (Source: VIX Central)

These patterns provide reliable reversal signals, especially near support and resistance levels. Volume confirmation adds robustness to the signals.

5. Piercing and Dark Cloud Cover Patterns

The Piercing and Dark Cloud Cover patterns involve two candles reversing after a sharp move in the previous trend.

• Piercing Pattern – In a downtrend, the first candle is long and bearish. The second bullish candle opens below the first close but rallies to close above the midpoint of the first candle. Indicates upside potential.
• Dark Cloud Cover – In an uptrend, the first candle is long and bullish. The second bearish candle opens above the first close but drops below the midpoint of the first candle. Hints at a potential downturn.

Piercing Pattern and Dark Cloud Cover (Source: StockCharts.com)

These single candle reversals work best with other confirmations like the stochastic oscillator to pinpoint likely trend changes.

6. Inside Bar Pattern

The inside bar pattern consists of a small range candle that forms within the range of the preceding candle’s body. It signifies consolidation before a potential breakout or reversal.

In an uptrend, a bullish inside bar represents continuation higher upon breakout. In a downtrend, a bearish inside bar hints at further declines after the range low breaks.

Inside Bar Pattern (Source: FX Academy)

Inside bars are best played near support and resistance for efficient risk management. Use other indicators like the 20-period MA for added confluence.

How to Trade Candlestick Patterns

Now that we’ve covered some of the best candlestick setups, let’s discuss approaches for trading them profitably:

• Combine with other indicators – Candlesticks gain power when combined with indicators like moving averages, trendlines or the RSI for confirmation. This improves the quality of trading signals.
• Focus on previous structure – Look for candle patterns that form near key chart points like previous swing highs or lows, fib levels or round numbers. This helps set logical stop losses.
• Use risk/reward ratios – Set profit targets wider than stop losses to account for failed signals. Aim for at least 1:1.5 risk-reward for quality setups. This ensures you remain profitable over many trades.
• Trade the retest – Once a pattern completes and price breaks out, look to enter on throwbacks to broken support/resistance. This confirms the new trend.
• Check larger timeframes – Zoom out to higher timeframes to gauge overall market structure. Avoid trading against the larger trend without other evidence.
• Managing trades – Use trailing stops to lock in gains as the trend extends. Move stops to breakeven once price hits 1-2x risk. Book partial profits at key levels.

Proper implementation of these tips will vastly improve your candlestick trading performance.

Common Questions About Trading Candlestick Patterns:

Candlestick patterns are an essential component of forex price action analysis. However, many new traders have questions about trading these formations profitably. Below we answer some of the most common queries:

1. What timeframes work best for candlestick patterns?

Candlestick patterns can be traded on any timeframe. Lower timeframes like the 15-minute and 1-hour provide more frequent trading signals, but have lower odds. Larger timeframes like 4-hour and daily have higher quality setups, but fewer overall trades. Many traders scan lower timeframes for entry signals, then confirm on higher timeframes for better odds.

2. Where should I place my stop loss with candlestick patterns?

Intelligent stop loss placement ensures you limit downside when trades move against you. With candlestick patterns, place stops below key swing lows for long trades and above recent swing highs for short setups. This ensures you exit failed signals quickly with minimal loss. Give the market room to breathe.

3. What is the best candlestick pattern indicator for MetaTrader 4?

The Pattern_Recognition_Master indicator for MT4 automatically identifies over 30 candlestick patterns on your charts. Once installed, it will display real-time alerts and enable one-click pattern trading. Customize settings like colors, fonts and notifications to suit your preferences. Streamline your chart analysis with this powerful indicator.

4. Can I trade candlestick patterns alone?

While candlestick patterns do produce valid trading signals, combining them with other confluence factors creates a more robust approach. Additional confirmations like support/resistance, trendlines, momentum oscillators and volume can greatly improve your pattern accuracy and win rate. Never rely on candlesticks alone. Context and confluence are key.

5. What is the best candlestick pattern scanner?

Utilizing a candlestick pattern scanner can save you time when analyzing charts across numerous markets. The ProSignal Scanner is one of the best currently available. It allows you to quickly scan over 1000+ symbols across stocks, forex, crypto and commodities to identify your criteria for bullish/bearish candle patterns. You can also set alerts and auto-trade the scanner signals.

6. Should I buy or sell when a candlestick pattern completes?

Patience is essential after a candlestick pattern forms. Never blindly buy/sell the completion of the pattern itself. Look for confirmation of the expected move through a break/close of swing high/low, moving average or trendline. This confirms trader acceptance above/below key levels. Entering on confirmation improves accuracy significantly.

Candlestick patterns provide a valuable edge in forex trading, but must be applied with care and confirmation to avoid false signals. Use the context of overall price action to improve performance.

Conclusion

Mastering high probability candlestick patterns is crucial to trading success. This guide has provided a foundation of the most profitable chart formations for trading forex.

Key takeaways include:

• Candlestick patterns visualize market psychology through their shapes and sequences.
• Engulfing, Harami and Doji candles are powerful reversal patterns to trade.
• Morning/Evening Stars, Dark Cloud Cover and Inside Bars signal potential trend changes.
• Combine patterns with other indicators and analyze overall market structure for best results.
• Trade pattern breakouts and retests for confirmation and optimal entries.
• Use smart risk management for each pattern to maximize profits.

Forex chart patterns can provide a distinct edge, but no single strategy guarantees success. Continually refine your technical skills by studying price action and honing your pattern recognition abilities. With the right knowledge and discipline, candlestick trading can unlock immense potential in the forex market.