As you become more and more experienced with using Forex you are likely to begin seeing patterns within trades that are good indicators of whether to buy or sell. These are known as ‘Buy and Sell signals’. Though nothing is ever guaranteed, most traders with years of experience base much of what they are doing on these signals.
There are countless buy and sell signals out there, with different traders swearing by different techniques. In this article, we’re going to give you a quick introduction to some of these signals, all using what has come to be known as ‘a candlestick chart’.
Candlestick charts have their origins in Japanese rice trading, but the system has been incorporated into modern financial systems. They take the from the rectangular shape and lines on either end, which have a striking resemblance to a candle and wick. One candlestick will normally represent one day’s worth of price data concerning a single stock. Over time these candles group into patterns that traders can use to make buying and selling decisions.
Though each candlestick represents a day’s worth of data, it is broken into four parts. The opening prices, closing price, the hight price, and the low price. The central rectangle is known as the real body, and the colour of this gives information about whether the opening or closing price was higher. A filled, or black candlestick, means that the closing price was greater than the opening price. This is known as ‘bearish’ which indicates selling pressure. A hollow, or white candlestick, shows the exact opposite and is known as ‘bullish’, indicating buying pressure. The lines at either end of the candlestick are known as shadows and show the price range throughout the day. The upper shadow represents the stock’s highest price, while the lower shows the lowest price.
Over a period of time, these candlesticks form patterns that can give a general impression of market movements. Here are some of the most common:
This bullish reversal pattern is seen by a short candle body and a long lower shadow. This is a signal that sellers drove the price low during the trading session, but was followed by strong buying pressure. The typically signals that a stock is nearing its bottom during a downtrend.
The Engulfing Pattern
This is a two-candle reversal pattern and comes when the body of the second, hollow candle completely engulfs the first, which was filled. This is a downward trend and shows a win for the buyers. It is considered best to enter a long position when this pattern emerges.
The Piercing Line
Again, this is a two candle bullish reversal pattern, which also occurs in downtrends. The first long black candle is then followed by a white candle that opened lower than the previous close. After that buying pressure pushes the price up to at least halfway, or more, up the body of the black candle.
The Morning Star
Often seen as a sign of hope in a downtrend and consists of three candles. The middle candle is typically short ( and can be black or white) and comes after a black candle but before a long white candle. It shows that the selling pressure has now begun to subside. The third candle overlaps with the body of the first and shows renewed buyer pressure, and could be the sign of a bullish reversal.
Three White Soldiers
Three continuous white candles that close progressively high is known as three white soldiers. This shows a steady advance in buyer pressure, but if the candles appear to be very long, it could attract short-sellers, which would drive down the price further.