Forex chart patterns

As we mentioned before candlestick charts are very popular since it is easy to spot chart patterns when using them.   These chart patterns are used to gauge the mood and psychology of the market.  In this chapter we will go over a few of the more commonly used patterns.

Long bodies show a high level of pressure either buying or selling.  They show that in the particular session of time that the candlestick represents the price move a significant amount.  Conversely a short body shows little pressure as the price stayed at a similar level in the same duration.

Marubozu

Marubozu are extreme versions of long bodies where no shadows occur and the movement between the open and close price was completely dominated by either by buying or selling pressure.

Long shadows

Long shadows show that much of the activity of the trading session occurred beyond the open and close price range.  A long upper shadow shows that buying pressure pushed the price up but then later in the session this price was pushed back down by increased selling pressure.  A long lower shadow shows the reverse where sellers dominated first but were later pushed back by buying pressure.

Spinning tops

Spinning tops have short bodies and long upper and lower shadows. They represent indecision in the market as both sellers and buyers were active during the session, creating volatility in the price level but then ending up near where they began.  It is often inferred to represent a reversal (or at least a weakening of the trend pressure) when it follows a long trend.

Doji

Doji is an extreme version of the spinning top where the price closes at almost exactly the opening price.

Engulfing pattern

An engulfing pattern is composed of 2 candlesticks.  The first has a relatively short body while the second has a body which is longer and open and close engulfs the body of the first.  This pattern is used to infer a possible reversal at the end of a trend.

Many of these patterns are used to spot reversals in the market trends and so are used to indicate entry and exit points for trades.  Chart patterns should not be used without further confirmation and most traders wait for confirmation by placing the trade order above or below the indicated price level to make sure a reversal has indeed taken place.

Next lesson - Fibonacci levels