Forex trading systems today use little of the Japanese candlesticks in their strategies. I suppose this is due to both the larger complexity of coding them in the major Expert Advisors software as well as their slightly higher complexity compared to traditional technical analysis. I describe the main Japanese candlestick strategies in a short and simple to understand way so that they can be implemented in any of the existing Forex trading systems.
To start with, candlestick patterns offer more information than a simple line chart and are visually comprehensible than bar charts.
One of the most common candlestick patterns that can be used in Forex trading systems are Dojis. A Doji is a reversal signal where the opening and the closing prices are at or near the same level. The lack of a real body in the candle means the bulls and the bears are fighting and there could be a trend reversal very soon. As the Doji is a sign on a pending reversal be very careful in putting on any new positions. However, do not act on it. A Doji needs a candlestick confirmation pattern for you to execute a trade in your Forex trading system.
Another common patter is the Tweezer Bottom – we get it when two or more candles have matching bottoms. They can be made of real bodies, Dojis or wicks (just shadows). Ideally these would occur in consecutive candles but sometimes can also be considered in nearby candles.
A Tweezer Top, on the other hand, is when two or more candles have matching tops. These are good reversal signals, especially if used mechanically within a Forex trading system.
We now move onto directional patterns that you can in a Forex trading system (so far we considered reversal patterns). A morning star is a bullish three candle pattern where the first one is a tall red real body, the second one is a small real body (can be red or green) that gaps below the first real body and the third is a tall green candle that closes at least 50% into the red body. If you are looking at intraday data and there is no gap (as is often the case), that would still count as a morning star.
On the opposite, we have an evening star which is a three candle pattern in a bullish price movement. The first candle is a tall green body, the second one is a small real body (red or green) and the third one is a small third red candle that closes at least 50% into the first candle’s real body.
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