Candlesticks

Often traders over complicate their forex trading strategies with an array of indicators, overlooking the simple but very important information that a candlestick chart shows. Candlesticks can tell you whether buyers or sellers are dominating the market, or if a trend is running out of steam and about to end, amongst many other important events in price action. They can help you time entry and exit points or tell you that the trend will continue and you should hold onto the trade.

Bullish Candles

Bullish candles are candles where there are more buyers than sellers and therefore the price is appreciated. The strength of the buyers or ratio of buyers to sellers is indicated by the size of the candle. The larger the candle, the more buyers there are compared to sellers.
                                                         
Bearish Candles

Bearish Candles are the reverse of bullish candles and represent more sellers than buyers. The strength of the sellers or the ratio of sellers to buyers is indicated by the size of the bearish candle. Strong bearish candles have very small or no wicks.
               
                                                                                                    
Indecisive Candles

Indecisive candles are candles that have large wicks and small bodies.  As the price moved up the buyers were in control, but they could not maintain control of the price action, and the sellers were able to push the price down. As the price fell the sellers couldn’t maintain control either and the buyers were able to push the price back up.

Indecision candles are often called reversal candles, however a candlestick alone doesn’t indicate a reversal is about to occur. 

A strong reversal signal occurs when we have a grouping of indecisive bars or non bullish/bearish candles. For a true reversal signal we first require a trend. There is no exact definition of what a trend is or isn’t, but candlestick charts soon show the trend of a currency pair over a particular time period.  Generally 4 or more strong bullish or bearish candles are required for a trend to exist.

In order for indecision candles to help to signal a reversal, at least 3 or 4 consecutive indecision candles are required. These indecision candles do not need to be exact indecision candles; some might be small bullish or bearish candles, but they must not be strong bullish or bearish candles. The group must also not favour any direction – the closer to sideways the candle is, the more indecisive it is.

                                                                                                 
Reversal Pattern – Long Wick Pattern (LWP)

 A long wick pattern is a chart setup that shows that a reversal, or change in direction, is about to occur. A long wick pattern consists of a trend and a special type of reversal candle known as a long wick candle. The trend is the same as in the group indecision bar setup.  The long wick candle has a wick that is larger than the body and the wick must be in the same direction as the initial or preceding trend.


In this example, 3 short candlesticks of a preceding short trend are shown. The next candle is the long wick candle. You will see how the wick is larger than the body and the wick is pointing in the direction of the initial trend. This candle tells us that the bears are no longer in control of the price action and the bulls are taking over. It is important to note however that this long wick candle alone does not represent a reversal pattern. The pattern consists of both the trend and the reversal candle.

Another important feature to consider is the body of the reversal candle. If we are looking for a bullish reversal (change from a downtrend to an uptrend), a bullish reversal candle indicates a stronger reversal than if the candle was still bearish.