Written by Robert McKinley

Candlestick Patterns

 

Basic Candlestick Patterns

Forex traders can get a lot of information from candlestick patterns. Here are the basic patterns and what they mean.

Spinning Tops

A “spinning top” has a long upper shadow, a long lower shadow, and a small real body (or just “body”). The color of the body can be disregarded.

This pattern tells us that the activity between buyers and sellers is indecisive.

• The small body indicates that there is little movement between open and close
• The shadows tell us that there was activity by both buyers and sellers but neither of them overpowered the other.
• While prices had significant up and down movements, there was little change between the open and close of the session. Buying and selling activity, essentially, cancelled each other out.

Spinning tops during uptrends

• This usually means buyers are scarce.
• There is a chance that a reversal in direction could occur.

Spinning tops during downtrends

• This usually means sellers are scarce.
• There is a chance that a reversal in direction could occur.

Marubozu

Even though this name may seem rather exotic to English-speaking people, its candlestick pattern explanation is straightforward.

• A Marubozu pattern has no shadows coming from the bodies.
• It’s high and low are the same as it’s open or close. Notice that I said “… open or close.” Whether the high and low are the same as the open or the close depends on whether the candlestick’s body is filled or hollow. Further explanation follows.

There are two types of Marubozu

1. White Marubozu

   • It has a long white body and no shadows.
   • The open price equals the low price.
   • The close price equals the high price.
   • It is a bullish candle and it tells us that the buyers were in control during the entire session.
   • It is often an indicator that a bullish continuation or a bullish reversal pattern has begun.

2. Black Marubozu

   • It has a long black body and no shadows.
   • The open price equals the high price.
   • The close price equals the low price.
   • It is a bearish candle and it tells us that the sellers were in control during the entire session.
   • It is often an indicator that a bearish continuation or a bearish reversal pattern has begun.

Doji

• A Doji candlestick can be identified by its very small body, which shows as a thin line.
• A Doji has the same open and close price or very close to the same price as indicated by its extremely short body.
• A Doji also tells us that there is indecision about session positioning between buyers and sellers.
• Once again, even though prices move above and below the session opening price, the close ends up at or near the open price and the fight between buyers and sellers is, basically, a draw.

Doji has four different and special types of lines. For example, the length of upper and lower shadows in a Doji can vary so that a Doji candlestick can look like a cross, an inverted cross, or a plus sign.

If you see a Doji form after there has been a series of candlesticks with long hollow (white) bodies – such as white Marubozus – the Doji is telling us that the buyers are getting very tired and their activity is weakening. At this point, more buyers are needed to keep the price moving up. The problem is; there are no more buyers. So sellers smell an opportunity to get in and drive the price back down. (See below.)

This does not meant that you should automatically sell (go short). You should look for confirmation. Wait to see if a bearish candlestick closes below the long white candlestick’s open.

If you see a Doji form after there has been a series of candlesticks with long filled (black) bodies – such as black Marubozus – the Doji is telling us that the sellers are getting very tired and their activity is weakening. At this point, more sellers are needed if the price is to continue to fall. But the sellers appear to be pretty much done. So this time, the buyers smell an opportunity to get in cheap. (See below.)

In the above instance where the decline is weakening due to the lack of new sellers, new buyers are needed to confirm a reversal. For that, look for a white candlestick that closes above a long black candlestick’s open.

The next lesson is Candlestick Reversal Patterns

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