Do Forex Candlestick Patterns Work?
Having had a background in the stock market of about 5 years prior to entering the forex market, there were certain skills that I had acquired that I could not bring into the forex market.
One such area was that of candlestick patterns.
Now if you have studied candlestick patterns before you know that there are some formations that rely on the opening bar to gap above or below the previous bar’s range. Two examples of this would include the shooting star bearish reversal pattern, and the piercing line bullish reversal pattern. Both involve the market to gap at the open above the previous day’s bar or below the previous day’s bar respectively.
How can these candlestick formations exist in a market that does not gap? Obviously they can’t. But do the nature of these patterns work?
One such candlestick phenomenon that I enjoy trading on are the engulfing patterns. My definition of the engulfing pattern is when today’s price action totally engulfs the previous days’ body, making my definition redundant in the forex market (as I require the opening price to gap above the previous days’ close [for an engulfing bear] or below the previous days’ close [for an engulfing bull]).
So when I came across to the forex market I threw this popular pattern away.
However, several months into my forex trading experience I began to see a certain phenomenon that looked very similar to the engulfing formations and early Friday morning drew great testament to this forex-hybrid-engulfing pattern:
If you have come into the forex market with candlestick experience and wish to use this knowledge in the forex market, firstly, be aware that no gaps exist. Secondly, just because there exists no gaps does not mean that those patterns are rendered useless, they may just be in different clothing (if it looks like a duck and quacks like a duck… it’s probably a duck!). Finally, even if your candlestick pattern doesn’t involve gaps, test it to see whether it is tradable (you may also wish to check that you have read the article labelled: 5 questions you must have answered before you test your forex system) – just because certain candlestick patterns work in the stock and/or futures market does not mean that they will in the forex.
Test to make certain.
If you would like to know more about candlestick patterns go to Litwick, a great exhaustive free internet resource on candlesticks.
Tags: Forex Trading
September 14th, 2005 at 3:50 pm
My mentor, Sam Seiden, asked me a question once. Which came first, the “doji” candle, or the resistance the currency pair you are trading ran into. Here is an example of what he means: http://www.cbot.com/cbot/pub/cont_detail/0,3206,1070+12192,00.html
January 21st, 2009 at 2:41 pm
Some great information here. I think candle patterns have some very great potential to make profit in Forex. I just need to learn all the patterns or at least the important ones. Thank you very much fr sharing this with me!
April 5th, 2009 at 3:51 pm
The market is quite calm now… quite boring…
August 2nd, 2009 at 4:23 am
Trading Candlestick patterns is the easiest and most reliable method of trading in my opinion. They are a visual representation of price action. The Doji, Hammer and engulfing are some of the best ones to trade too.