Forex Candlestick Formation In Price Action
Forex candlestick formats provide the same forex information with the usual bar formation, but the format of forex candlestick formation charts is more clear and accurate in describing price action.
How to read the forex market price movement using forex candlestick formation has been applied in the country of origin of Japan since the 18th century. At that time candlestick chart is used to predict the movement of rice prices. When the stock market in Japan began in 1870, forex candlestick is widely used by traders to analyze the ups and downs of certain stocks from time to time. Renowned US analyst Charles Dow in the 1900s took the candlestick in predicting the direction of stock price movements until this formation became popular all over the world today.
Basically the forex candlestick formation provides the same forex information with the usual bar formation that was made later, but in the format, the candlestick formation chart is clearer and more accurate in describing price action. Visually, the demand and bid price behavior is clearer to understand. In trading charts that use candlestick formation the role of trader who wants bullish prices and bear price is clearly visible, and who will eventually win will be seen in the formation of candlestick that formed later.
The Candlestick Forex Formation Often Appears
The basis of the price action method is the observation and interpretation of price movements through a candlestick formation. Because it is popular, analysts give names or designations for certain candle formations that often occur, such as hammer or doji. Here is a picture of candlestick formations that often appear in the market and used in the analysis by the method of price action:
Bullish candle: describes price movements that tend to rise during that time period. In this case the number of traders who want a price increase is greater than those who expect prices to fall.
Bearish candle: describes price movements that tend to fall during that time period. In this case the number of traders who want prices to fall greater than those who expect market price increases.
Long lower shadow: this formation is bullish. The tail length should be at least equal to the length of its body candle. The longer the tail (shadow) will be more valid, meaning the bullish possibilities are greater. Traders who want price increases are bigger than those expecting prices to fall.
Long upper shadow: this formation is bearish. The length of the top shadow must be at least equal to the length of its body candle. The longer the shadow will be more valid, meaning the possibility for a larger bearish. In this condition, traders who want prices to fall greater than those expecting prices to rise.
Hammer: candlestick formation that indicates bullish state. This formation is more valid if it occurs in a downtrend condition. The tail length is at least 2 times the length of its body candle. Hammer does not have a shadow over which means traders who want more price increases to enter the market in the closing moments of closing.
Shooting star: the opposite of the hammer, is bearish. This formation is more valid if it occurs in uptrend conditions. Shadow length of at least 2 times the length of its body candle. Traders who want prices fall more in the market at the closing moments.
Harami, Doji and Spinning tops: they are indecisive, but these formations often appear. In the uptrend or downtrend conditions, these 3 formations need confirmation by the candle formation that occurs afterwards in order to predict the direction of price movement.
Dragonfly doji: is bullish when it comes to downtrend conditions.
Gravestone doji: is bearish when it comes to uptrend conditions.
Engulfing: can be bullish or bearish (see the formation in the picture above)
Setup Key Price Action
The main price action setup is the pin bar, inside bar and fakey (false) bar. Here’s the candlestick formation on the daily chart that formed on each of these setups:
Candle bar pin formation
As shown in the picture above, candlestick formation for pin bars that often occur is long upper or lower shadow and long tail doji (gravestone and dragonfly). This formation matches the pin bar characteristics:
- the open and close prices of a pin bar approach the high or low level of the bar, the closer it will be more valid.
- the open and close prices of a pin bar should be close to each other, the closer the more valid.
Pin bars can indicate trend direction forwarding or trend reversal, depending on the pin bar position in the current trend path. In the case of open prices and close prices approaching the high level of the bar (long lower shadow formation), those who want more price increases than expect the price to fall, so that at first the price drops to the bar’s lowest level but at the end of the closing price pushed up to near its highest level.
A pin bar must necessarily be confirmed by the bars that occur afterwards to ensure stronger bull or bear sentiment. If the closing price of the bar afterwards is greater than the closure of the long lower shadow bar, then market sentiment tends to be bullish, and vice versa for long upper shadow formation. If the candle formation is hammer or dragonfly doji, then market sentiment tends to be stronger where those who tend to want the price down have exited the market or ‘lost’ compared to those who expect the price to go up and have taken a buy position. Likewise for downtrend sentiment (shooting star formation or gravestone doji). Another example for the candlestick formation on the pin bar:
Candle formation inside bar Price Action
The inside bar is a bar that is in length in the previous range bar. The inside bar shows a brief market consolidation, before a breakout occurs in the direction of the dominant trend. A bar formation consisting of an or a few inside bars should be confirmed by the next bar for clear market sentiment.
Basically, all candle formations can be an inside bar as long as the open and close prices are in the previous range bar. Example of candle formation inside bar in price action is harami formation.
Fakey candle formation (false) bar
The fakey (false) bar formation indicates rejection at a certain level. The price will move following the ongoing trend, but then reverses course after the break of the support or resistance level. Often after fakey formation is formed, the price reverses strongly. Usually fakey bar is preceded by the formation of the inside bar.
In the example above look inside bar with harami formation (bar to 2 spinning top formation), and pin bar with candle shooting star formation before break level support it.
Inside bar is one candlestick pattern that consists of (at least) 2 candlestick that is used as one of the reference signal. Inside bars are also used as one simple strategy that is easy to understand, but profitable to get pips.
strategy this time using candlestick pattern “Inside Bar” as signal confirmation. If you do not know what it is Inside bar, let’s discuss together in this paper.
Inside bar is the name of candlestick pattern which consists of 1 big candlestick and 1 small candlestick.
Normally very valid candlestick patterns give signals at H4 or greater time frames.
What is Inside Bar?
Visually Inside Bar is 2 candlestick forming pattern, where;
- The first candlestick, is what we can call a “candle mother” or a big candlestick.
- Second candlestick, we can call as “baby candle”. This second candlestick is called as Inside Bar.
Inside bar traits
- Consists of two candlestick formations.
- The first candle has a large volume. Can be a long bullish candlestick or long bearish.
- The second inside bar or bar, has a volume smaller than the second candle volume, can be a bearish or bullish candle.
If you do not understand, can be interpreted as the first candle in the form of candle bearish with a large volume, eg 100pip, and the second candle in the form of a bullish candle but only has a volume of 50 pips or less than half the volume of the first candlestick.