In this article, we’ll explore how to effectively trade using Forex candles on your MT4 charts. Candlestick patterns are a vital part of technical analysis and often signal turning points or reversals in the Forex market.

In this guide, we’ll cover the bearish reversal and bullish reversal candle patterns—two of the most important patterns for traders to watch for. By understanding these key formations, you’ll be better equipped to spot potential trade opportunities.

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Bearish Reversal Candles

Bearish reversal candles typically appear at the end of an uptrend and indicate a potential shift toward downward price movement. Here are three of the most common and reliable bearish reversal patterns to look out for:

1. Shooting Star

The Shooting Star is a single-candle bearish reversal pattern that forms at the peak of an uptrend. This pattern begins with a price increase but ends up closing near the opening price, leaving behind a long wick and a small body. The wick should be at least 1.5 times the length of the body.

This pattern is a signal that buyers attempted to push the price higher but were eventually overpowered by sellers, leading to a decline. In the example shown, the Shooting Star pattern led to a decline of nearly 1000 pips in less than two weeks.

2. Bearish Engulfing

The Bearish Engulfing is one of the most common and reliable bearish reversal patterns. This pattern occurs when a large bearish candle (closing lower) engulfs the smaller body of the previous bullish candle. The strong body of the bearish candle suggests a shift in market sentiment from bullish to bearish.

Not only does the Bearish Engulfing pattern signal a reversal, but it can also indicate the continuation of an existing downtrend. For example, even though only two Bearish Engulfing candles are circled in the chart, this pattern frequently appears at peaks, signalling a continuation of bearish momentum.

3. Hanging Man

The Hanging Man is another common bearish reversal pattern, often seen at market peaks. Initially, the price will move significantly lower, but then reverse and close near the opening price, leaving behind a long wick beneath the small body.

The Hanging Man candle is similar to the Shooting Star, except that its wick extends below the candle instead of above.

If the Hanging Man appears at the lows of a downtrend, it’s called a Bullish Hammer, which signals a potential reversal to the upside.

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Bullish Reversal Candles

Bullish reversal candles form at the end of a downtrend and suggest that the market is likely to shift direction and move higher. Here are the key bullish reversal patterns to keep an eye on:

1. Bullish Hammer

The Bullish Hammer is a common reversal pattern that looks identical to the Hanging Man but occurs at the bottom of a downtrend. Like the Hanging Man, the price will initially move significantly lower, only to recover and close near the opening price, forming a small body with a long wick beneath it.

This pattern suggests that the market has found support at the low and is likely to move higher. However, traders should always remain cautious, as the next candle may breach the low of the Bullish Hammer. Setting stops at a reasonable distance is crucial to managing risk.

2. Bullish Engulfing

The Bullish Engulfing pattern is the opposite of the Bearish Engulfing. This pattern occurs at the end of a downtrend and features a large bullish candle that completely engulfs the smaller bearish candle preceding it. The engulfing candle suggests a significant shift in sentiment from bearish to bullish, signalling that buying pressure is taking over.

The Bullish Engulfing pattern is often a powerful signal of a trend reversal, particularly if it appears at key levels of support.

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Using Forex Candle Patterns in Your Trading Strategy

These candle patterns are essential tools for Forex traders, providing insights into potential trend reversals and market sentiment shifts.

However, it’s important to remember that not all candle patterns are created equal. Their effectiveness depends on where they appear in the market cycle.

For example, a Hanging Man at the peak of an uptrend is a bearish signal, but a Bullish Hammer at the bottom of a downtrend signals a potential reversal to the upside.

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Key Considerations for Trading with Candlestick Patterns

1. Confirm the Pattern: Always wait for confirmation of a pattern before entering a trade. For example, you may want to see the next candle moving in the expected direction (bullish after a Bullish Engulfing or Bullish Hammer, and bearish after a Bearish Engulfing or Shooting Star).
2. Manage Risk: Candle patterns provide useful signals, but like all technical analysis tools, they are not foolproof. Always set stop-loss orders at a reasonable distance to protect your trades from unexpected price movements.
3. Look for High-Probability Setups: Combine candlestick patterns with other technical analysis tools, such as support and resistance levels, trendlines, or indicators, to increase the likelihood of a successful trade.
4. Study Historical Patterns: Use your MT4 charts to backtest and study how these patterns have performed in the past. Understanding the context in which a pattern appears can help you identify high-probability setups in real time.

Forex candlestick patterns are an essential tool in any trader’s toolkit, offering insights into potential price reversals and market shifts. Remember to practice sound risk management and set stops a safe distance from the high or low of the reversal candle.