There is a special section in every good price action trader’s toolbox reserved for Forex candlestick patterns, and for good reason.
Aside from technical chart patterns such as the head and shoulders or bull and bear flags, these candlesticks can offer you a chance to understand the sentiment that’s driving a particular market.
In this lesson, we’re going to cover three of my favorite Forex candlestick patterns. I’m going to assume that you’re familiar with Japanese candlesticks. If not, you may want to visit this post and then come right back.
By the time you finish this lesson, you’ll know how to identify these formations, what makes them so lucrative as well as the price structures to stay away from.
I’ll be using the terms “candlestick” and “bar” interchangeably throughout this lesson. A pin bar or an inside bar can technically be called a pin candlestick and inside candlestick, but these aren’t nearly as common.
Let’s dig in!
1. The Pin Bar and Its Ability to Signal Turning Points
Let’s begin with my favorite candlestick called a pin bar. Like most formations, these can form as either a bullish or bearish signal.
So what exactly qualifies as a pin bar?
Let’s take a look…
I hope the video above cleared up any questions you may have had about the pin bar.
Here’s an illustration of the characteristics we just discussed.
Before we get into why these are so powerful, let’s first break down the components of the structure.
The tail of a pin bar is also called a “wick” or “shadow” and represents the most critical element of the pattern. As a general rule, the tail should make up at least two-thirds of the entire pin bar. Notice how the tail on the two pin bars in the illustration above are much more pronounced than the rest of the structure.
Next is the body. The body represents the open and close of a pin bar and can vary in size. However, there shouldn’t be much space between the open and close.
The first rule about the tail should help keep you in line. After all, if the tail is at least two-thirds of the candlestick, then the body should be relatively small.
The nose of the pin bar, which is sometimes nonexistent, is important only as it relates to the tail and body. If the tail follows our rule of being at least 2/3 of the entire pin bar, and the open and close are close together, then the nose shouldn’t be a make-or-break characteristic.
Just know that the nose should be as small as possible, much like the image above.
Why do I trade it?
When it comes to Forex candlestick patterns, the pin bar is by far my favorite.
- It’s easy to spot when you have your chart setup to trade Forex price action
- It provides a favorable place to hide your stop loss
- The pin bar can be extremely profitable when correctly utilized
- They are effective on both the daily and 4-hour time frames
Now that you have a firm grasp on the characteristics to look for let’s get into a couple of examples.
The first is a bullish pin bar that occurred on the NZDJPY daily chart.
Notice how after an extended move lower, the NZDJPY found support and subsequently formed a bullish pin bar.
This pattern triggered a sharp move higher back to previous swing lows, which acted as resistance.
Next up is a bearish pin bar that occurred on the EURUSD daily time frame.
In this case, the EURUSD had carved out an ascending channel. On the second retest of resistance, sellers came out in force and eventually formed a bearish pin bar.
This particular candlestick formation triggered a 400 pip drop over the next eighteen sessions.
I wrote a more detailed lesson on the pin bar where I get into what makes a tradable setup as well as where to place your stop loss and target.
2. Nothing Says Continuation Like the Inside Bar
The inside bar is one of the more misinterpreted Forex candlestick patterns simply because they aren’t hard to find. This observation is especially true for those trading anything less than the daily charts.
Take a peek at the video below where I explain the characteristics of the inside bar and an easy way to determine if one is bullish or bearish.
To recap, here’s an illustration showing the attributes of an inside bar:
The inside bar’s range (high to low) should be engulfed entirely by the previous bar’s range, also called the “mother bar.”
Another way of saying it is that the mother bar should completely engulf the range of the inside bar.
So what makes the inside bar so lucrative?
When it comes to Forex candlestick patterns, the inside bar is my second favorite pattern to trade.
- It can act as a profitable continuation pattern if it occurs during a strong trend
- It provides a favorable place to hide a stop loss
- A tradable inside bar doesn’t occur often, but when it does it can be a highly effective Forex candlestick pattern
Here is an excellent example of the inside bar in action:
Notice how the inside bar in the chart above formed during a strong uptrend. An established trend is a requirement for trading this particular candlestick pattern.
The reason for this is that the inside bar is nothing more than consolidation. So we have a strong trend followed by consolidation which leads to a breakout in the prevailing direction.
Pretty simple stuff, right?
The next chart shows two bearish inside bars that formed on the EURUSD daily chart. Note that the pair had been in a downtrend for several months, therefore these are bearish continuation patterns.
You could make the case that the first signal in the chart above was also a pin bar, and I would agree. The combined rejection of former support and consolidation made for an incredibly profitable trade setup.
To learn more about inside bars, including which ones to trade and which ones to avoid, check out my detailed lesson on trading the inside bar pattern.
3. The Misunderstood Engulfing Bar Reversal
Last but not least is the engulfing candlestick. Unlike the inside bar that we just studied, this formation most often signals a reversal in the market.
Why do I call it a misunderstood pattern?
Because it takes more than an engulfing candle to warrant a position. To be considered tradable, an engulfing candle must develop at a key support or resistance level and after an extended move up or down.
Here’s a brief video that explains what I look for…
While the video above only addresses the bearish engulfing candle, the same rules apply for its inverse, the bullish engulfing.
For it to be profitable, an engulfing pattern must form at a swing high or low. Only then can it be used to formulate a trade idea.
Notice how the range of the engulfing bar completely engulfs the previous bar’s range. Hence the name, this is the most prominent and significant feature of this pattern. It’s also what makes it such a lucrative signal.
While the engulfing bar pattern is my third favorite Forex candlestick pattern, it can be extremely telling if properly utilized.
Here are a few things to keep in mind when trading them…
- They typically signal a forthcoming reversal
- These patterns should only be utilized on the daily time frame and after an extended move up or down
- If used as an entry signal, your stop loss should be placed above the engulfing bar high for a bearish pattern and below the engulfing bar low for a bullish pattern
- For a higher probability setup, always combine them with other favorable methods or techniques.
The bearish engulfing pattern below occurred on the AUDUSD daily chart.
In fact, there were two back-to-back formations at key resistance.
As you can see, the pair had carved out a wedge pattern. The two bearish signals formed at resistance, creating two profitable opportunities.
Know that the first candlestick in the chart above is also a bearish pin bar or at the very least a bearish rejection. It’s rare, but these two patterns can sometimes overlap.
Always remember that a bullish engulfing pattern at a swing low is a sign of potential strength. It signals that the current downward momentum is likely coming to an end.
Alternatively, a bearish engulfing pattern at a swing high is a sign of potential weakness. If you see one form in this manner, the chances are good that an increase in selling pressure is on its way.
Last but certainly not least, both candlestick patterns must form at a key level to be tradable. Otherwise, you may find yourself trading a lot of false positives.
Whether you trade using raw price action or some other means of identifying favorable setups, the three candlestick patterns above will surely improve your trading.
As lucrative as these formations can be, always remember that there are never any guarantees. Just like any other Forex trading strategy, the three above can and do fail, so always protect yourself.
Last but not least, the pin bar, inside bar and engulfing pattern are most useful when combined with other confluence factors. By doing this, you greatly increase the odds of a successful trade.
What is a candlestick pattern?
A candlestick pattern refers to the shape of a single candlestick on a chart that can indicate an increase in supply or demand.
Are Forex candlestick patterns reliable?
Yes, but the reliability of a pattern greatly depends on where it forms on the chart. For instance, a bullish pin bar at key support is going to be far more reliable than one that occurs in the middle of consolidation.
Which Forex candlestick pattern is most profitable?
The pin bar and engulfing candlestick patterns are two of the most reliable and profitable in my experience.
Now I've Got a Question For You...
Are you ready to begin using these patterns in your trading?
Then you definitely want to download the free Forex candlestick patterns PDF that I just put together.
It contains all three formations above and shows you the exact characteristics I look for when developing a trade idea.
Click the link below and enter your email to download the cheat sheet.
I notice you talk about inside bars and pin bars do you trade the engulfing pattern as well or no?
It isn’t something I currently trade. I get plenty of setups between pin bars and inside bars, which I’ve found to be more reliable than engulfing patterns. When traded properly of course.
In my opinion, You are better Teacher than Al Brooks. You can explain this all shit in simple way.
Mlotek, thank you for the compliment. Although, I’m not too familiar with Mr. Brooks or how he teaches.
thanks alot will be happy if i may have the book u help me alot
My pleasure. I haven’t written any books, yet. 😉
thanks again…i enjoy reading your articles…n i learn a lot from you…now i know trading with price action is very power full than other…may i know if i have tree open trade setup all with price action open together…now 1 is hit SL and other 2 is still runing …so what can i do now..is it sitll wait for they hit sl/tp or i should close the trade? thanks…
Pleased to hear that, Alex. You’re very welcome. As for the trades, that’s really up to you. I don’t advise folks on what they should do with their money.
justin you are great
Thanks for the kind words. 🙂 Feel free to reach out with any questions.
Justin, thank you once again for all your honest effort and depth of knowledge trying to educate us to be and do better in fx trading. Please can you talk a little bit of Moving Averages next time . Thanks and I appreciate.
You’re very welcome. Here are a couple of lessons on moving averages for you:
Hello. Very well explained. I’d like to ask, for how long can a candlestick pattern be valid?
Panagiotis, glad you enjoyed the lesson. As long as the candlestick formation is not invalidated. For example, the tail of a pin bar being breached.
Hi Justin, I read somewhere you were considering removing inside bars from the course material, is this true? Are you finding you don’t trade many inside bars these days?
Mike, I don’t trade inside bars nearly as much as I used to. I wouldn’t say they’ve become less effective, just not something I favor right now especially when volatility picks up.
Your method of teaching is understable and straight foward and I like that . A great mentor.
Cagn, I’m pleased to hear that. Thanks for the feedback.
If there is a brearish pin bar just below support. Green not red. Could this indicate a breakthrough ?
Rachel, I would need to see an example to answer that question.
I was thinking the same thing as Rachel as well. Basically, your lesson above shows two types of bearish and bullish pin bars – ones where the body is “filled in” and ones where the body is “empty”. The question I had in mind was, does it matter whether it is filled in or not?
So for the bearish pin bar example, you have it filled in with black. What if it is the same shape but not filled in? I’m thinking that it doesn’t matter. If the body is formed below a resistance level, the tail still shows lots of selling – whether the selling was greater than the opening price of the body or if it was less shouldn’t matter; it’s still indicating a lot of selling above the resistance line. But I’m not 100% sure since I’m just learning this…
Hai justin……can you tll me which broker can trust to trade?
Thanks for most of your analysis. I would like to know what retail forex broker is and their list. Also the names of parent forex companies that are not brokers.
Great articles man. The simplicity yet value of the concepts and the clarity in your thought and teaching make this a superb site.
I know what is engulfing pattern
Thanks alot for good information
Terima kasih atas pelajarannya dan akan saya jadikan pedoman dalam menganalisa dalam trading saya.
Thanks Justin for the insights on the inside bar. I guess yr strategies will make me a better trader.
Honestly ur teaches is the best. I ved leant alut following ur blog, and I said that today I must comment on you. Having u and Nial Fuller as my mentor, I no the sky will be my limit on my forex journey.
Thks and God bless u
Justin thank you so much for the information on your site to guide traders. You are such a great trader. I working my way to register in your community of traders.
Thanks. I am a newbee. This fundamental training is very refreshing. Willy Moore
What candlestick pattern do you trade Justine because you said you no longer trade inside bar
binary trade options, is a much easier form of trading. So, if you are a binary options trader, you will not have to constantly worry on when to sell of the capital in order to avoid the market volatility. This trait of the binary trade options reduces mental stress of the traders since they are now forecasting just the development of the asset for a fixed time period.
hi Justin. anh có thể cài giúp tôi cái indicator này dược không,
thank you so much sir
your methods helps
thanx alot justin ur work is really amazing i have been interested in trading for a while now bt did not have money to pay and i must say as much as im still clueless with most of the stuff i must say u have made a very big difference god bless
You’re welcome. Happy to help.
Thnx. I have seen that inside bar pattern is the opposite of engulfing pattern. Surely ???
Good analysis but can this pattern also work for 4 hour time frame
This is an awesome trading idea to using candlestick patterns
So far you are the best mentor I’ve ever found in my trading journey, thanks so much for sharing your knowledge.
Thanks for all the useful stuff that available for free on your website. As a new and confused trader i would like to ask that in the illustration of “Pin Bar (EURUSD pair) after the formation of Pin bar the, suppose, we got to sell trade but after 6 bar the 7th bar is bullish and then the 8th bar is bearish and an “INSIDE BAR”, my Question is if it’s not a qualified inside bar WHY???
Please answer as i always get confused in such situations.
in this blog you tell very useful information about candlestick pattern. canddlestick pattern is the importent part of forex. it is the main part of trading in this blog you tell ABOUT three part of candlestick pattern of forex