Forex Price Action Basics - Lesson 6: Price Action Set-ups
Previous lesson, Why is this Important...
Now that you should have good understanding of basic Forex price action, it's time to re-visit Japanese Candlesticks. If you would like a refresher, please go back to our Forex Price Action Basics Lesson 2: Japanese Candlesticks.
As taught previously, Japanese Candlesticks display the opening price, closing price and high and low of price for a determined time period; a daily chart displays a candlestick for every 1 day, an hourly chart displays a candlestick for every 1 hour, etc. In this lesson, we will teach you the basics of why Japanese Candlesticks are so important in technical analysis and how they can be useful when trading Forex...
What is a Price Action Set-up?
Price action set-ups are specific candlesticks that can determine where future price may be. Bullish set-ups can signal that price is going to be higher in the near future and bearish candles can signal that price is going to be lower in the near future. This lesson will detail the most commonly traded Forex price action set-ups...
Single Candle Price Action Set-ups
Pin bars are candles that have a very small body and a very long upper or lower wick. They can signal price reversal as well as price continuation. Sometimes pin bars are also referred to as kangaroo tails, hammer candles and shooting stars. Below are some examples of bullish and bearish pin bars. Bullish pin bars have long lower wicks and signal that price may move higher. Bearish pin bars have long upper wicks and signal that price may move lower.
Do you notice the long lower wicks and the small bodies on the bullish pin bar illustration? Do you notice the long upper wicks and the small bodies on the bearish pin bar illustration? Below are some examples of real price charts. We have highlighted the pin bars that successfully signalled where future price will be.
Pin bars should not be confused with indecision candles (also referred to as spinning tops), which have both a long upper and long lower wick with a small body. Indecision candlesticks display that there is no clear "winner" from the candle open to the candle close. Below are some examples of indecision candles.
Doji candles appear when a candle has the same (or very similar) opening and closing price. Doji candles can signal a price reversal. Below are some illustrative examples of doji candles.
Double Candle Price Action Set-ups
Engulfing candlesticks are just as common as pin bars in the Forex markets. Engulfing candles are a double candle set-up, meaning it is a price action setup that consists of 2 candles, not just 1. Just like pin bars, engulfing candles can signal price reversal and price continuation, they can be used to predict where future price might be. Bullish engulfing candles are a candle that closes bullish (price closes higher than it opened) and the candle body engulfs the previous candle body, if bearish. Bearish engulfing candles are a candle that closes bearish (price closes lower than it opened) and the candle body engulfs the previous candle body, if bullish. The illustrations below may help to make this clearer...
Below is a real price chart (the same one used for pin bars). This time we have highlighted all of the engulfing candles which successfully signalled where future price will be. Bullish engulfing candles signal that future price might be higher, bearish engulfing candles signal that future price might be lower.
Triple Candle Price Action Set-ups
Morning & Evening Stars
Morning and evening stars are a 3 candle setup. Just like pin bars and engulfing candles, they are used to help speculate where future Forex price might be. Morning and evening stars don't generally act as a signal for price continuation but they can act as a signal for price reversal. A morning star Forex price action set-up consists of 3 candles in specific order; a strong bearish candle, an indecision candle or doji candle, and a strong bullish candle. An evening star Forex price action set-up also consists of 3 candles in a specific order; a strong bullish candle, an indecision candle or doji candle and a strong bearish candle. Below are some illustrations of a morning star and an evening star.
Inside bars are another 3 candle price action set-up used in the Forex markets. They are very similar to morning and evening stars, but the centre candle is engulfed by the range of the previous candle (the first candle), the last candle breaks and closes outside the range of the first candle. Let's look at an illustration of bullish and bearish inside bars (sometimes referred to as three inside up and three inside down)...
Inside Bar Set-up (Three Inside Up)
Inside Bar Set-up (Three Inside Down)
Examples of Bullish Engulfing Candles
Each bearish body is engulfed or overshadowed by the bullish candle body, these are bullish engulfing candles
Examples of Bearish Engulfing Candles
Each bullish body is engulfed or overshadowed by the bearish candle body, these are bearish engulfing candles
Morning Star Example
Evening Star Example
Examples of Bullish Pin Bars
Small Upper Wick
Small Candle Body
Long Lower Wick
Examples of Bearish Pin Bars
Long Upper Wick
Small Candle Body
Small Lower Wick
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