How to trade a forex sell signal using charts & candlesticks

Learn how to exit a forex trade by using sell signals to identify the right time to close a position. Discover common sell signals and how to trade them.
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Updated: Jan 5, 2023
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The competitive nature of the forex market means traders spend a lot of time deciding when to enter and exit a trade. While you can use different methods to stay ahead, one effective way is to use forex sell signals.

Sell signals indicate that the market is about to reverse from a prevailing downtrend. This happens when the market is doing poorly, and buyers are unable to absorb the selling pressure. 

The reason behind a downtrend can be technical or fundamental, but whatever the reason, understanding what to look for before the market takes a turn can help you to be successful. Here’s how you can spot a forex sell signal.

Forex candlestick sell signals 

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There are certain candlestick patterns that signify a change in the market when they appear. These are:

1. Pin bar candlestick pattern 

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The pin bar pattern represents a sharp reversal in the market. It is made up of one candlestick defined by a long wick or shadow. The body of the pin bar reversal is relatively small compared to the wick. 

The wick of the bearish pin bar shows the area where the price was rejected as the uptrend begins to move in a different direction. 

It is crucial to mention a few things about the pin bar before continuing. For one, pin bars can appear in different shapes, and they are more reliable in some market conditions than others. However, sell signals tend to be most accurate when they appear soon after a strong uptrend.

Source: Flow Bank

Trading with pin bars

There are different ways to use the pin bar depending on what you want to achieve. One popular way is to enter the market on a 50% retrace or pullback of the pin bar for the highest chances of success. Another way to trade the forex market successfully is to enter or exit the market after the pattern forms at the current market price.

Note that the pin bar might result in a false signal when it appears in consolidation or ranging periods because of the market’s indecision.

Before entering the marker on a pin bar, set a stop loss order below the small lower wick of the bearish pin and a limit entry near the 50% pullback of the pin bar. When looking for a position to exit the market, watch out for points where the price made a significant move at the key resistance level.

Trading with other patterns 

The pin bar reversal pattern may not be reliable all the time and should be combined with technical indicators and chart patterns.

A moving average could be added to the chart for added confirmation of the sell signal along with the Relative Strength Index. In the case of the moving average, the signal will be confirmed if the price is moving below the MA. When the RSI is at an overbought level, then the sell signal is also confirmed.

2. Engulfing candlestick

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The engulfing candlestick signals a change in the direction of the market. It consists of a bullish candlestick and a larger bearish candlestick that completely “engulfs” the preceding candlestick. The upper wick of the bearish candle should be higher than the highest point of the prior bullish candle.

Source: DailyFX

Trading the engulfing candlestick 

A bearish engulfing candlestick is strongest when it appears at the top of an uptrend but will lose most of its reliability if it appears anywhere else in the trend. If the trend records two swing lows after the appearance of the pattern, it‘s likely to continue downward. 

The second candlestick determines the best time to enter the market. Once it is fully formed, traders can open a short position at the lowest point of the lower wick to take advantage of the early reversal.

Stop loss orders are placed at the highest point of the upper wick in case the price action continues the previous uptrend. In addition, target or take-profit levels can be set at the previous level of support to ensure the best risk-to-reward ratio. 

The engulfing pattern works well as a sell signal and reversal indicator. It is also relatively easy to spot in a chart and appears in different timeframes, which increases its usefulness.

Learn how to trade the bearish engulfing candlestick more in-depth from HowToTrade’s experts if you think it sounds like a solid sell signal pattern.

3. Inside bar 

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This pattern forms after a strong trend and indicates that a consolidation period is near. The pattern consists of two candlesticks where the first bar is smaller and within the high and low of the previous bar. The larger bar is referred to as the mother bar. 

It does not qualify as an inside bar if the two bars are equal or very similar to each other. However, having two candlesticks with the same highs and lows will be acceptable as long as the inside bar does not exceed the mother bar by even 1 point.

Source: ThinkMarkets

Apart from indicating a potential consolidation, inside bars act as selling signals from key resistance levels. The inside bar works best in daily charts and could produce false signals if used for shorter time frames. Plus, it works best when it appears in a strong trend and could be false if it forms in a sideways market or a weak trend.

Trading the inside bar

The body and size of the mother bar are important because the pattern is less reliable if the mother bar is weak.

Stop loss orders for the inside bar sell signal can be placed at the low point of the mother bar. If the mother bar is larger than average, the stop loss can be placed halfway through the mother bar. 

More experienced traders could place the stop loss after the previous swing low, and use Fibonacci extensions as a limit forecast. The inside bar can be a bit tricky for beginners, and it is better to take some time to learn it by taking relevant forex trading courses before using it in your trading strategy.

Forex chart pattern sell signals 

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These are some of the most reliable chart sell signals:

1. Ascending channel

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The ascending channel appears within prolonged downtrends and is used to sell currency pairs. The ascending channel is one of the best forex signals to use and consists of an upper channel, lower channel, and price channel.

Source: DailyFX

Trading the ascending channel 

The ascending channel pattern is evident in every time frame, and it works well for traders looking for different trading strategies. It also increases the trader’s flexibility because it can be used to identify reversals, trade breakouts, or follow trends.

An ascending channel is used where the prevailing trend is a downtrend. A sell limit order can be set just above the upper channel, and a stop loss order placed close to the start of the ascending channel. For trading a reversal, stop loss orders can be placed close to the lower channel and take profit targets located above the channel.

2. Heads and shoulders 

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The heads and shoulders pattern is a reliable forex pattern for opening sell positions in the market. Their profitability makes this pattern one of the most popular among forex traders. 

The pattern must contain three elements:

  • Head: This is the peak of the formation.
  • Shoulders: The left and right shoulders sit at the side of the highest point or peak. It is preferable if the shoulders have the same or similar price points. However, this is very difficult to identify on a chart, and asymmetrical shoulders are accepted.
  • Neckline: This is the trendline connecting the shoulders. The break of the neckline activates the pattern.
Source: IG Markets

Trading the heads and shoulders 

The design of a heads and shoulders pattern offers clear and concise stop loss and take profit levels. The stop-loss order is frequently placed above the neckline because it activates the pattern. If the pattern provides a false signal, then your capital can be easily protected.

Entry into the market can be made after price action closes below the neckline and the trend is confirmed. However, the use of the heads and shoulders pattern will be limited where a strong market action causes the trend to continue in the same direction.

3. Rising wedges 

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The rising wedge is made up of two converging trend lines connecting recent higher highs and higher lows. It can be a sell signal or provide confirmation of the continuation of the trend.

With the rising wedge, the price action within the trend lines temporarily trades in an uptrend, and volume gradually decreases as the pattern forms. 

Source: ThinkMarkets

Trading the rising wedge 

A major advantage of the rising wedge pattern is that it warns of the impending downtrend before it happens. Entry into the market can be made after the initial breakout of the lower trendline and a stop loss order set inside the wedge. Any return to the wedge invalidates the pattern and causes the stop loss to close the trade. 

Keeping the distance between the entry point and stop loss short reduces the risk associated with the trade. Keep in mind that the head and shoulders pattern is still a technical indicator and is best used along with other indicators. 

Conclusion 

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Forex sell signals provide an effective edge in the forex market and are beneficial to any trader. You can study how the patterns work in a demo account to gain knowledge of it and choose how it fits your trading strategy.



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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.