Price action is what matters in the market. If you have been trading for a while you must have realized by now the importance of price action. Trading solely based on price action is also known as Naked Trading. This is precisely what we do. We trade naked. This is what most pro traders do. Did you download you FREE copy of the Trader World Magazine?
Candlestick Patterns are Leading Signals
Candlestick patterns are powerful price action signals. These patterns are leading trend reversal and trend continuation signals. The emphasis is on leading because most technical analysis indicators are lagging. Moving averages are lagging. Moving averages just average the past price in an attempt to smooth it. By looking at the moving averages you are just looking at the past. There is no prediction about the future.
Most technical indicators are combinations of moving averages. By the time you know that the trend has changed using a moving average, the trend is almost 50% over. So you will miss most part of the trends if you continue to trade with moving averages. You need to combine moving average based indicator with price action. If you have been trading without using candlestick patterns, you are making a huge mistake.
This is what most new traders do wrong when they start trading with candlesticks. They start using these candlestick patterns on lower timeframes like 5 minute, 15 minute 30 minute and 1 hour. Now these patterns are not that good on lower timeframes. But on higher timeframes like monthly, weekly and daily these patterns are pretty strong. You can also use these patterns on H4 and H1 but below that the reliability it not that good.
Look For These Unconventional Bull Bull & Bear Bear Patterns
New traders are told to look for standard candlestick patterns like the bullish engulfing pattern, the harami pattern, evening star, morning star, shooting stars, hammers, dojis etc. Doji is an interesting pattern. A doji is formed when the opening price and the closing price are almost the same. A doji on a higher timeframe like the weekly and the daily is a powerful signal.
Now most of the new traders get confused and find it difficult to identify these patterns. In today’s market, the reliability of the standard patterns that have been mentioned above is not more than 50-60%. Many times you will see a bullish engulfing pattern and you will think that the market is poised for an upward move. But the market will shoot down. Filtering these false patterns becomes a real headache until you lose your confidence in them.
The above infographic is good. It gives you a fairly good idea of the most popular candlestick patterns. The above infographic has been copied from the mql5 site. We would like to thank the moderator of that site who has posted this great infographic. Now in the video below Steve Primo talks of 2 unconventional candlestick patterns that are the extreme opposite of the bullish engulfing and the bearish engulfing pattern. He calls them Bull Bull Pattern and the Bear Bear Pattern.
Now you need something more as well before you start using these patterns in your trading. Watch the above video and you will understand what we mean. The problem with candlestick patterns is that most of them subjective meaning you have to look at the overall market before you make your decision. Precisely because of this problem when we try to code these candlestick patterns to develop a good indicator, we don’t get good results. Why? These patterns have got a fuzzy nature.
One way to solve this problem is to use one or two indicators when trading with candlestick patterns. It will be a good idea to combine fibonacci levels with candlestick patterns alongwith MACD. You can also use pivot points instead of fibonacci levels. Fibonacci levels are a bit subjective . Tell 2 trades to draw fibonacci levels and most probably they will draw 2 different levels. Pivot points are much better than fibonacci in our opinion The reason is simple. We calculate the pivot points using a standard formula. There is no chance of 2 traders drawing different pivot levels because of the standard formula. No combining the MACD gives you the chance to draw the divergences. This can be a good trading system. But you will need to optimize it.
The idea is that trading solely based on candlestick patterns is going to work. You will get a bullish engulfing pattern in a downtrend. You will take it as a reversal signal but it will hit your stop loss. How do you filter this false signal? We will use the MACD to determine the momentum of the trend. If the downward momentum is strong, we will simply ignore that signal. On the other hand if the market is ranging and the upward momentum is strong, you will take this bullish engulfing pattern.
You must got the idea by now. Looking at the candlestick patterns is an art. The more you are going to practice with these patterns, the more expert you will become. Just don’t make the mistake of using these patterns on their own. As said above combine them with one or two indicators. This will increase the chance of success more. What you will look for is confluence. When the 3 indicators confirm a bullish signal, it means buy and when the 3 indicators comfirm a bearish signal, you will sell. It is as simple as that. Did you read the post on how to turn $100 into $1 million in 12 months trading forex binary options? When you trade forex binary options, candlestick patterns are great in telling you when the market is going to go up or down.