Wednesday, February 24, 2010
By: Terry Allen
Expert consensus considers that candle patterns that have either a long upper or lower shadow with little body, are the most useful, e.g. hanging man, hammer, morning star and inverted hammer. You are also recommended to search for these patterns on the more reliable hourly and longer-period charts.
You can use these candlestick patterns in the following way. If you have been unable to activate any new trades using your trading strategies, you could attempt to locate entry opportunities by searching for one of the patterns listed above.
For instance, suppose you detect a hammer on a daily chart. You should then investigate the reasons behind its formation by studying the fundamentals, up-and-coming news and technical aspects. From this study, you must try to determine if a full-blown reversal is developing or just a relief retracement.
Sometimes, you may have other reasons for entering a new trade. However, you are recommended to still inspect the candlestick patterns of the applicable currency pair for additional confirmation. For example, suppose you are thinking about activating a new long trade within a bullish trend after studying the four-hour charts. However, whilst consulting the relevant candlesticks, you notice that a morning star is forming. Under such circumstances, you are well-advised to reconsider and wait for further developments before opening your new position.
Learning how to use candlesticks can greatly help you detect new trades, confirm your open positions and prevent you entering trades that could eventually transform into losses. However, you must be aware that candlesticks have limited use about the times of key fundamental news releases.
You can also determine the effectiveness of introducing candlestick confirmation into you trading strategies by using the following method. First, calculate the expectancy value of your trading strategy and then repeat the process, but include an extra step by introducing candlestick confirmation. Any improvement would demonstrate to you the value of this concept. You will almost certainly find that it does.
Candlesticks can provide you with the ability to pinpoint changes in price direction. If you incorporate this technique into your trading strategy, then the enhanced product could generate serious profits for you from Forex trading. You cannot ignore the impact and importance of a strategy involving technical analysis of the market when Forex trading. As such, Candlesticks could help you predict future price trends from volume and available price studies.
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