Sophia Todorova has a background in teaching and psychology, and as such relishes the idea of assisting new traders on their journey to Forex trading success. Technical Analysis is her passion. The charts speak, and she listens.
RULES TO TRADING CANDLESTICK PATTERNS
- Draw the trendlines for the timeframes being used for trading. This enables you to determine the direction you should be trading in. See previous article on rendlines here.
- For higher probability trades, trade only in the direction of the trend a according to your relevant timeframe. For example, as a swing trader, I usually trade in the direction of the daily chart, using the 4-hour timeframe, or sometimes the 1-hour for tighter entries. I also make sure I am aware of resistance and support areas on the weekly timeframe. Day traders/scalpers generally trade in the direction of the 1-hour trend and entries are made on 1-15-min charts.
- Find the latest A, B swing (in an uptrend, the trendline is drawn across the A’s). Once a new high/low is made, the ‘C’ point becomes ‘A’ again.
- Try to identify where the ‘C’ could potentially form. Aim to enter as close as possible to the trendline. The Fibonacci tool is useful for this purpose, as well as for identifying targets later. In ‘building a case’ for entry on a particular trade, identify other support/ resistance that could help in placing the odds in your favour. I like to look at past resistance and support areas for both entries and exits, as resistance turns into potential support once the market is above it, and support turns into resistance when breached.
- Look for candlestick patterns at your projected ‘C’. These patterns include engulfing candles, tweezer tops/bottoms, double tops/bottoms, pin bars, etc. They will indicate price rejection and reluctance to go beyond the point where they appear, and so is a good indication of a potential entry point.
STOP PLACEMENT & TARGET PROJECTION WHEN TRADING CANDLESTICK PATTERNS
In the interest of safety, as well as good risk management, it is a good idea to vary the placement of stop losses according to the depth of the retracement that took place to form a ‘C’. Some traders can easily eye-ball retracement levels, but a fibonnacci tool can be used to measure this. For the .382 and 50% retracement levels, stops can be set a few pips above/below the candlestick pattern, as such shallow retracements suggest fast, aggressive movement, and normal market swings will not endanger stops. It is important to take into consideration the pip spread of the instrument being traded, and make adjust your stop accordingly. The stop losses for .618 retracement or higher should ideally be placed beyond the ‘A’ point.
Please note that if you are making an entry without a candlestick pattern for confirmation, it is better for the stop loss to be placed beyond the ‘A’ point, regardless of retracement level.
When first looking for an entry, it is also then that targets for profit should be identified. If you are using the fibonnacci extension tool, look for targets that are near to resistance/support levels (the same principle applies as when making a case for entries) When a trend resumes after a shallow retracement, it is likely to go further, and in less time than it would normally after a very deep retracement. Finally, if an opposing candlestick pattern forms after entry, take profits early, or at least move the stop to break-even level, as this can be an early sign of an impending reversal.
Thanks for readimg….Safe trading!
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