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Candlesticks are what most professional traders use in order to quantify price movements in a charting format and if you are taking this course a basic knowledge of what candlesticks are is assumed.
As you may already know candlestick trading is a whole mantra on its own so the purpose of this section is just to illustrate how candlesticks and in particular the various formations that they form can be used in line with the principles and methods that I both teach and trade with.
The intention is not to give you a complete education on every candlestick formation and an interpretation of what they mean, but rather to show you some example formations and how to apply them in the market. If you have a good knowledge of candlestick formations this section should give you an idea of how to apply any other formations that you may know well.
One of my favourite formations is what is known as a pin bar Reversal pattern.
This is quite simply seen as a candle stick with a long shadow particularly in comparison to the actual body of the candle. These formations are also known as the hammer and hanging man formations.
Below is a visual illustration:
You can see above the candle that is highlighted in the yellow box has formed a pin bar reversal formation.
This is visible from the way that the shadow is much longer than the main body of the candle. Basically what this is showing us is that the price has tried to continue going up but it couldn’t quite manage it and the sellers pushed the price back down.
This is a good reversal indicator but only when used with a confluence of other reasons pointing to the same trade.
Before you can take any candle stick formations seriously you must have confirmation of direction, and the level at which the candlestick reacted from.
An example of how you can use a pin bar reversal formation is by looking for the formation as soon as you have a confluence of reasons to be trading in that direction and also as soon as price reaches a level of support or resistance at which you would expect price to react and possibly reverse.
In the chart above for example you could think about trading that bearish formation only if you had other things telling you that the market may be going down such as market flow or lower highs and lows, and if there was some levels of support and resistance at the same price where the candle formation formed.
This is just a simple example to illustrate that trading doesn’t have to be complicated in order to get success and that simple things like candlestick Formations can be just as powerful as the next tool when applied in line with the basic principles that I teach.
One other Candlestick pattern that can be applied really well to trading from Support and resistance is the Inside bar formation.
This is when a candle forms and its whole range is contained within the range of the preceding candle.
Here is an example:
In the example above you can see how the candle with the arrows, is completely contained within the range of the preceding candle (which is shown with the two black lines) this is known as an inside bar formation.
Traders look to trade the break of the high or low of the inside candle but if you incorporate these set ups within the principles we teach you will have a far higher success rate in your trades than by just using them on their own.
As with the last illustration you need to have a confluence of other factors supporting your trade both in direction and the actual price level that you’re trading from.
In the chart example above if you had a confluence of reasons to sell and suspected that price was coming off a recognized level of resistance you could consider using a break of the low of the inside candle as an entry into the market.
Again, this is just a simple example of how to come up with a system using the core principles that really matter.
Basically the idea is to use candlestick formations at or around Known levels of support or resistance in a confirmed direction to give your trades a much higher probability.
There are lots of other Candlestick formations that you can use to make trading decisions with but I have deliberately only given you a couple of examples here because the aim isn’t to get you trading with candlesticks particularly, instead its only to make you aware that they can be incorporated into a system as long as it adheres to the main principles.
If you do prefer to trade using a specific candle stick formation be sure to use it with a combination of other tools and principles that you learn in this course to give yourself the maximum chance of success.
Next: Price Patterns