Neither
candlestick pattern can be a trade signal itself, nor can it be used for
indicating of the possible entries. The pattern just shows the expectations in
the market and signalizes the possible changes. For seeking of the entry,
another method of analysis rather than candlesticks should be used.
CONTENTS
1.Peculiarities
of the candlestick pattern analysis
2.An example
of trading candlesticks strategy based on Engulfing pattern
3.The
candlestick Forex strategy with «Free candle» indicator
4.General
remarks regarding candlestick trading
If you
prefer day trading, being skeptical to indicators, then Japanese candlestick
Forex trading strategy would meet your expectations. Candlestick patterns
enable a trader to determine the market situation as well as supply and demand
balance.
PECULIARITIES
OF THE CANDLESTICK PATTERN ANALYSIS
The longer
the «body» of the candlestick in Forex, the stronger the Momentum and the
greater the potential to move in specified direction. A «bullish» candlestick
with the large «body» and the short «shade» shows that the buyers influence the
market more than the sellers. A «bearish» candle with large body and short
«shade» means that the market supply is stronger than demand. A long «shade» in
specific direction means that in the process of the candlestick’s formation in
Forex the supply and demand balance has shifted. The changes of the market
expectations can be determined by comparing the candlesticks with each other.
The short
shade from one or the other side indicates greater chances of the movement in
definite direction. Relatively equal «shades» provided the candlestick’s body
is small (Doji candlesticks for Forex pattern) represents market indecision -
the pressure on the buyer’s and seller’s price is approximately the same. In
such circumstances, even a small growth in volume of trade may cause a strong
price movement; more often there is a trend to reverse.
Let us
remind the main candlestick trading systems:
The
candlestick patterns which may be defined as reversal patterns warn not only
about reversal trend but also about the lateral movement start or exit from it;
and sometimes about reduction of the movement’s speed without change of the
direction. Any pattern makes sense only where it reaches the strongest level.
If reversal pattern succeeds then it will be followed by continuous definite
movement.
All trading
patterns made up of 1-2 candlesticks would lose their significance if during
current movement (trend or correction in price movement) this pattern applied
more than once. This is especially true for Doji candlestick patterns. The most
reliable Japanese candlestick signals appear on Daily timeframe. Following
timeframe decrease, the reliability of the signals lowers.
AN EXAMPLE
OF TRADING CANDLESTICKS STRATEGY BASED ON ENGULFING PATTERN
Candlestick
forex trading strategy uses this candlestick pattern as reversal signal or the
correction start.
Trading
asset: any currency pair.
Trading
period: the European and the US sessions.
Timeframe:
D1 or H1.
Candlestick
trading strategy for signal to buy:
The
formation of candlestick «engulfing» pattern is required on the low of the
downward trend.
The signal
is confirmed: it can be Doji candlestick pattern or one more Engulfing pattern
in the same direction.
Low of the
first Engulfing pattern must not be renewed, moreover - the more remote the
price, the stronger a trading signal.
At the
moment of the next candlestick opening we will open a long position. Stop Loss
will be fixed below a Low confirmation signal.
Candlestick
strategy forex for signal to sell:
The
formation of candlestick «engulfing» pattern is required on the high of the
upward trend.
The signal
is confirmed: Doji candlestick pattern or one more Engulfing pattern in the
same direction.
High of the
first Engulfing pattern must not be renewed.
We will open
a short position at the moment of the next candlestick formation. Stop Loss
will be set above the High confirmation signal.
THE
CANDLESTICK FOREX STRATEGY WITH «FREE CANDLE» INDICATOR
The trading
strategy uses candlestick patterns with high reliability level and sliding
average for the determination of the current trend. EMA(9) is advised for the
popular currency pair trading on M15 timeframe. «Free candle» is considered to
be a fully formed 15-minute candle, body and shade of which do not touch EMA
(9) line, and the closing price of the candlesticks in forex trading is not
higher/lower the previous extreme. «Free candle» must have the average «body»
and average «shade» («hammer», «dodji» reversal patterns and GAP are not
applicable).
Trading
asset: EUR/USD, USD/JPY, USD/CHF, GBP/USD, EUR/GBP, EUR/JPY, GBP/JPY.
Trading
period: the European and the US trading session. Candlestick forex trading in
the periods of the market’s indecision is not advisable.
The main
trend’s direction is determined by EMA(9). For the long position (buy), the
existence of the «free» bullish candle above EMA(9) is required. The next
candle’s entry after «free candle» or a Buy Stop order should be slightly
higher than the closing price. The Stop Loss is fixed in max level of the «free
candle».
For a short
position (sell) a «free bearish candle» should be fixed below the moving
average. The entry at the opening of the next candle depends on the market or
should be made by a pending Sell Stop order. A Stop Loss should be fixed 3-5
points below min of the «free candle». For setting of Take Profit, two ranges
of the «free candle» should be used.
A good
moment for the entry when it comes to candlestick strategy trading in regard to
main currency pairs appears within 15-30 minutes after the European session
opening, when the market direction has been determined. The average duration of
the open deal is up to 1 hour. It is not recommended to trade without Stop Loss
or enter within first 5 minutes of each hour.
The deal
should be opened unless:
distance
from closing price of the «free candle» to ЕМА(9) is less than 3-4 points;
body of the
«free candle» is less than 10 points.
From the
mathematical expectation prospective, the «free candle» forex candlestick
trading is sufficiently effective, if the deals are not made too often and only
in reliable configurations.
GENERAL
REMARKS REGARDING CANDLESTICK TRADING
Forex
candlesticks analysis comprises of a variety of types, which may involve from 1
to 6 candles. The majority of patterns work more efficiently in the main trend
direction, the reversal patterns considered to be weaker. In intraday trading,
the main trend on the greater timeframe should be taken into account.
If after
receiving of the candlestick signal, the movement in the market does not
confirm it, then the trend will probably flow in the opposite direction. The
principles of the capital management are mutual for any forex candlestick
trading strategies. For the long positions Stop Loss is fixed 5-10 points below
the candlestick pattern’s minimum, while Take Profit is 10 points lower than
the maximum of the previous fractal. For the short position rules for fixing
Stop Loss/Take Profit are similar.
Neither
forex candlestick pattern can be a trade signal itself, nor can it be used for
indicating of the possible entries. The pattern just shows the expectations in
the market and signalizes the possible changes. For seeking of the entry,
another methods of analysis rather than Japanese candlesticks should be used.
Credit :
https://www.forexchief.com/library/forex-strategy/candlestick-forex-trading-strategy/#lin1
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