I don’t particularly trade too many different candlestick patterns. I find it confusing to use too many patterns in making a decision. It’s as if some people believe they can actually read the hidden message the price is trying to tell them rather than simply a high probability opportunity.
So they memorize as many patterns as possible without understanding why and in what context they may be effective in the first place. Some patterns are neither here nor there in their effectiveness and certainly not with-ought the context of support/resistance, moving averages, trends, and fundamentals that drive these trades in the first place.
Compound this with the fact that there is no real proof offered that these patterns actually turn a profit and you have a recipe for failure.
I will refer to only a few candlestick patterns. You’ll need to download the PDF below to follow along with visuals.
My focus will be on exhaustion candle and indecision bars only. This short list of candlestick patterns is because I use only these patterns in continuation and reversal trades. They are the most consistent in their predictive power, but only when combined with other technical and fundamental factors. They are close to useless by themselves. I find these to be the most consistent among all the candlestick patterns
In both types of trade setups that I use these candles essentially help find a small reversal both in the direction of a trend and also exhaustion of the trend at a significant reversal.
It is better to keep it simple and use only a small selection of candlestick patterns and just the most reliable because they aren’t that reliable by themselves, to begin with. Keeping it simple helps us stay focussed when making a trading decision.
RSI, support/resistance, volume, and fundamental analysis all compliment your technical analysis. However, some of the critical candlestick stock chart patterns mentioned below add an essential layer to your trading. They help alert you to reversals. I said stocks because they’re used extensively in charting these markets, but they can be used in many markets including forex.
Candlesticks were created in the 1700s in Japan to help trade rice futures. Steve Nison brought them to English speaking communities through his famous book “Japanese Candlestick Charting Techniques.” Again, there are many patterns, but let’s focus only a few, the higher probability ones.
Bullish Candlestick Patterns
I will focus on three types of indecision candles and ton type of exhaustion: the Doji candlestick pattern, Gravestone Doji pattern, dragonfly Doji pattern and pin bars as exhaustion bars. These are shown in figures 1 through 6 in the downloadable PDF.
Diagram 1 shows a typical Doji occurring at the end of a downward trend. This reversal pattern must be taken in conjunction with a trend line, fundamental trend, support/resistance or round number. Diagram 1 also shows the corresponding levels of confluence of support needed to have a higher probability reversal.
Diagram 2 shows a reversal at a bottom near a Gravestone Doji or Inverted Hammer candlestick. This Doji is a level of indecision which in conjunction with the other factors shown provide a higher probability entry for a long trade.
Diagram 3 shows a Pin Bar reversal at a bottom. It is also known as the Hammer candlestick pattern. Here price tries to move lower but exhausts itself and move back near the price entry point.
Bearish Candlestick Patterns
Diagram 4 shows s typical Doji candlestick pattern occurring at the end of a rising trend. Again, this reversal pattern is not a guarantee of a reversal, but it can be a warning of one. It must be traded in conjunction with a trend line, fundamental trend, support/resistance or round number. Diagram 1 also shows the corresponding levels of confluence needed to have a higher probability reversal.
Diagram 5 shows a reversal at a top situated near a Dragonfly Doji candlestick. Again, with this sign of indecision is included the other factors of confluence needed for a higher probability entry. These other factors of convergence include support/resistance, moving averages, trend breaks, and oversold/overbought areas.
Diagram 6 shows a Pin Bar reversal at a top. It is also known as the Shooting Star candlestick pattern. Here price tries to move higher but again exhausts itself and moves back to the price entry point.
Day Trading Chart Patterns
Patterns are not enough. Most using technical techniques alone will fail. That’s why I’ve included other factors to consider with your trading. There’s a more thorough list of these factors in the downloadable PDF below.
You need to include meditation and visualization as well as intake of daily news and fundamentals as part of your trading. I’m sure some are successful incorporating volume with technicals, but the point is technicals by themselves are in general insufficient, The meditation and visualization habits are not as necessary for long term investing as they are for day trading since day trading results in intense, stressful decision making. Long term trading or investing tend to be more precise and less stressful.
If I seem redundant in my continual drumbeat to move beyond the technicals such as candlestick chart analysis, it’s not because I view them as useless. They are insufficient alone to result in reliable trading success.
In the PDF below I include more on what’s necessary to combine with the candlestick patterns in forex. Please have a look.