Tad DeVan is a Senior Forex Analyst for Market Traders Institute and host of the Ignite Trading Room. Ignite Trading Room is FREE to join for active SmartTrader users.
Candlestick patterns are one of the important tools for conducting technical analysis to forecast the direction of prices. They can help traders interpret possible market trends and also signal bullish or bearish movements. And these trends and patterns, in turn, help traders to form their trading decisions.
Today, we will be talking about a simple candlestick pattern that’s commonly used for identifying trades in the direction of the trend.
But before that, here’s a look at what candlesticks are and how to identify the patterns they form.
Introduction to Candlesticks and Candlestick Formations
Candlesticks are used to identify chart patterns. These patterns help traders in setting up a trade by giving them insights about the entry, stop loss, and exit levels.
The patterns are formed by grouping two or more candles in a certain sequence. Although powerful trading signals can be identified by just a single candlestick pattern. So, candlesticks can be broken down into single and multiple candlestick patterns.
Strength is represented by a green or bullish candle and weakness by a red or bearish candle.
A general rule of thumb is to look for a prior period while reading candlesticks. If you are looking at a bullish pattern, the prior trend should be bearish. And likewise, if you’re looking for a bearish pattern, the prior trend should be bullish.
Below is a quick cheat sheet showing five types of bullish and bearish candlestick formations. You can also download the PDF version by clicking here.
With that in mind, let’s get talking about a simple way to spot and trade these formations in the direction of the trend.
Trading Japanese Candlestick Formations
Now, the best way to go about spotting candlestick formations is to know them by memory. You can do that by reviewing the above cheat sheet and practicing how to find those formations on your charts.
Alternatively, if you’re on the SmartTrader trading platform, an easier way to identify these patterns is to click on the ‘Candlestick Tools’ button, which allows you to activate all the bullish / bearish candlestick formations and gives you all the formations that meet the formula on your selected chart.
Here’s how it would look on the chart:
Green Candlesticks Highlighting Bullish Formations
Once this is done, one way to trade these candlesticks is to spot them at the bottom of retracement.
That means identifying the green candlesticks that are at the lowest levels during a given time and setting a trade on them for higher levels. So, once you spot a green candlestick from where the trend on the chart is reversing, you can place a trade for higher levels (as the pattern is indicating an uptrend).
The opposite goes for red candlesticks. Here you will identify the red candlesticks that are at the highest levels on the charts during a given period of time and set a trade on them for lower levels.
Here’s an easy way to understand this…
- Look for candlestick formations in an Uptrend if you’re looking to Buy
- Look for candlestick formations in a Downtrend if you’re looking to Sell
- For a better chance of success, trade the candlesticks at the end of retracements (as compared to trading the ones that are already in a trend)
So, that was one of the many simple ways in which you can trade using candlestick formations.
Tad Devan, Senior Currency Strategist at Market Traders Institute, has also recorded a short video on this strategy a while back, which you can Watch Here.
For more such Forex strategies and trades, you can visit the Analyst On Demand Trading Room.
Every week, within the trading room, Tad will take you through real market conditions and help teach you the keys to being a consistent trader across the board. Just spend a little time in Analyst On Demand and we believe you could see great results for yourself. You can access it by clicking here >>
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