I have written a candlestick trading strategies in previous posts ago. But, now is another explanation that might interest you.
Pairs: GBP/JPY, if you have not discovered this amazing pair yet you are missing out.
Time frame: I use 4 hour charts, and only 4 hour charts.
Alarms: If your current trading platform does not have price alarms then you need to find a new one. Since I trade 4 hour charts, price alarms are essential. You need to set alarms and be prepared to trade when the price reaches a certain level.
I use a combination of candlestick patterns, support and resistance lines, and price action. As you can see, I have not mentioned any indicators because I do not use them. My trading is all about following the actual price and not indicators. In the next few pages I am going to explain candles, S/R lines, and price action in detail, and then I will explain how to use them all together.
People underestimate the power of being able to read candlestick patterns. Candlesticks tell you exactly what’s going on with the market.
A bullish candle tells you that the bulls are currently in control. A bearish candle tells you the bears are currently in control. A doji candle tells you that the bears and bulls are fighting, but neither one is winning. So, when you get a doji forming after a series of strong bullish candles what does that tell you?
The bulls were in control of the market, but now the doji shows that the bears are fighting back. The
bears and bulls are opposing forces and they are always trying to pull the price in their direction. Sometimes the bulls have more power and it goes up, other times the bears have more power and the price goes down. So every time you look at a candle you should think of it as a struggle between the bulls and the bears.
Long Wicked Candle Patterns (LWP’s)
Long wicked patterns are, in my opinion, the strongest type of reversal pattern. They are not simply doji’s, hammers, or shooting stars. LWP’s are the combination of several different factors that make for a very strong reversal sign. Let’s dissect the two most important parts of a LWP.
The preceding trend is the most important part of the long wicked pattern. If there is no preceding trend it is not a LWP. Identifying a preceding trend is not hard, but it is also not a science. I can’t tell you “a trend is exactly 100 pips,” because a trend is dependent on current market conditions and, obviously, the pair you are trading. I know it is a little hard when you do not have an exact rule to follow, but with just a little practice you will be able to spot trends with ease. I describe a preceding trend as a series of 4 or more candles moving strongly in the same direction. The preceding trend is important because it shows that either the bulls or the bears are currently in power. In the picture below the preceding trend is shown in the red box.
Reversal patternThe actual reversal pattern is what screams out to us, “the bulls/bears are losing power!”, and tells us the price might be turning around. The long wicked pattern is also very simple to identify:
1. The wick must be longer than the body of the candle.
2. The wick must be pointing in the same direction as the preceding trend.
The reversal pattern alone is not a LWP. It is the combination of the preceding trend, and the reversal pattern that make an LWP. In the picture below the reversal pattern is shown in the red box.
If we put these two features together what does it mean? Previously I said that each candle represents a struggle between the bulls and the bears. So if you think about it, a bearish trend LWP (the above picture) means that the bears were much stronger than the bulls and they were able to push the price down in a bearish trend for a while. Then, all of a sudden the bulls stepped in and pushed the candle back up forming a reversal pattern. So obviously we are seeing that the bears no longer have more power than the bulls and the bulls are fighting back.