Higher Probability Candlestick Entries
A lot of traders feel they aren’t too different from an animal on the Sahara hunting their pray. Just like the hunting animal knows there are certain environments where they are more likely to score their next meal the trader favors certain set ups before entering a trade. This article will walk you through the environment on the charts that will yield the higher probability candlestick set-ups. You will also be introduced to merging pivot lines that work well with candlestick charting.
Trading by Candlelight
Candlestick charting is a method of displaying price action so that you can readily see the battle and winner of buyers to sellers to obtain distinctive trading signals. Candlestick trading has been around for centuries and has been introduced to the Western world within the last few decades.
There are many individual candlesticks and candlestick patterns that can tip you off to a new move. Common formations are the doji, the shooting star, and the hammer. To get a better handle on different patterns, Daily FX has a course to help you grasp different candles formations to assist your trading.
Combining Market Type with Candlestick Signals
First, it’s important to note that a market is either in one of two common environments. Either a range bound market with price bouncing between support and resistance. This is the most common market environment. The other market that trader’s find themselves in is a trend with price showing higher highs and higher lows in an uptrend or the opposite in a downtrend.
Here is the first rule for candlestick entries that we want to focus on once the market type has been identified.
-When in a range bound environment, we want to focus on candlestick formations or patterns near support or resistance for entries. Support and resistance can be identified by eyeing price action ceiling and floors or by adding Pivot Points to the charts.
-When in a trending environment, we want to focus on candlestick formations or patterns near pull backs in the direction of the trend for entries.
In addition to Pivot Points, we can also look to common indicators like the 200 period moving averages to help us pinpoint candlestick patterns around key prices in the market.
Pivot points are a famous indicator to help you forecast future points of resistance and support to limit risk and find profit targets.
The Pivot number is the high, low, and close added up and then divided by three.
P= (H+L+C)/3= pivot point
This is easier than it sounds because it will be a default indicator you can add.
Once the Pivot Levels are added along with a major moving average, we will look for price action to move to one of these levels. That is when we’ll heighten our attention to patterns that develop to see if a reversal is upcoming or a continuation is shown.
On the AUDUSD, 2 hour chart we see price respect and move off of the monthly pivot price. We also see additional action around the 200 day moving average that confirms the bounce of the Resistance line (green) back down to the monthly pivot line. There is nothing predictive about the Pivot Lines except the fact that many traders look to them in placing profit targets, stop exits or deciding when to stop buying or selling into a move. This gives Pivot Lines a bit of a self-fulfilling power. As you add these lines onto the charts, you see that price often respects these lines in either reversing from them or showing a strong continuation off of them.
Here is the USDJPY, 2 hour chart which shows price bouncing off the pivot and rushing up to the Resistance 1 line.
The take home message is that you can look to Pivot Points and a large period moving average for reversal or continuation signals and then set your stop below the signal and your profit target near the resistance or support line. This will ensure you keep good risk management while hunting for higher probability entries.
Trader's looking to enter the market are often sent off on a journey to discover the 'holy grail' of market entries. They study numerous theories; Japanese candlestick reversals, contrarian theory, oscillator divergence, wave theory, and others. Traders who are just starting out, put their trust in indicators and oscillators and rely on them make the decisions on when to place an order - and the more indicators/oscillators they discover, the more they add into their strategy.The most neglected indicator/oscillator is price. That's right, price! Price is superior to any indicator and all others come second. It's the only indicator that encompasses everything - economic factors, political and geographical. Novice traders often do not understand the importance of price and most of the time, they don't give it the attention it deserves.The most effective market entry is trend reversal. After an ongoing trend towards one direction, the market eventually signals the end of that trend and begins a new one towards the opposite direction. In this article, we'll be focussing on a few of the most popular reversal patterns: head & shoulders, double top and triple top.Head & ShouldersHead & Shoulders have a reputation for being one of the most dependable reversal patterns. It's a pattern based on price movement and indicates the start of a new trend in one direction, after an ongoing trend in the other direction ends. How to spot Head & Shoulders:1. To have a reversal, an existing trend needs to exist, and head & shoulders is no different.2. A prevailing uptrend (in this case) is made up of consequent higher tops and bottoms.3. If volume is available, it signals alerts.4. An upwards move to the Head often illustrates decreased volume (if available) and signals a warning.5. The right Shoulder is lower than the Head and indicates a potential reversal.6. A significant close below the neckline (with increased volume, if available) indicates the end of the uptrend and the start of a downtrend.7. To calculate the minimum price target, project the height of the pattern to the neckline's breakout point. Triple TopsSimilar to the Head & Shoulders, the Triple Top is made up of three (almost) equal tops and a significant close below the support (bottom) of the formation. It's important to have a break below the bottom in order to have a valid Triple Tops. The three tops on their own are not enough! How to spot Triple Tops:1. An existing trend (in this case an uptrend) is vital before you go looking for a reversal.2. As with Head & Shoulders, the existing trend is marked by its consecutive higher tops and bottoms.3. If volume is available, it signals alerts.4. The upwards move to the resistance area indicates decreased volume (if available) and signals weakness to move higher.5. Equal (or almost equal) tops make up the resistance area.6. A significant close below the bottom (with increased volume, if available) indicates the end of the uptrend and the start of a downtrend.7. To calculate the minimum price target, project the height of the pattern to the breakout point. Double TopsDuring an uptrend, a top might surpass a previous top if the demand exceeds the supply. When that trend runs out of gas, it will start showing signs (signals) of weakness. If volume is available, then a decrease in it will be the first signal as it moves upwards. Another signal is if the last top fails to go higher than the previous one. A reversal is confirmed if prices break below the bottom/support area. How to spot Double Tops:1. An existing trend (in this case uptrend) is necessary.2. The existing uptrend is defined by consecutive higher tops and bottoms.3. If volume is available, it signals alerts.4. The upwards move to the resistance area indicates decreased volume (if available) and signals weakness to move higher.5. The tops are equal (or almost).6. A significant close below the bottom (with increased volume, if available) indicates the end of the uptrend and the start of a downtrend.7.To calculate the minimum price target, project the height of the pattern to the breakout point. Price rules supreme over oscillators and indicators. Price discounts for everything that affects the markets and reveals the crowd's (traders) psychology. There are many bearish or bullish trend reversal patterns, and traders should pay more attention to them rather than experimenting solely with candlestick reversals and oscillator signals. Available volume in combination with oscillator analysis, can confirm reversal patterns with higher potential accuracy.
What is Gap Trading? Gap refers to the space between the end of a candle and the beginning of the next candle. Gaping is not a regular feature of the market, it usually happens during the weekly market open. It happens at the price closing of a particular pair on Friday and at the price opening of that currency on Monday. The stock and commodity markets in particular enjoy more price gaps. Gaps are caused by longer or shorter than the expected ratio of any currency. And in the stock market, there is a price gap every day. Normally, if there is a price gap, it is covered again. This is normal, but there are some reasons behind it. When there is a price gap, there is no support or resistance area, so the price can move openly in that direction. Does price always fill the gap? Technically speaking, the price fills the time gap by 90%. However, if the previous trend of the gap is more than 300 pips, then it takes about 15 days to fill the gap. If it is within 90 pips, then it is seen to be filled in 2-3 days. Is Price Gap Trading Profitable In Forex? According to the pair, the price gap can be of many ranges, there can be many types, such as some gaps are in the price breakaway, some are in the trend continuous pattern, filling the gaps in all the pairs or patterns is not exactly the same. However, if you see that the price gap is closing, you can trade to fill that gap. Since there is no support or resistance in the gap space, in most cases the trade does not change without filling that gap. If you want to trade in currency gaps, consider that currency first, record the gaps in a few months, and report on both short and long gaps by day. Remember there is no reason to think that it will always fill the gap. Long gap trades are more sustainable than short gaps, so do not hold trades in the hope of filling a full gap, because sometimes the market gap fills half immediately and then fills the remaining gap after a very long time, so if you stop trading Understand the future of this trade.
The key to making money in the currency exchange market is to avoid emotional decisions and to follow a carefully thought out strategy that takes the current market and history into account. Going with your gut is not the way to go in the Forex market. Going with your gut could cost you money. Forex trading is a highly volatile market where emotions tend to run high. Emotions can influence your trading decisions, unless you have a strategy planned in advance, and stick to it, no matter what you think you're seeing at the moment. The keys to success in Forex are system, analysis and perseverance. Most experienced traders tell novice traders that they need to develop a system — and stick to it no matter what. Letting your emotions rule your decisions can hurt your trading in a number of ways. The system tells you when to buy, what to buy when to trade and what to trade for. By sticking to your system you'll maximize your profits. A system based on technical analysis of historical market trends is one of the most potent tools that you can utilize if you're just getting started in Forex trading. Many traders, with years of experience, continue to use this system to keep the profits rolling in. Many traders will tell you that when their gut instinct and their system collide, the system is almost always right. Using a mechanical system takes the emotion out of your trading, eliminating one of the reasons people fail. Your system doesn't sway with emotions. It sticks to a tried and true course. To be effective, your system — whether you develop your own or adopt one created by someone else — should identify the entry and exit point of your trade, mitigating factors, and an exit strategy. In general terms this is as follows: