Trading the High Wave Candlestick Pattern
Many candlestick traders don’t fully realize that every candlestick tells a story about the market. That is certainly the case with the often overlooked high wave signal. In this addition to my free price action trading course, I’m going to show you how you should be trading the high wave candlestick pattern.
This candlestick formation, like the spinning top and doji formations, shows indecision in the market; therefore, you wouldn’t take the high wave candlestick as an entry signal, but it can be a good indicator that the market may be changing direction. You often find multiple high wave candlesticks at the top or bottom of trends that are changing direction.
Note: I have not found pure naked candlestick trading to be profitable in my own personal experience, although I know of traders that do well with these techniques. I have, however, found that using candlestick signals with a reliable trading system, that has proven to be profitable on its own, can be a powerful combination.
What is a High Wave Candlestick Pattern?
As I mentioned earlier, the high wave candle is similar to a spinning top or doji – as it signals indecision. The idea is that, over the course of the given time period, the bulls and the bears both tried to move the market, but neither was able to hold onto their gains by the end of the period.
Like a spinning top, a high wave candlestick pattern has a relatively small real body. The difference is that a spinning top has relatively small upper and lower wicks, whereas a high wave candlestick has relatively long upper and lower wicks, revealing more volatility.
In the image above, you can see a doji, a spinning top, and a high wave candlestick. Spinning tops and high wave candlesticks can have either bullish or bearish real bodies. The real body of a high wave can be larger than the real body of a spinning top, but should be relatively small when compared to its total range (the distance between its high and low).
You may see high wave Japanese candlesticks forming in various places on your charts – including consolidating (low-range, sideways) markets. In order to be of any use, like the doji and spinning top, the high wave signal must come after an uptrend or a downtrend. Used in this way, it could signal a possible change in direction. At the very least, it should alert you to the possibility of stronger, more reliable, reversal signals upcoming.
Trading the High Wave Candlestick Pattern
In the image below, you will see a series of high wave candlestick patterns. The first occurred after a small retrace in the overall trend, which is not typically where this signal would be useful. However, as you can see, its occurrence after a relatively large bearish candle signaled indecision in the market. It was followed by an inverted hammer (which is a weak bullish signal), and then the trend continued upward.
The second occurrence, in the image above, is a more useful example of trading the high wave candlestick pattern. It appeared after an extended uptrend, signalling that the market was unsure about continuing the uptrend. That signal was followed by a bearish engulfing candlestick that engulfed the previous 2 candlesticks. The trend reversed from that point.
The third high wave signal appeared shortly after the previous bearish engulfing pattern. This signaled more indecision, but ultimately the trend continued its reversal.
Notice: At the top of the trend above, we have a high wave candle, followed by an engulfing candle, followed by a spinning top (or a formation very similar to one), followed by another high wave candle, followed by a doji, and then finally another engulfing pattern, before continuing the bearish reversal of the trend. All of these candlesticks are telling a story.
The last high wave candlestick in the image above came after a downtrend, signalling indecision. It was followed by an engulfing candlestick, forming a bullish engulfing pattern (although not a very good one). The result was another reversal (at least in the short-term).
Below are some examples of how you could use the high wave candlestick pattern in your own trading:
Example #1: You’re watching an uptrend, waiting for a reversal signal. You see a high wave candle. This lets you know that there is indecision in the market, and you should be on the lookout for an upcoming strong reversal signal, e.g., shooting star, bearish engulfing pattern, evening star, etc…. The high wave candle also strengthens the idea that price will reverse in the area of your strong reversal signal.
Example #2: You’re in a existing trade. You’re near your take profit. The market seems to have lost its momentum, and then you see a high wave candlestick form. You notice that this stall in price is also happening near a significant support/resistance zone. You decide to close your trade, keeping your profits, rather than risking a sharp reversal; or perhaps you just move your stop loss to break even.
Exmaple #3: You decide to scale into a trade, starting with a small position. At first, price action is going your way, but then you notice a series of indecision signals, e.g., high wave candles, spinning tops, dojis, etc…. You decide to hold off adding to your position until the market shows you more evidence that it will continue in the direction of your trade.
As I always say, candlestick trading is great for predicting short-term changes in market direction; however, nothing works 100% of the time in trading, and even strong reversal signals that work out can’t guarantee that the reversal will continue in your favor.
That being said, you shouldn’t be trading the high wave candlestick pattern as an entry signal, but it can add to the case for taking a strong reversal signal. You often see multiple high wave signals at the absolute tops and bottoms of large trends, which can be powerful with the right trading system.
Like all the other candlestick signals that we have discussed in my price action course, the context in which these signals occur is very important. If you see a high wave candlestick during a period of price consolidation, it’s obviously signalling market indecision, but so is the low-volatility, consolidating market. However, these signals can be valuable when they occur during trends, especially strong or extended trends.
Steve Nison recommends using candlestick signals with western technical indicators to find and qualify the best trades. I like to combine candlestick signals with another profitable trading system that works well with candlesticks, like the Infinite Prosperity system.
The high wave candlestick is a simple indecision signal – not powerful on its own, but it can help to make a strong case for taking other, stronger candlestick signals. Hopefully, this article will help you get started trading the high wave candlestick pattern.
Hi,We developed a totally free (mt4) money management script, which calculates the risk, the stop loss value and adjusts the position size automatically for each trade. The link: mt4trademanager.com.au - MT4 Money Manager v2.0Again: it is NOT for sale; it is totally free. If you could try it even on MAC that would be fantastic.
Time Frame : 15mins and aboveIndicators : Average Directional Movement Index - ADX (Settings : 14) and Fractals Background on Fractals and ADX? ADX Indicator or Average Directional Movement Index gives you a reading of how strong the market is trending. We will use this to our favor and combine it with Fractal Indicator to pick a high probability trade. These indicators can be found by default in your indicators list on your Metatrader 4 platform. Fractals show peaks and dips. To explain it easier, a Up Arrow Fractal forms when there is a lower high on both sides of a candle. A Down Arrow Fractal forms when there are higher lows on both sides of the candle. Please note that fractals will only form when the candle closes with the given criteria of high lows or lower highs on both sides. Understanding The Fractal Guru Strategy When the ADX is trending by seeing the blue line rising steadily, we look for Fractals to jump in the trend. We do not take all Fractals, only the ones with tails pointing to the Fractal. Let me explain this in a bit more detail and as simple as possible with some examples. (I will also be posting a video tutorial with this to help understand this method. Long (Buy) Positions Using The Fractal Guru Strategy On the ADX, the dotted green should be above dotted red and the solid blue line should be steadily rising Look for a Candlestick with a tail pointing to a Down Arrow Fractal When you see this Down Arrow Fractal, enter Long. Place stops 5 pips below the low of the Fractal Candle. Exit using proper money management or upon the cross of the dotted green and red lines in the ADX. Short (Sell) Positions Using The Fractal Guru Strategy On the ADX, the dotted red line should be above dotted green line and the solid blue line should be steadily rising Look for a Candlestick with a tail pointing to a Up Arrow Fractal When you see this Up Arrow Fractal, enter Short. Place stops 5 pips above the high of the Fractal Candle. Exit using proper money management or upon the cross of the dotted green and red lines in the ADX.
One of the biggest mistakes new traders make is to focus on the rare ‘Black Swan’ event happening instead of simply trading a methodical system. Too many traders continually bet on a big crash happening by buying put options or selling futures short in the middle of a bull market than simply going with the trend of the market. Too many new traders want to be the next Paul Tudor Jones by being right about a crash. Paul Tudor Jones did double his account selling short on Black Monday but the rest of his career was based on steady trades taken in the direction of a trend or betting against extended market tops and bottoms. Black Swans are rare events and do not produce steady market returns due to there randomness and rarity. For me the warning from Nicholas Nassim Taleb about the dangers of Black Swans in the markets applies more to risk management than creating a system around their occurrence. Taleb had both great success while trading the possibilities of Black Swans on a few occasion and severe drawdowns when none appeared over prolonged periods of time. I believe that profitability lies in trading signals inside a winning system not betting on a Black Swan event to make you rich. The governments of the world all focus on preventing bad events from occurring which bring down the probabilities of events outside the Bell Curve. The path to trying to capture a Black Swan event usually causes a drawdown and could lead to ruin . While a trader has to manage their position size so they are not ruined by an outsized move caused by a Black Swan event, in the long term your profits will be made by normal price action of White Swan market action. The path to long term profits is buying the deep dips caused by fear or trading with the trend. Trend followers will capture a lot of Black Swan profits because they will be on the right side of a trend when the Black Swans do take flight.