In this article will be talking about trading with candlesticks formations and patterns. Candlesticks formations are one of the best trading signals that you can have. Using candlesticks can be very profitable and would allow you trade with less risk, more confidence, and they can be used as additional confirmation tools with almost all strategies.
Candlesticks formations are not all equal. There are powerful patterns, weak patterns and ones that you should completely ignore. And just like any technical analysis method, they’re best to be used with high time frames. For example, 1 hour time frame and higher charts.
When candlesticks formations and candlesticks patterns are used with smaller time frames, they will eventually and produce too many false signals. And that would make them less effective and even risky.
Inside bars, are one of the most effective candlesticks formations. Also known as the daily bars. This candlestick pattern happens when a candle is formed within the previous candle. In other words, the previous candle completely covers the last/new candle. Here is an example...
Candlesticks Trading - Inside Bar
Open your chart right now, and start looking for inside bars. I’m sure you’ll find many. Doesn’t matter which time frame or currency pair you’re trading. It’s everywhere! That means if you’re trading this pattern, you won’t have any problem regarding how often it’s formed. And that’s a huge problem for many traders, especially beginners who can’t wait for a specific pattern to be formed. And the problem gets worse when you remember that you should only use candlesticks patterns with higher – slower – time frames.
With inside bars, this is not an issue. On the other hand, being found so often means that it can’t or shouldn’t be used all the time. Because the more signals you get, the more chances of false signals you would also receive.
Another important thing to keep in mind is that inside bars are reversal signals. That means if price is currently moving in down trend/wave, an inside bar would suggest that a reversal in direction is about to occur and price may start moving in up trend very soon.
This pattern is correct about 65% of the time only. It’s not enough to use it on higher time frames, it must be used as confirmation rule/signal within a complete strategy. The strategy explained here is a clear example of how you can trade this wonderful pattern.
We’re going to use support and resistance levels with A.C indicator for the main strategy, and we’re going to use inside bars to confirm our entry points. This strategy works best on daily chart. So you can use it as your main trading strategy or as early reversal-alert system with your own intraday/swing trading strategy.
How it works?
First step is to "scan" the charts of major pairs, and look for recent inside bars. When you find one, we move to step two and check A.C indicator. In step two, we should wait until we get a confirmation signal from A.C indicator. A bullish bar above 0 line, or bearish bar below 0 line. Here is an example...
Candlesticks Trading - Inside Bar
Third step and last step, is to wait until breaks last support or resistance. In the above example, we would wait until price breaks last resistance. When that happens, we can safely open a trade. Example...
Candlesticks Trading
Support and resistance levels should also be used for stop loss and targets with strategy. For example : Fibonacci levels and pivot levels. If you prefer, you can even replace the inside bar and use pin bars! Both would work perfectly well and produce profitable results for short term and long term trading goals.
The most important thing here is to remember that trading is not all about charts, patterns and indicators. Trading is also a numbers game. If you don’t calculate your numbers correctly, then you may lose money even if you have the most powerful strategy in the world. And if you’re calculating your numbers correctly, you may get positive results even if you’re trading with a basic strategy.
One of the most important – if not THE most important – numbers that you should calculate are the ones that determines your risk management. Risk management simply means to calculate and understand how much you can risk per trade Vs. how much risk the existing trade can provide. And only trade when the risk is within your red lines.
For example, if you can or only willing to risk 5% of your account, then that’s your red line. All your numbers – especially your maximum stop loss level – should reflect this limit.
Another thing is, to make sure that your profits are always more than what you’re risking. In other words, your profit targets must always be higher in value, than your stop loss. and that would lead us to another important rule… Cut your losses short, and let your profits run!
That means your stop loss level should be static – fixed number – or specific level. While your profits should be dynamic, even with maximum values. For example, when I start the trade I can set my stop loss level to 75 pips and my maximum profit to 150 pips. But When I see that price is going to pass my maximum profit lines I can always change it to 250 pips for example, and add trailing stop to lock my profits. Or even start with no target and just add a trailing stop.
Demo trading would allow you to test and try as many strategies and plans as you want, and only keep the ones that provide best results. That’s why I highly suggest and recommend that you open a demo account – if you don’t have one already – and start testing this strategy with different money management plans until you get the results that you feel more comfortable with. Trading is personal, your results could be completely different than any other trader, even if all are using the same strategy. So trust your own results and no one else’s.
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