June 25, 2018

Candlestick Trading Tools

To hear some people talk, you would think that

candlestick trading tools

are the Holy Grail for the trading community. Devotees may claim that market sentiments are magically revealed to them, and this transparency allows them to achieve far greater profits.
Yet on the other hand, it seems that other traders just don’t “get it”. They locate the common candlestick patterns that they are told to watch for, yet their trading statistics do not improve. The question is how both attitudes can coexist in a single trading market.

The answer is that it all depends on the approach that you take to incorporating knowledge of candlesticks and their patterns into your regular trading life. When you start using candlesticks, a little enthusiasm is appropriate but it is important not to forget the other principles of trading that you have learnt. Candlesticks are only tools, another “string to your bow”, and must be used in conjunction with traditional trading concepts.

There are a number of important principles that you should remember when bringing candlestick charting into your trading.

  • First and foremost, remember that all traditional Western charting tools can and indeed should be used on a candlestick chart, just as they are on the original Western bar chart. The candlestick chart shows exactly the same information, simply in a more easily readable form.
  • Candlestick patterns are only relevant if they occur in the correct trend. For the most part, candlesticks are used to identify reversals, so even more obviously there must be a trend to be reversed.
  • A candlestick pattern by itself, no matter how “perfectly formed”, should almost never be considered a good reason for a new trade.
  • If a candlestick pattern confirms a separate indication that you have gleaned from technical analysis, then the reversal is more likely.
  • In fact, the more signals that you see, both in candlestick patterns and in Western indicators, the more likely the predicted action.
  • The candlestick shows not only the prices traded, but also the strength of sentiment behind the move.
  • Candlesticks can be useful for timing trades, and may initiate action when other indications are favorable, such as the start of a breakout.
  • Candlesticks should not be used to identify price targets. Other Western tools, such as support or resistance levels, trendlines, or Fibonacci ratios are more appropriate.
  • There is always a price that says that the trade was wrong, and that it should be exited – the “cut your losses” principle. You must know this price before you open your trade.
  • Finally, you should always assess the risk/reward of each trade you are considering, to determine whether the trade is worth taking in the first place.

Many of these principles will be familiar to you from traditional trading. For some reason when traders “discover” candlestick patterns, they sometimes abandon the experience and common sense that they have accumulated in the past in pursuit of more intricate and satisfying pattern recognition, and then become frustrated that the patterns seem to “work” less than they were led to believe. Trading is a percentage game, and used correctly candlesticks can and will serve to better your odds.