Before I get into my favorite candlestick pattern, I want to first mention that I am in the process of writing a book about forex trading for Wiley & Sons. I want this book to be one that will actually help you improve your trading skills. So I am not writing what I think be beneficial to you, instead I am asking you, the potential reader what you would love to learn from such a book, and then use that feedback as a guide.
Candlestick patterns were created by Japanese rice traders of the 1700s. These informative expressions of price action were forgotten and did not resurface within the trading world until Steve Nisson brought them back in the 90s. Candlesticks are more effective than “Western” price bars because the information that they provide is easier to see and interpret, even though they are both delivering the same information: Open, high, low and close. Candlesticks are easier on the eye.
With that being said, there are many candlestick patterns out there to learn and experiment with. The typical inexperienced trader will try to learn them all and try to trade every pattern simply because it has appeared on some chart. Since this effort only leads to random results, these traders just lose a bunch of money and go look for something else, or they stop recognizing the patterns altogether. If this sounds like you, then here is what I suggest: find one or two patterns that are easiest to recognize and understand the psychology behind. Don’t use them as an excuse to take a trade, instead use them as a form of confirmation to enter a trade that meets additional criteria.
Earlier in my learning curve, I used to search for a handful of candlestick patterns to help confirm trades. I used to look for them on small time frames such as the five minutes or lower. I have since stopped all that ineffective behavior and now only focus on one pattern and only on the one hour time frame or above. My candlestick pattern of choice is called the Harami. It translates into something like “pregnant woman” in Japanese. It is a two candle pattern that begins with a larger range period followed by a candle that has a range entirely within the first candle. This second candle is also called an “inside bar”.
The reason why I like this pattern so much is because it represents a form of trading exhaustion very similar to range bound markets that we recognize on larger time frames. This pattern can appear anywhere within a price series. Alone is is random, just like all market generated price information, especially on smaller time frames. What makes this pattern valuable is when it appears at an important price level that I define way ahead of time using the methodology that I teach at SMB. Do you need the SMB patterns to benefit from this pattern? No. You can use this as a form of validation for your methodology as well. Remember just because you have a pattern does not mean you have enough information to justify initiating a trade. Most inexperienced traders will force trades and not consider the many global variables that must be present in order for this to be effective.
Methodology comes first, then you refine your analysis as trading opportunities emerge by using price action techniques like candle stick analysis to validate your trades. Do you want to see an example of this process in action? Watch my video here. And don’t forget to subscribe to my channel, there are new videos twice a week. Make sure to leave a comment also.
Remember the trading process is not as simple as looking at some lines on a chart and pressing a button. A great deal of effort is required to first develop a perspective and then refine it to the point where you can trade confidently because you fully trust in what you are doing. Candlestick analysis is very effective way to refine price action information as an opportunity is developing, but you must fully understand how to apply these techniques. If you would like to shorten your learning curve in this area, then let me know. Otherwise I hope you found this information helpful. Questions? Put them in the comment section.
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Marc Principato, CMT
*No Relevant Positions