Your first tool for trading is your brain. If you fill it with useless information and confuse yourself with complicated trading methods, you will always be confused in the market and end up in trouble. I will help you to extract the vital information from the unnecessary ones. This will help you see and think clearly.
Take a look at any chart you like, what do you see? I see the time and price movement axes in the chart and, most importantly, the candles. The price chart is the first tool that any trader who uses technical analysis needs to learn. Candlesticks can provide almost all the necessary information for trading, as long as you understand their language.
Yes, candles talk to you with their shapes in the chart. Candlesticks help you find your entry and exit points better or even earlier. So using candlestick patterns makes trading easier for you. As you learned in previous articles, it’s important where the candle forms, what color it is, or in which trend it appears.
Each candle on your charts represents the outcome of a battle between buyers and sellers. Each round of these fights can have different times; I mean, it can happen in different time frames. Perhaps you are confused and indecisive about your trading. Please don’t feel bad about it.
This is normal because it’s easy to be unsure about the patterns and you don’t want to miss the market’s profit. I was the same when I started trading, but remember that practice makes perfect. It is interesting to know that I could make a profit of more than 30% in one trading period by using the concepts that I said in the previous articles and the concepts that I will teach you in the future.
You can be even more successful than me by learning and practicing. I will be delighted to hear about your success. Let’s get to know this scoreboard better so that you can competently predict the next rounds of the game.
What are the main points of trading with candlesticks?
As you know, some candles are essential for us. In the financial markets, any information becomes valuable when it can be used to help us in trading.
In the previous articles, you became acquainted with the important candle types, and now it’s time to learn how to use them in your trading. I will give you a summary of them and teach you how to trade with each one. But if you didn’t read the previous article, it is better to look at it first.
Bullish candles with a long body and a short shadow indicate more power, and volume validates uptrends power.It also shows the high demand and buyers insisting on their decision. The opposite is true as well. Bearish candles with a long body and short shadow indicate more power, and volume validates downtrends power.
It also shows that the sellers are dominant in the market. Short and square candles with short shadows and low volume tell us that the market is indecisive and neutral. The most important point is that candles are more valuable for us when they form in crucial areas such as dynamic or static support, and resistance or moving average indicators.
A famous saying says one out of two candlestick patterns will fail. So we don’t want to rush into unwanted and loss-making trades. You need to ensure that your prediction is correct and then open positions, but you don’t want to lose opportunities as well.
You might ask, how is that possible? I’ll tell you the ideal entry points with the perfect stop loss spots.
How to use candlestick patterns in your trades?
You have learned in the previous articles that each candlestick has its characteristics, and I have prepared examples for the more important patterns so that you will be ready to trade with any pattern you see on the chart.
As you know, candlestick patterns are more important in specific areas. When you find a pattern near a support or resistance area, you can use these areas to find better entry points and set your stop loss. In most of the examples below, increasing trading volume can increase the validity of each pattern.
On the other hand, you will see that I have mentioned two or three entry points and stop loss in some examples. According to your trading system and risk management, you can use them for your positions. Let’s begin step by step.
How to trade according to Doji?
Do you remember what a Doji is? If not, you can check it out and come back after! I will tell you how to trade when you see a Doji. (Near critical areas!)
You can see in the above chart that the price is involved in a resistance area. On the third encounter with this area, a Doji candle (Gravestone Doji) formed. By pairing candlestick patterns with support and resistance areas, you can increase your chances of success.
Doji candles are single candlestick patterns. You might think, “Why should I combine support and resistance levels with candles? I can get more signals by considering the candles and making more money!”
The price patterns are repetitive in the chart and may have errors, no pattern can help you to make correct decisions alone. According to the resistance area and the formation of the Doji candle along with its previous and subsequent candles, you have received the necessary approvals, and you can enter the position.
I used to think the Doji candle would cause a reversal, but I realized that this pattern happens a lot in the chart. Without other confirmations, it is not very reliable. You can doubt the strength of the trend after seeing the Doji candlestick because, as you know, this candlestick is formed when the market is uncertain about its future movement.
It means buyers and sellers got equal points in this round. Let’s take a closer look at the chart below.
When a Doji pattern forms at the end of a downtrend or uptrend, there is a higher probability of a reversal and the end of the trend. Therefore, when I see a Doji candlestick in the middle of a trend, I will be more careful about my position or enter the new one in the condition of other confirmations.
You can wait for the next candle to enter the position, so your entry price will be close to the next candle. The stop loss is the highest price of the Doji candle. If the Doji candle occurs at the end of a downward trend, the stop loss is the lowest price of the Doji candle.
You can see another stop loss above the resistance area. Placing the stop loss in these areas can decrease the possibility of touching your stop loss. The price reacted to these areas in the past, so it should be hard to break, and in this way, your stop loss will be behind the support or resistance trench. The price can attack, but it isn’t easy.
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How to trade according to Bullish Candlesticks?
- Hammer: A Hammer candlestick is a single Bullish reversal candlestick pattern that forms during a downtrend. It is so named because the market is bottoming out.
Just because you see a Hammer pattern in a downtrend doesn’t mean you should enter a buy order on the spot! More confirmation is needed to ensure an uptrend. A typical example of verification is to wait for a green candle to close above the opening price of the Hammer candle.
After seeing the Hammer candle, you can hit your entry point on that same Hammer. By that I mean, place your entry point a little higher than the Hammer candle and set your stop loss at the lowest price of the Hammer candle. You can also place your stop loss below the support area.
Not always, but usually you can set your stop loss above the resistance area and below the support area. You will get to know what I’m saying in the following examples. As you know, this is not the only Hammer in financial markets; It also has an opposite twin called the Inverted Hammer.
- Inverted Hammer: The Inverted Hammer candle indicates the possibility of a change in the direction of the trend. A long shadow above shows buyers have tried to push the price higher when the price has fallen.
However, the sellers who witnessed the buyer’s actions said: No way! They have tried to lower the price. Fortunately, the buyers had enough breakfast and closed the trading session close to the open. As the sellers couldn’t close lower, this suggests that everyone who wanted to sell had already sold. And if there is no seller anymore, then who is there? Buyers.
The same goes for the Inverted Hammer. It appears at the bottom of a downward trend. Again your entry will be a little above the shadow (the highest price of the Inverted Hammer), and your stop loss will be a little below the candle (below the lowest price).
Like the Hammer pattern, you can place your stop loss slightly lower than the support area in the Inverted Hammer pattern. You must ensure that the preceding candles are red and Bearish for both the Hammer and Inverted Hammer.
- Bullish Engulfing: The Bullish engulfing pattern is a two candlestick pattern.
This pattern occurs when a giant Bullish candlestick immediately follows a Bearish candlestick. The second candle has “covered” the Bearish candle. Buyers are warming up, and a strong Bullish move may form after the recent downward trend or a bottoming period.
Your entry will be above the second candle (when the second candle is closed) and our stop loss can be the bottom part of the second candle. According to your trading system, you can also put your stop loss below the support area.
- Piercing Line: The piercing line pattern is a two candlestick pattern that appears at the end of a downward trend near a support area, the same as Bullish engulfing.
We wait for the candles to be formed completely, and when we are sure, our entry will be above the second candle, and our stop loss will be a little lower than the bottom shadow. You can set your stop loss below the support area like the other positions.
Also, the volume of the second candle is crucial because it shows the power of the trend.
- Bullish Harami: A Bullish Harami pattern consists of two candlesticks with contrasting colors side by side.
Harami means pregnant in Japanese. That’s why the first candle is called mother in Bullish harami, and the second is called the child, and the small candle fits inside the larger candle. In the Bullish pattern, the mother wears a red dress, and the child wears a green dress.
Given that the mother gives birth to whatever she is pregnant with, the second candle represents a trend in this pattern. If the second green candle forms at the end of the downtrend, it will be a buy signal. After seeing this pattern, a critical prediction is the slowing down of the price chart movement.
Your entry point will be above the mother or child candle (after closing the little one), and your stop loss can be either below the first candle or the support area, according to your risk management.
- Morning Star: The behavior of the Morning Star pattern is like a ball falling on a large spring and then rebounding rapidly.
The price decreases at the beginning of the candle’s formation, then buyers support it, and the sellers are still trying. It’s like the movement of a ball on a spring. The Morning Star’s shadows are the ball’s up-and-down movement, which falls into a support area and rises. Here’s an example of trading with the Morningstar pattern.
According to your trading system, enter at one of these points. Also, adjust your stop loss according to your risk management principles (below the Doji candle or below the support area).
- Three White Soldiers: The Three White Soldier pattern forms when three long Bullish candlesticks form after a downtrend, indicating that the trend has reversed.
This triple candlestick pattern is considered one of the most vital Bullish signals (like an uppercut strike), especially after an extended downward trend and a short bottoming period of the pattern.
You can enter a position slightly higher than the third candle and place your stop loss somehow lower than the first or second candle. You can still place your stop loss below the support zone, like in the above example.
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How to trade according to Bearish Candlesticks?
- Shooting Star: The Shooting Star appears only after the upward movement. The price goes higher and a Shooting Star occurs. The next candle will be open below the Shooting Star to confirm the pattern.
The lowest price of the Shooting Star candle is perfect for entering the market! Placing your stop loss slightly above the long upper shadow of the shooting star or the resistance area is better to minimize the potential risk. Finally, the price goes down as expected.
- Hanging Man: The Hanging Man is a Bearish reversal pattern. When the price rises, the formation of a Hanging Man candlestick indicates that sellers are outnumbering buyers.
The long shadow at the bottom shows sellers pushed the price lower during the trading session. Buyers could push the price up, but only near the opening price.
It should be an alarm because it tells you that there are no more buyers to provide the necessary momentum to push the price higher. The entry price will be above the shadow, and your stop loss can be above the candle (it usually does not have a shadow on top) or above the resistance area.
- Bearish Engulfing: This Japanese candlestick pattern occurs when a Bullish candlestick is immediately followed by a Bearish candlestick that completely “covers” it.
So the power of the sellers has outweighed the buyers, and there is a possibility of a sharp move down. You can enter the trend from the bottom part of the second candle (when the second candle is closed), and your stop loss can be either above the second candle or the resistance area. You can consider this pattern valid if there is a gap between two candles.
- Dark cloud cover: There is a solid Bullish candlestick in the dark cloud pattern and a Bullish gap. After that, a solid Bearish candle fills the gap; this pattern signals a coming Bearish reversal.
It would help if you waited for the candles to be formed completely. Then, your entry can be below the Bullish or Bearish candle, and your stop loss will be a little higher than the second candle’s top shadow. Also, the volume of the second candle is essential because it shows the power of the trend.
- Bearish Harami: This pattern consists of two candles, with the difference that the first candle is green or light and the second candle is red or dark.
The first Bearish Harami candle is green, following its previous upward trend. The second candle, with a contrasting color and a small body, indicates the market’s volatility and warns of the end of the trend or even the price decline. The child candle is smaller than the mother candle so it fits inside the first candle’s body.
It causes a price gap between the first candle’s closing and the second candle’s opening. Our entry point will be below the mother or child candle (when the child candle is formed), and our stop loss can be either above the mother candle or the child candle, according to our risk management.
You have two entry points again. One is slightly lower than the ascending candle (first candle), and the other is lower than the descending candle (smaller candle).
- Evening Star: Some Japanese candlestick patterns are triple candlestick reversal patterns, indicating the end of the current trend and the start of a new trend in the opposite direction, like Evening star and Morning star patterns.
The evening star pattern appears at the end of an upward trend near a critical resistance zone. Our entry can be below the third candle, and our stop loss will be above the upper shadow of the second candle. Like the other examples, you can also set the stop loss above the resistance area.
- Three Black Crows: The three black crows’ candlestick pattern contradicts the three white soldiers.
I think you have heard that crows usually bring bad news. In the financial markets, seeing three red or dark descending candles is a bad sign for buyers, and the price will fall soon. When three Bearish candles come after a strong uptrend, this pattern indicates that a trend reversal is on the agenda.
Reverse the process of the three white soldiers. I mean, place your entry point slightly below the third candle. And put your stop loss above the candle or the second; you can still use the resistance area to determine the stop loss.
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How to trade according to Continuation Candlesticks?
- Bullish and Bearish Marubozu: Now we have reached the heavyweight candles that record a good score on the scoreboard or chart and their movements are aggressive and intense.
Marabouzo candles are more significant than other candles, which indicates their strength. They usually do not have a shadow, which means that the price had a lot of power when these candles were formed so that this candle can prevent future price returns.
You can enter the position after forming the Marubozu, but it’s better to wait for the next candle, which is a confirmation sign and place your stop loss in the middle of the Marabouzo candles. In Bullish candles, you can also set the stop loss below them and in Bearish candles above them.
- Falling Three Methods: Do you remember riding the slide as a child? Some of them had ridges like a waterfall, taking you up a little and then down on the way down.
In the end, you were coming down, but you moved up a little bit in this way. If you slide down a steep slope, you will fall hard. In the financial markets, some patterns raise the price slightly like a slide, but the price trend is downward in the end.
You have become familiar with the Falling Three Methods pattern in previous articles. In this pattern, you will find the opportunity to enter the market, but not at the beginning of the new trend or the end of a previous trend. You can find an entry point in the middle of the current trend.
As you know, this pattern consists of five candlesticks (ideally). To trade with this pattern, you can place your entry point below the fifth candlestick and your stop loss above the fourth candlestick. In this pattern, you should ensure that the price is not close to certain support areas to enter the trade more confidently.
- Rising Three Methods: In this method, You can enter the market by closing the last candle of the pattern. On the other hand, you can trade when the price moves above the price of the last candle.
If you are in a bit of a hurry, you can look for an entry point before the last candle closes, but if the last candle fails to complete the pattern, you should be ready to exit. You should ensure that the Rising Three Methods pattern is not below a significant resistance to enter the uptrend more confidently.
Resistance and support levels should be checked on long-term charts to increase the probability of a successful trade. If the initial Bullish candlestick shadows that represent the high and low price of the trade for that period are short, the “Three Ascending Method” may be more valid. In the rising three methods, our entry will be above the fifth candle, and our stop loss will be below the fourth candle.
This article taught you how to react to the market by seeing each trend and pattern and showed that for some of these patterns, you could enter or place a stop loss at different points. The use of these depends on your trading system. Don’t make reading price charts too complicated.
Once you find your chart preferences, look for the right amount of information in the chart to make good trading decisions. In other words, don’t overcrowd your mind with additional information. Keep enough space in your brain to analyze and make decisions. Finding the right combination is different for every trader.
Like any other pattern or strategy in the financial market, it takes time and effort to identify them in real time. I recommend you to trade on a demo account with at least 50 successful attempts in these patterns before using real money in the market. Once you have your data set, you can measure your success. Knowing your win-loss ratio will give you the confidence to trade!
Slow and steady wins the race. You will be successful by being patient. Where there is a will, there’s a way. I’ll help you through this way, so keep following for more helpful guides.