Trading Candlestick Patterns In Technical Analysis the Right Way
In technical analysis, a candlestick pattern is a movement in prices shown graphically on a candlestick chart which traders use to predict a particular market movement.
It's essential to learn that candlestick patterns can't be traded out of the blue. Therefore, chart pattern analysis should be done in the context of the current trend. Moving averages, for example, could work well in identifying the current trend.
In the example above, we highlight why it's important to only trade candlestick patterns that:
Develop at the correct location.
The chart pattern has the right shape (A+ setup).
The highest probability patterns generally develop after strong trends, either bullish or bearish.
Let's take a closer look at the Hammer Pattern displayed above. The Hammer Pattern ideally comes at the end of a strong downtrend, and its wick is significantly bigger than the previous candles' price action.
However, in our example above, the Hammer's long wick doesn't stick out from the recent price action, and its wick is small relative to the recent price action. Therefore, this is not an A+ setup.
Also, the location of the Hammer is not great because it's in range-bound conditions and not towards the end of a downtrend. Subsequently, the profit potential for this setup is small as immediately above the Hammer, we face strong resistance.
At Cryptohopper, we use robust algorithms that attempt to identify these patterns correctly for you. Additionally, we also give you the opportunity to use moving averages and the Candlestick patterns to identify strong trends.
How to practice Candlestick Patterns
Identify the current trend.
Look for the entry and exit points.
Consider the risk/reward ratio.
Draw the setup correctly on the chart.
Identify the next resistance/support level.
Identify the volume.
Monitor the price action.
Seek confirmation from other technical indicators.
Take the emotion out of your trading.
Identify the best candlestick patterns for your trading style.
Don't get stuck on one pattern.
In the coming weeks, we'll cover trading candlestick patterns in more detail. If you haven't yet, you can sign up for a free Cryptohopper account here.