rapidforex.com

8 Rules For Successfully Trading Candlestick Formations

The last 4 blog posts have taught some of the major candle patterns worth knowing as a forex trader.  And with 8 posts in the past week about candlesticks, we’re almost ready to move on to support and resistance.

As a wrap up for now (there’s more to learn about japanese candlesticks later), I want to give you some rules for trading candlestick formations.

No matter what forex candlestick formation or other indicator you are basing your trade on, you should follow several rules to ensure that you are making sound judgments when you are trading, that you are trading based on educated reasons and always while practicing sound equity management.

These rules apply specifically if you are trading a morning star , evening star , tweezer top , or tweezer bottom candlestick pattern:

1. Find all of your support and resistance lines.
2. Find and draw all of your trendlines.
3. Find a convergence (a location where there is more than one reason for the market to bounce, such as a trendline or a Fibonacci sequence).
4. Trade in the direction of the trend (“the trend is your friend”).
5. Wait to trade until the market bounces at the convergence to make your trade.
6. Buy at the opening of the next candle after the morning star or tweezer bottom has fully formed. Sell at the opening of the next candle after the evening star or tweezer top has fully formed.
7. Set your protective stop loss order at the last level or resistance (if you are trading an evening star or a tweezer top) or at the last level of support (if you are trading a morning star or tweezer bottom).
8. Do not trade morning stars (evening stars) or tweezer tops (tweezer bottoms) if prices are in consolidation (the rapid forex blog will discuss this in more detail in future blog posts).

In my next blog post, I’m going to start explaining support and resistance (this is the real meat-and-potatoes of forex trading).

Posted in Japanese Candlesticks, Technical Analysis

The Morning Star Candlestick Formation

Over the past few days I’ve discussed Japanese candlesticks in forex price charts, today I will show you the first candlestick pattern, the morning star formation.

A morning star candlestick formation forms at the end of a downtrend (it’s the bottom), potentially signaling a reversal into an uptrend.

A morning star formation, which includes three or more candles, is characterized by a larger bearish candle, followed by a small-bodied bullish or bearish candle (a spinning top or a doji), followed by a larger bullish candle.

In order to qualify as a morning star formation, the third bullish candle must close at or above 60% of the original bearish candle’s opening (counting the bottom of the middle candle as 0 and the opening price of the original bearish candle as 1).

As you can see in morning star picture below, a morning star formation can consist of more than three candles.

The defining characteristics are the initial larger bearish candle and a final larger bullish candle that closes at or above 60% of the initial bearish candle’s opening.  In between those two candles can be a single doji or spinning top, or several.

You can confirm the morning star once the final bullish candle has formed.

If you identify a morning star and decide to trade it, buy at the opening of the candle that follows the morning star’s final bullish candle.  Set your protective stop loss order at the last level of support (which will be the low of the morning star’s middle candle).

Trading morning stars can be particularly lucrative if you have a convergence (that is, the reversal implied by the morning star is further implied by a trendline or some other indicator).

In my next post, I will discuss the evening star japanese candlestick pattern. Hint: it’s just like the morning star only reversed. It will signals a trend reveral, but this time it reverses from an uptrend to a downtrend.  After that, I’ll introduce the tweezer top candlestick pattern.

Posted in Japanese Candlesticks, Technical Analysis