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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 Tweezer Top Candlestick Pattern

By now you should start to be understanding a lot about japanese candlesticks and how to use them in patterns to trade. I’m continuing to explain these patterns to you so you become a proficient forex trader. Soon, I’ll be showing you how these patterns are used in actual trading, but you need the theory first.

The second candlestick pattern that can be a very useful tool in spotting potential trend reversals is the tweezer top (and it’s partner, the tweezer bottom).

The tweezer top formation, as its name suggests, reveals the end of an uptrend and the beginning of a downtrend (a top).

A tweezer top formation has the following characteristics: two or more candles (dojis or spinning tops) of roughly equal height with long upper wicks (the wicks must make up at least 60% of the entire candle).  The two (or more) candles can be bullish, bearish, or a combination of both.

If you identify a tweezer top and decide to trade it, sell at the opening of the candle that follows the second high candle in the tweezer top formation.

Forex Tip: Set your protective stop loss order at the last level of resistance (which will be the tweezer top’s high).

As with any indicator, trading on a convergence increases the probability that you will profit from your trade.  If you spot a tweezer top, look for the trendline break or another indicator to provide more reason to believe that the market is reversing.

Can you guess what’s coming next? The tweezer bottom is the upside-down version of the tweezer top. The more examples you see of these candlestick patterns, the more useful they will be to you.

Posted in Japanese Candlesticks, Technical Analysis