In this lesson, we will be looking at the basic Japanese candlestick patterns that were discussed in the previous lessons to make sound trading decisions.
Remember, candlesticks are useless on their own, and you must always consider the market environment and what the price is telling you.
But before we begin, just a few words of caution…
As with any technical indicator or tool, if candlesticks point to a reversal or continuation that does NOT mean it will happen.
This is the forex market and nothing is set in stone!
Using Candlesticks with Support and Resistance
The simplest way to use candlesticks is with support and resistance levels.
Because support and resistance levels determine areas, where buyers and sellers have set up their defenses, looking at how candlesticks react to them, will help you greatly in predicting where price will head next.
Here’s a real forex world example:
In this scenario, you can see that there is resistance around the 1.4900 level.
You badly want to enter but you decide to wait instead because the candle that touched this level looks very bullish.
Two candles later, you spot a nice three-inside-down candlestick pattern, which is considered a very potent bearish signal.
Using the formation as your sell signal confirmation, you go ahead and short the pair.
Since you’re a smart trader, you also set a stop loss above the resistance.
Because of your high level of patience and your knowledge of candlestick formations, you have greatly increased the odds in your favor.
Let’s see what happened after you shorted…
You might think, “Why do I have to pair support and resistance levels with candlesticks? I could get a lot more signals with just candlesticks and make more money!”To answer that, take another look at the same chart of your hypothetical trade…
We’ve highlighted some potential trade signals based solely on candlestick formations.
Take a look!
If you had traded on those candlesticks formations alone, you would have lost every single time!
By simply pairing candlestick formations WITH support and resistance levels, you have increased your odds your winning.