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Why Candle Patterns Rule

In this video:
00:33 – There are so many ways to trade
00:51 – The downside to Fundamental trading
01:22 – The flaws with Technical trading
01:52 – I trade Candlesticks
02:35 – Focus on the individual candle
03:29 – A candle paints a picture
04:05 – Helps with back testing
05:05 – 2 types of candles to trade

I'm going to talk about why candle patterns rule as a Forex trader. So let's get into that and more, right now.

Hey Forex traders, Andrew Mitchem here from the Forex Trading Coach with video and podcast number 322.

And I thought I'd take this opportunity … It's autumn here in New Zealand, beautiful day as you can see to get outside and make the video from out here, rather than standing in front of the charts.

There are so many ways to trade

So many different ways that you can trade Forex. Unfortunately, most of them are not good ways but the two traditional ways that people look at trading Forex are either to become a fundamental trader or a technical trader or sometimes a bit of both.

The downside to Fundamental trading

So the downside for being a fundamental trader, in my opinion, is that it becomes your opinion of what you see in the news, or what you hear in the news. Is that news better or worse than expected and there's so many different variables and it changes all the time, it's quite difficult to make an assessment, in my opinion. Now I know there's people out there watching this who will say, “Look, I'm a fundamental trader and I trade really well.” That's great. But for most people, I believe that fundamental trading's not that easy.

The flaws with Technical trading

Technical trading. Well, as a technical trader, I also see the flaws of that. And with technical trading, the problem is is that so many people get caught up with indicators, just too many indicators, get their charts cluttered, they get information overload, confusion, all those type of things. You know, one timeframe's telling you something, or buy, then another timeframe's telling you you should be selling. And so you get complete confusion there.

I trade Candlesticks

But as a technical trader, I'm more based and focused on candlesticks and using candlesticks. Well they've been around for centuries so I figured when I started trading, “Look, if these candlesticks, Japanese candlesticks, have been around for centuries, I really should start looking at them and trying to understand why they are so successful.” And like all things, you know, there are flaws in every system, nothing is perfect. I'm not saying just go out there and understand candle patterns and all of a sudden your trading will be perfect, that's not going to happen. But it's understanding how to use candle patterns and candlesticks.

And I've developed, I suppose, my own take on them. I don't use the traditional, you know, looking at multiple candlesticks and flags and triangles and those type of things.

Focus on the individual candle

I'm more focused on the individual candle that has just closed. Many benefits to that. Number one, you can trade different timeframe charts, but you only need to look at your charts at the close of a candle. So if you're trading, say a four hour chart, I know that, now I'm recording this, I've got another three and a half hours before I need to look at my four hour charts. It makes life very, very easy to do. It also means I can make my analysis once the candle has closed. Of course when it's closed it's not going to be moving anymore, there's no movement of indicators, horizontal levels are set, and it makes things very, very easy to do. And you can make your analysis without too much rush, you're not stressed, forcing to either be at your computer or to take a trade like right now, like you would if you were say a news trader. So that's another one of the benefits.

A candle paints a picture

And also, when you think about how a candle has been made, it's basically telling you about momentum, it's telling you where the big players are in the market, where the sentiment is, are there more buyers, are there more sellers. But it's not just the candle shape itself, it's where that occurs on the chart, what's happened before it, has there been some indecision, has there been a previous bounce at that level. All those types of things that we build on as part of the way that I trade and the way that I teach to build on the candle pattern and the candle shape itself.

Helps with back testing

But really, another benefit when you think about it, is backtesting. See how can you backtest news, news trading, how can you backtest realistically with a lot of indicators because, you know, an indicator A might cross over B and when you see that completed, it looks like it's closed in the right part of what you're looking for. The reality is, that when the price is moving and the indicator's moving, you may get multiple false signals. Whereas with candle shapes, you can go back through any currency pair, any timeframe chart, and you can analyse. Look if I've seen a pin bar followed by an engulfing bar and it's happened at this time of the day, it's happened at this part of the chart, it's at this prior indecision, it's bounced at this level, you can see that where it be last week or last year, doesn't matter. And you can have high certainty and high probability that if you see that type of pattern again occurring on your charts, likelihood is you have high probability behind you to say the price is likely to do this. And that's another great thing.

2 types of candles to trade

And of course, as you know from my trading, I like to keep things simple. I only really look at two different types of confirmation candle, I'm looking at engulfing candles and outside bars, they give me the confirmation and the reassurance to jump into a trade. And to get some form of indecision, I'm looking at either dojis or hanging man pattern or a pin bar. I don't trade those as specific candles, I see them as indecision, as an early warning to see a possible trade set up. Sorry about that, if you can hear in the background a helicopter's flying over and I'm wishing I should be really up there flying today, which I probably will be at the weekend. Going off subject there.

So, you know, it's all about using the candle shapes and candle patterns to your advantage. If you're already in on a trade and you see an indecision candle showing on your charts, it gives you a clue that maybe, that we're not going to get to our profit target because the indecision candle is a bit of an early warning system. But in terms of entering a new trade, indecision followed by confirmation is a fantastic way of looking at your charts and gives you a high probability entries and also allows you to manage your trades, while you're in the trade.

So I hope that helps, this is Andrew Mitchem from the Forex Trading Coach. You have a great weekend and I'll see you this time next week. Bye for now.

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