These formations are only a second confirmation for entry placing a higher chance of success on the trade. I find candlestick formations to be most accurate on the 1 hour charts and above, I would not bother using any of these formations for the scalping system.
Candlestick formations are used to identify the underlying physiology of the market, usually with a reasonable accuracy.
Below is an example of a normal falling and raising candlestick:
When a candlestick tries to make a new high/low but fails to close at those levels it gives some clues as to who is in charge, the bulls or the bears. There are literally hundreds of candle stick formations used by traders all over the world to profit from the markets. We are only going to focus 4 formations here in this section, these are the formations I found to be most profitable and occur regularly.
This small candle if seen after a good move is a strong reversal signal,with confirmation it is very reliable entry point.You will often see the Doji when trading the divergence system,usually when the stochastic is topping/bottoming out, a great confirmation that you are on the right side of the market.
green candle that completely engulfs the previous one. For a sell confirmation the firs candle would be green followed by a red candle that completely engulfs it.You will often see engulfing candles with the 4H breakout strategy on the break of the support/resistance line, this indicates good volume and momentum in the market.
This formation give us a heads up that the bears/bulls are loosing steam and the market may be thinking about a reversal.
This formation often happens just before a strong move or breakout, be sure to have your eye out for this formation when trading the divergence system.
Pin Bar Formation:
The pin formation is one of my favorites, it shows huge emotion of the market indicating a sign of a reversal, in this case the bulls pushed the market high but failed to hold it so price returned back to around the open leaving a pin formation.
The pin always points away from where price may be heading, the opposite is true for a bullish pin formation. You will often see these formations after a breakout on the 4H breakout system when the retrace takes place.
These formations take some getting used to in the beginning but with a little practice will help you trading decisions immensely.
Lets take a look at some of the previous examples in this book and see if we can spot some candlestick formations giving us a heads up of what is about to come.
The chart above is an example form the 4H breakout system, after the breakout occurred we were looking for a retrace. If you look at the retrace you will see a pin formation giving us a heads up that price was being rejected and this was followed by a Doji.
Above is another example from the 4Hour breakout strategy,as this breakout was about to take place we had a pin formation that also totally engulfed the previous Doji candle. Looking now you can easily see the momentum in the breakout. Look how many Doji candles formed against the resistance line.
Above is an example form the divergence system, on both of these entries we had confirmation from candlestick formations.
The first trade was taken off of a Doji candle which is difficult to see in this picture due to the trend line covering it, but I assure you it is there.
The second trade was taken off of a bearish engulfing candle. Once you get to know these 4 formations you will see them everywhere its like reading a book!
This brings us to the end of Understanding Candlestick Formation – Price Action, I hope you have enjoyed reading about this system, if you have any questions at all then don’t hesitate to use the comment box below!