Candlestick Pattern Strategy – Trading Without Lagging Indicators 

 November 25, 2015

By  Advanced Strategies

The mention of Price Action Strategy often tends to evoke mixed responses from traders. For the average beginner trader, price action might seem very complex, while for an experienced trader, price action trading is almost second nature. One of the benefits of price action trading is the fact that traders rely on the candlestick pattern strategy and at times chart patterns. The use of indicators is almost kept to a minimum with price action trading. This is because of the fact that indicators are often lagging in nature and it is difficult to enter early into a trend. Price action trading is usually ideal for traders who are looking to keep their positions open over a period of time (swing trading), although price action trading can also be used for scalping the intraday markets as well.

Related: Powerful Price Action Strategy that is easy to learn and implement

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Within price action trading, Candlestick patterns are one of the most commonly used means to trade the markets. The candlestick patterns are based off the Candlestick charts which was developed decades ago by Japanese rice traders. Visually compelling, candlesticks can be a great way to understand what the markets are doing. There are many candlestick patterns and it can indeed be overwhelming for traders to learn all the candlestick patterns.

An important aspect to bear in mind that Candlestick patterns alone do not offer much information and that they need to be taken in context within the larger market moves. Therefore, Candlestick patterns are more ideal when trading with horizontal support and resistance levels or at times even with indicators such as moving averages.

In this article, we’ll look at only a few Candlestick patterns which are known to be very reliable, easy to spot.

Candlestick Pattern Strategy

Engulfing Patterns: The Engulfing patterns are two candlestick patterns, where the second candlestick engulfs the previous candlestick’s body. There are two types of engulfing patterns, a bullish engulfing and a bearish engulfing. A bullish engulfing pattern signals a move to the upside, while a bearish engulfing pattern signals a move to the downside. A bearish engulfing pattern formed at the top of an uptrend signals an imminent move to the downside, while a bullish engulfing pattern formed at the bottom of a downtrend signals a short term or a reversal move to the upside.

Doji: There are different types of doji candlestick patterns which go by names such as dragonfly doji, rickshawman doji, Gravestone doji and so on. Regardless of the names, a doji candlestick pattern is identified by the fact that prices open and close at the same price while leaving upper and lower wicks. A doji candlestick pattern signals indecision in the markets, meaning that prices can move up or down depending on the market sentiment. The doji candlestick is a single candlestick pattern. A doji candlestick appears at the top or the bottom of a trend and signals a reversal. When the doji appears in the middle of the trend it can also signal indecision in the markets.

Harami Patterns: The Harami candlestick patterns are the opposite of the engulfing patterns. Here, the second candlestick is engulfed by the first candlestick. There are two kinds of Harami patterns, a bearish and a bullish Harami patterns. Similar to engulfing candlestick patterns, Harami patterns are made up of two candlesticks. A bullish harami can be found at the bottom of a downtrend while a bearish harami can be found at the top of the uptrend.

Related: Trading without Lagging Indicators – Know What to Do Before the Market Even Reacts

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The chart below summarizes the above candlestick patterns explained.

Candlestick Pattern Strategy

Candlestick Patterns Strategy

Using Candlestick Patterns with Moving Averages

A very simple way to trade the candlestick patterns is to apply a 20 or a 50 periods moving average to a chart on a timeframe of H1 and above. When prices are above the moving average, it signals an uptrend. Therefore looking for bullish engulfing, a doji or a bullish harami when prices are touching the moving average can be used as a buy signal targeting the most recent high. Likewise, when prices are trading below the moving average, look for bearish engulfing, a doji or a bearish harami when prices retrace to the moving average.

Candlestick Patterns Strategy with Moving AveragesCandlestick Pattern Strategy with Moving Averages

The chart above illustrates how traders can use the candlestick patterns explained in this article, combine it with a moving average and trade accordingly. While it might look a bit difficult at first, the above three candlestick patterns are one of the easiest and reliable candlestick patterns that can be used to trade the markets and a good way to get introduced to price action trading.

If you would like to learn more about Candlestick Pattern Strategy and Price Action Strategy, we have an excellent Price Action Strategy Manual that you can download and instantly apply to your everyday trading. C

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