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Candlestick is a display of price movements and dynamics in the forex world that is shaped similar to a candle. Candlestick’s history originated in Japan, when rice traders made diagrams that measured rice price movements. This diagram became the forerunner of candlesticks in the present.
Candlestick consists of 2 parts, namely body and shadow. However, the shadow is also called the tail of the candlestick, because its shape is similar to the tail of an animal. In one candlestick it has a variety of information that can be analyzed. The body of candlestick contains information of opening and closing prices while the tail of candlestick contains information of the highest price and the lowest price reached at one time. The length spread of the candlestick indicate the volatility and activeness of recorded price movements at one time.
Diagram of Candlestick (Source: en.wikipedia.org/candlestick_chart)
With so much information contained in a single candlestick, it is not surprising that the price display with candlesticks is more widely used than just a line or a trunk bar. In a simple but profitable trading system lesson, we also know what is called Price Action, which is looking at the possibility of future price movements by looking at the price itself, one of the ways is by looking at the available forms of candlesticks.
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To achieve forex trading system with consistent profit using this candlestick, we must know first what are the patterns that must be known in seeing candlesticks. There are many patterns that are known to be formed by candlesticks, but don’t worry because there is no need to memorize all types of candlestick patterns. There are several patterns that will emerge that will be discussed later.
Varieties and Types of Candlestick Patterns (Source: candlescanner.com)
As you can see, there are many different types and types of candlestick patterns that are identified. Each has a different strength level in terms of validity and also the frequency of occurrence on the chart screen. However, there is no prohibition on remembering all of them, even though they don’t have to. Simply print an example of a candlestick pattern and match it to what you see on the MT4 screen. Or, just open the pattern image on the computer and match it with the trading screen that we have.
How do you trade using candlesticks?
As already mentioned, there are many types and patterns that can be seen. However, of the many types that appear we focus on Doji, Engulfing and Star. These three types of patterns appear most often and the highest probability to come out also gives a signal that a trend reversal will occur. This type of trend reversal pattern is more awaited by traders than candlestick patterns which indicate the continuation of the trend.
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Doji or in other form is pinbar, is a form of candlestick where the body of this candlestick is small and sometimes even almost absent while the tail looks very long compared to the body of the candlestick. Candlestick tail can point up or down. If in a bearish trend and the tail appears downward, it means there will be a reversal of the trend towards bullish and vice versa if the tail appears upward from the current bearish trend, it means that there is a possibility of a change in the trend towards the bullish.
Meanwhile engulfing is a longer form of candlestick compared to the previous candlestick in the opposite direction. For example, a candlestick with a tail-to-tail length of 30 pips appears and is bearish, then engulfing is a bullish candlestick whose tail-to-tail length is more than 30 pips. this type of candlestick usually occurs when the buying pressure suddenly appears after a protracted selling pressure.
Star is a form of candlestick pattern that implies a reversal of direction similar to a doji, but in a shorter version of the candlestick. It is called a star because the body and tail of the candlestick are small and short so that it resembles a star. This pattern occurs after pressure from both bullish and bearish price trends and indicates that there will be a price reversal in the future.
Examples of Candlestick Pattern Forms
The three forms of patterns mentioned are a sign of a reversal of trends, according to the example image above. Therefore, if such pattern has been formed, we can prepare to open an order. If a reversal sign appears in the resistance area, we can prepare to choose sell options, while if it appears in the support area, we can choose to take long positions.
What about SL and TP?
Stop loss can be adjusted with various approaches. The first is a stop loss if the same candlestick pattern reappears before the previous one is valid. The second is to set at a certain distance, for example 30 pips or 50 pips or other numbers. Third with the help of indicators, both graphic indicators such as Fibonacci or dynamic ones such as Bollinger Bands or Moving Average and others.
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The profit target can also be determined using the above approach. Profit targets can be set proportionally with a ratio of 1: 1 with a stop loss or with other ratios such as 2: 1 or 3: 1. The profit target should be set after the stop loss has been set first. This is to maintain psychological trading and financial management in the account that we have.
What to Look For?
Like statistics, the patterns above can be more valid if there is a lot of data coming in. In this case, input data that means a lot of time frames in accordance with the trading strategy and trading system should be at least 1 hour (H1) or more. The likelihood that the pattern gives the wrong signal will also be higher if used on a small timeframe.
The next, always be aware of the news schedule that will be released that day. Sometimes due to news releases it makes the candlestick pattern invalid and shows the wrong signal. We should wait until the news release is complete and then re-analyze the candlestick pattern that is visible. Even though you have set the stop loss, this is better avoided to minimize losses.
Third, it takes time and practice to get used to and be able to see this candlestick pattern. Therefore, it is better to trade on a demo account or with a small capital is advised to get used to seeing candlestick patterns. Don’t be shy about “copying” candlestick images or sticking them near a computer, because there are no rules about memorizing all candlestick patterns. Over time, surely we will get used to the patterns that will emerge later.
Finally, there is no trading system that is 100% profit. However, trading techniques are simple but this profit can be a forex trading technique that is consistent profit if it complies with the stop loss and account management rules that we have set ourselves. Continue to learn and correct mistakes that arise.