Trading with Japanese Candlestick Patterns has the same trading principles as majority of techniques. It is well suited both for beginners and professionals. Nevertheless, there is always some level of confusion among adopters of this ancient technique.
The best way to clarify all questions – life trading example. Firstly, let’s list basic trading rules:
An important part of the trading routine – identify the current market state. Visual inspection of the chart history, predictions and analytics from the trustable sources, all this will help the trader to determine market state. There are three main states: Bearish trend, Bullish trend, Horizontal stagnation. To identify closest Resistance levels will be helpful as well. Preparation can have different stages and details; one remains unchanged – it is always necessary.
JCP technique bases on the identification of candlestick patterns and building predictionы. Often happens, that recent price movements can be identified in couple ways (patterns), even patterns with the opposite meanings. Such dilemma should be solved by defining Confirmation Levels for both patterns.
The highest point of the Bullish pattern and the lowest point of the Bearish are useful for determining such level. Principals are simple: if price, after pattern identification, crosses certain level, and moving in predicted direction – prediction is right.
Usually, after confirmation, a trade is opened.
Taking Profits and Stop Levels
Before opening the trade one should determine closing rules for this trade. Rules should cover both, profitable and losing trades.
Mandatory conditions should be Take Profit and Stop Loss levels.
Take Profit – Maximum desirable profit from the trade. Often resistance levels appear useful for determining Take Profit levels. Price behaves unpredictably close to the critical levels, so it is better to close the deal when the price approaches such levels.
Stop Loss – Maximal level of drawdown for the trade. Often Stop Loss set behind important Levels, or behind past price extremums. A trader should consider Money Management strategy before setting SL (for example, do not lose more than 10% of deposit per trade).
Early close conditions (closing the position before it hits TP or SL):
Early close of losing position – price action cancels determined scenario. For example, price crosses back the pattern confirmation level and confirms opposite scenario.
Early close in profit – reversal patterns appear before reaching the Take Profit level.
2017.03.09 – Bullish trend loses momentum near important 115,000 level. Reversal patterns often appear near strong resistance levels. Dark Cloud Cover pattern emerges. Confirmation level for the scenario is the lowest price of the DCC formation.
2017.03.15 – Price crosses the confirmation level, so trader takes Sell position.
2017.03.22 – Bearish trend continues till 110.000 resistance level. Close to the level price momentum starts to fall, the range of the bars goes down too. Two reversal figures Hammer and Doji appear, together this figures represent reversal pattern Tweezers. Nevertheless, price crosses confirmation (Max level of the figure) too late, and trader decides to leave the position.
2017.04.05 – Price takes another attempt to break 110,000 level, but, instead, forms Inverted Hammer and bounces back. This time trader decides to close the trade, gets 300 pips of profit.
2016.11.03 – Current market state is stagnation after long Bearish trend closest level 101,000. Ass usual stagnating movement accompanied with Doji figures.
2016.11.10 – Bullish Engulfing figure appear. Such pattern implies the victory of Bulls on the market. Next bar confirms the Bullish scenario – Buy is opened.
2016.11.17 – Doji (11.15) and Hanging Man appear, which identifies a decrease in Bullish moods. However, formations do not gain confirmation and trader decide to stay in the market.
2016.11.25 – Once again Hanging Man appear, this time price drops low enough to confirm the reversion. Also, it is important that the price be getting close to the 115,000 level. Trader closes the trade with profit 510 pips.
2016.12.09 – Three Crows would close the deal if the trader decided to keep the position until the appearance of a more significant figure.
Despite strict rules, Japanese candlestick analysis requires creative approach and intuition. Depending on the fundamental economic indicators and the news background, many rules can be neglected.