The potential success from trading candlestick signals alone is enough for many forex traders to simply watch the markets for these high probability setups. However, as with any trading strategy, they do not always yield positive outcomes and the potential to risk too much on what appears to be a definitive buy or sell signal from a candlestick setup may be the undoing of some traders. Whilst the temptation to enter a large trade on a clear-cut pin bar (shooting star) or engulfing candle is often great, there are several rules that candlestick traders can apply in order to increase their chances of success.
Mapping the price charts
The first addition to any candlestick setup should be an overall analysis of where the forex pair is trading in relation to the clear buy or sell signal. This is not a universal analysis of all available indicators, which can result in the dreaded “analysis paralysis” but a broad understanding of the price action that creates the signals in the first place. By creating a ‘map’ of the market, using recent and historical support and resistance zones, forex traders can identify those areas where price action, and therefore candlestick trading signals, are going to be most effective. It will also help traders avoid trading directly in to areas which have historically caused problems for price and eliminate the frustration of only recognising this after the trade has been taken. Plotting these lines of basic support and resistance will therefore add to the trading edge provided by high-probability candlestick setups.
Applying psychological indicators
Additionally, forex traders will improve their profitability add further psychological markers on their charts. A perfect pin bar or shooting star setup will have double the meaning to everyone if it is located at the 38.2% or 50% Fibonacci retracement areas. The rationale here is that not only will you be trading alongside the majority of candlestick traders, but you will also be trading in agreement with the large majority of forex traders who observe these important trading levels.
Trade size is important however obvious the setup
Managing the size of the trade is something that price action traders are required to learn fairly quickly in order to be profitable. This stems from the enthusiasm that traders experience when they see a so-called ‘no brainer’ setup on their charts. Remembering that the forex market does not adhere to these rules, however obvious, will keep the trade size in check for even the most attractive candlestick setups. Maintaining trade below the recommended 3% of total trading capital will ensure that price action traders can continue trading tomorrow.
Trading against the grain
Contrarian candlestick trading is something which will not appeal to everyone but can be helpful for forex traders to close a losing position as quickly as possible. When a candlestick setup goes bad, for example a bearing shooting star is engulfed by a bullish candle, some traders take this as a demonstration of market strength and jump in contrary to the setup. For many, realising that a setup has failed can also provide an excellent exit strategy if executed immediately.
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