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While I planned only to create a post when there was a valid Candle signal for the day I wanted to make this post about when not to trade. Even if there is a valid candlestick trigger, there are instances where it is better to stand aside. Or better yet maybe we should get down to defining what a valid Candle signal is?... |
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Ahhh... perhaps the best statement throughout this entire thread... what exactly is a 'valid' candle signal?
Having trading candles for awhile now, here is my definition of them being used in the traditional candlestick analysis - first, you must have a clearly defined trend. Why? Traditional candlestick analysis is meant to signify the possible end of a trend. Can't end a trend if you do not have one.
Step One: Be able to clearly define trend.
Once you've established a trend, then it's a matter of seeing a valid candlestick pattern/formation and then implementing your entry/stop technique. I say that b/c I've read many different views on how to enter a trade once you see a candle setup. Let's say for example you get a hammer. Some would say as soon as you see a hammer, enter a market order to go long. Some would say that you want price to rise above the high of the hammer and then enter. Some would say wait for price to retrace to somewhere in the body of the hammer and then enter. So, it's a matter of trader preference on where to enter and where to place the stop.
I attached a screenshot of a chart from this thread. You see a valid hammer signal, now the question is where and why do you enter? If you wait for a retracement into the hammer body, you may be waiting to long and never enter the trade. If you enter at the top, you need to have a larger stop... See the possible dilemna? You cannot just wing it, you must have written rules before placing any live trades. It's easy to say that you would go long right away on this hammer b/c it did not retrace much, but another hammer pattern could easily test the low of that hammer.
Step Two: Implement your entry and stop technique.
After that, it's a matter of managing the trade and exits. We've discussed WRB's, trailing stops, set profit targets, etc... Again, a matter of trader preference.
Step Three: Manage trade according to your specified rules.
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MrPaul - regarding the chart you posted, following my normal trading plan as stated above, I do not believe the first doji you have highlighted is a valid candle signal due to a lack of trend. I personally do not call one up candle an uptrend; therefore I would not consider a trade based on that doji.
Your other gravestone doji could be a candle signal. In your example volume is also a filter, so this may not be a valid trade for your setup.