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brownsfan019

Step 2: How to use candlestick analysis

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Now that we discussed the what these candlestick patterns or formations can look like (click here for that thread), we'll now discuss HOW to use what you've just studied.

 

There are a few schools of thought of how to use candlestick analysis. The most traditional way is to find the end of a trend (aka counter-trend). In other words, candlesticks can visually show the possible end of a trend. In my experience, I have found that candlestick analysis usually will signal the end of a trend; however, a few signals may FAIL before one WORKS. That's part of the game and a risk you have to be willing to accept.

 

The other important consideration here is how you define a trend and then how you define a counter-trend trade. For example, in day-trading the ES, I personally look for "counter-trend" trades, but the "trend" could literally be a small "micro'" trend. In other words, in my day-trading biz, I use the candlesticks to help show the possible end of one of the many, small "micro" trends that appear throughout the day, every day. I think that's what so powerful about candlestick analysis - while the majority of books, websites, etc. are going to talk about counter-trend on a daily chart, I think the candles can help quite a bit intra-day.

 

So in the purest form, candlesticks by themselves are meant to show the possible end of a trend. The other key here is what other indicators, if any, you use to aid you in recognizing a candlestick signal. For example, Tin has mentioned his use of volume in candlestick analysis.

 

And the last consideration for today is whether you use candlestick analysis as the PRIMARY or SECONDARY use in your trading plan. Again, many schools of thought here. I will add this piece of advice after having been 'schooled' by the markets over and over and over again.... ;) I would highly recommend you use something with your candlestick analysis, even if it's as simple as high volume, as Tin has mentioned previously. There's obviously more indicators out there than I could possibly imagine, so perhaps the combo is right in front of you, if you just look hard enough.

 

Good trading!

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Yes, I think that the combo of price and volume is the best that any could ask for. A fellow trader here, MrPaul, mentioned to me once that its really the simple fact that price attracts volume. Volume doesn't attract the price. Thinking like that really, I mean REALLY, helped solidify my trading. When the end of a trend ensues, you will most always see some sort of volume confirmation. Also breakouts or potential breakout failures will always have volume confirmation.

 

And, like you use brownsfan, volume based candles pretty much give those both to you in one fell swoop. The only thing that I have trouble with watching VBC's is just the speed of it. It's easier for me to watch 2 separate things than just one. Sounds weird, but its just easier for me to see it. I completely understand the validity in VBC's though.

 

So, yes, I completely agree that using candles alone won't give you the whole story. Kind of like most trading books out there. They give you only half of what the real deal is.

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Great points Tin!!

 

I think VBC's provide that volume confirmation that you like, already in the candles, so that works well for me. The catch being, as you've seen, these things can print VERY quickly if not paying attention. That's the downside, but that's also the upside - when candles are printing like crazy on a VBC, I am able to participate in that action as long as I am paying attention.

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Brownsfan:

There is very little info on VBC available on the web. Can you give us

some pointers on how to read a VBC chart? For instance what do I look

for in (1) a trend reveral ? (2) Congestion prior to a break out ?

Since you use very short-term VBCs, do you think Volume HLC bar chart

in this case would work just as well ?

 

 

Thanks

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Brownsfan:

There is very little info on VBC available on the web. Can you give us

some pointers on how to read a VBC chart? For instance what do I look

for in (1) a trend reveral ? (2) Congestion prior to a break out ?

Since you use very short-term VBCs, do you think Volume HLC bar chart

in this case would work just as well ?

 

 

Thanks

 

OAC - here's the thread that is dedicated to VBC analysis - http://www.traderslaboratory.com/forums/f34/volume-based-candles-and-how-to-1414.html

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