Identifying a Good Trade
Surprisingly, many traders don’t even know what a good trade looks like. They chase the market around instead, hoping to capitalize on the latest news or chat-room buzz. This sloppy approach can work for short periods of time, but will eventually lead to major losses. You can manage price patterns by using Japanese Candlestick Charting.
Price patterns represent the machine language of market prediction. Take time to study their inner workings because they reveal the nature of opportunity. In other words, they tell us when to trade, how to trade and why the trade should work. Couple the price pattern with candlesticks and you now have yourself a “Porsche” price pattern setup giving you a ridiculous trading advantage.
Here are 15 ways to manage opportunity through price patterns and candlesticks:
- Learn the classic chart and candlestick patterns first to recognize them immediately on any price chart. The chart patterns describe broad, predictable forces that print through all time frames and offer outstanding trades. Candles provide added precision in the context of the chart pattern through all time frames.
- Trade patterns that match the current market phase and reduce size when forces are in conflict. For example, most breakout patterns will fail in a weak market, no matter how pretty they look on the price chart. Pay even closer attention to candlestick “sell” signals in weaker markets.
- Candlestick patterns along with chart patterns predict outcomes as they reveal the will of the crowd. They point to time and direction because herd behavior drives a common will at key market intersections. Patterns lose their effectiveness when the crowd finally catches up to the prevailing market theme. Bullish candlestick patterns and bearish candlestick patterns provide this kind of trader psychology.
- Opportunity has many faces. Popular patterns, such as the head-and-shoulders top, capture the attention of traders, but charts show dozens of lesser-known predictive formations. Because these patterns avoid the crowd’s interest, they’re dependable over longer periods of time and are less susceptible to whipsaws. Always remember however that these chart patterns are only theoretical at first, and are better validated with proper candle formations and breakouts.
- Perfect patterns rarely appear in the modern market environment. Learn to execute comfortably in a debris-filled landscape. Understanding how to correctly interpret and utilize Japanese candlestick patterns will help navigate your decision making in murky waters.
- Pattern recognition doesn’t work for everyone. Some folks will find far greater success building trading systems or studying balance sheets. Avoid mixing systems and discretionary trading into one strategy because they don’t mix well. Keep it simple by familiarizing yourself with Nison candlestick pattern recognition.
- A good pattern never signals when to trade or when to stand aside. It points to a convergence of time and direction that should trigger predictable movement under the right circumstances. It’s the trader’s responsibility to formulate tactics that capitalize on a setup if it unfolds, and protect the trading account if it fails. The Nison Steps to Trading Success teaches you exactly how to use Western indicators with Japanese candlestick patterns, and use proper trade management principles.
- There is no single method to trade any pattern, and no setup will evolve the same way twice. The chosen trading strategy must capture expected opportunity while managing unexpected risk. Understanding candlesticks in context increases the opportunity while reducing the risk.
- Shift strategy to a more defensive posture when a large crowd trades a popular pattern. Consider going the other way if it fails, or standing aside and letting other traders risk their capital first. A trader must learn to be a chameleon and adapt to various market condition using sound candlestick principles.
- Enter a pattern before it breaks whenever possible. Risk remains low until price finally expands or reverses, setting off signals for all of the other players. Early entry lets traders execute several low-cost positions while waiting for a bigger move to unfold. The candlestick pattern will provide the necessary insight to say the course, go flat or reverse the trade.
- Always keep one eye on the clock. Time eventually turns against a pattern if price just sits there. Technical indicators start rolling over and the pattern can morph into an unpredictable mass of price bars. Choose entry levels wisely and exit immediately if the pattern deteriorates. Following proven and time tested Japanese candlestick principles will always steer you to making good decisions.
- Exercise patience after the pattern breaks out or down without you. Shift attention to pullback entry and be willing to stand aside if the market starts to run. The pullback trade must stand on its own merits after a pattern breakout. Keep in mind that many patterns predict only one price swing, and profit potential evaporates after the initial move begins. Look for early candlestick clues or solid confirmations to know when it’s time to take profits or exit the position.
- Align setups to natural time tendencies. Watch out for options week, turnaround Tuesday and the midday doldrums. Think contrary during the holiday season and don’t get caught with the crowd when the market opens on Monday morning. The beauty of knowing how to read candlestick patterns is the edge a trader has to understanding the current trading psychology.
- Patterns should correspond with well-established support or resistance levels. Use multiple time frames to confirm that larger market forces align with the current opportunity. Check the major averages and technical indicators to uncover divergences that could undermine the trade. Use these indicators to confirm the candlestick patterns because while a candlestick is necessary to place a trade, is not sufficient to put on a trade.
- Define a low-risk entry, the profit target and a stop-loss for each pattern. Consider the impact of pattern failure on every new setup. When price goes the wrong way, it can produce better profits than the expected outcome.
Steve Nison’s Steps to Trading Success teaches all the necessary tools to understand when to enter a trade, exit a trade or even put on a trade.