In this lesson, we will examine the basic Japanese candlestick patterns taught in prior lectures in order to make informed trading judgments.
Remember that candlesticks are meaningless unless you examine the market situation and what the price is telling you.
But, before we begin, a word of warning…
As with any technical indicator or tool, just because candlesticks indicate a reversal or continuance does not mean it will occur.
Nothing is set in stone in the FX market!
Using Candlestick with Support and Resistance
The most basic application of candlesticks is with support and resistance levels.
Because support and resistance levels indicate where buyers and sellers have put up their defenses, seeing how candlesticks react to them might help you predict where price will go next.
Here’s a real-world example:
In this case, resistance can be seen around the 1.4900 level.
You desperately want to enter, but you decide to hold off because the candle that reached this level appears to be quite bullish.
After two candles, you notice a lovely three inside down candlestick formation, which is considered a strong bearish indicator.
You short the pair after confirming your sell signal with the formation.
As a wise trader, you also put a stop loss above the resistance.
Because of your patience and knowledge of candlestick formations, you have considerably boosted your chances of success.
Let’s look at what happened when you shorted…
“Why do I have to pair support and resistance levels with candlesticks?” you may wonder. I could get a lot more signals and make more money if I only used candlesticks!”
Take another look at the same chart of your hypothetical trade to find out…
We’ve highlighted a few potential trading signals based only on candlestick shapes.
Check it out!
If you had only traded those candlestick formations, you would have lost every time!
You have boosted your chances of winning by simply combining candlestick formations with support and resistance levels.