Key Candles to Add to Your Trading Toolbox

Posted on Thursday, June 6, 2019 at 2:47 PM

All technical tools work at times, but none work all the time. The trick to technical trading is to identify when an indicator is likely to detect a high percentage trade. I have studied many charting techniques and tools in my 30-plus years in the commodity markets. Whenever I came across a setup that seemed to payoff often, I put it in a notebook. I made a collection of the best signals from many disciplines to build my own personal technical style. I categorized the signals into three types of setups: directional, consolidation and breakout.

Here are some of my favorite candlestick patterns. First, let’s look at a directional signal called a bullish engulfing setup. This setup works best after a couple of candles with below average ranges, followed by an above average range that surpasses both the low and high of the previous candle. This is also known as an outside day. Bear engulfing candles work just as well, but the close is lower than the open.

Another reliable tool is called a hammer. A bear hammer has a long wick from the high and closes very near the open of the candle. This structure often leads to lower prices going forward. Of course, a bull hammer would have a long wick from the low and an open and close that are very near each other.

The last candle is one that indicates neutrality. It frequently precedes large directional moves or trends. This candle is called a Doji. It is usually below average in length with an open and close that are the same or very near each other.

To build your own personal trading toolbox, search many disciplines and choose the signals that fit your style. If you like to sell option premium, look for markets that are overbought or oversold. If you prefer to trend trade, these candles should help with timing the entry of a trade.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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