Please note that there is more to trading reversals than what is shown in this article. This article is about spotting potential reversals. Taking the trades will be discussed in the next article in this series.
The last article, in this series, explained what candle patterns are and how to use them. In this article, I am going to explain the importance of viewing candle patterns as a whole and not just as a single pattern. I will also explain a few simple concepts on using candle patterns together.
Forget Perfect Reversals
When you start trading reversals you’re going to notice that very few reversals are actually perfect. Looking for a perfect trend followed by a perfect candle and a perfect reversal can work but do you really want to take a trade only once a month?
Reversal trades can be taken even when the formations are not perfect.
If you remember, in the last article in this series, I talked about understanding that candles represent the struggle between the bulls and the bears. If you look at these imperfect reversals in this way you can clearly see why it’s a reversal and why you should enter. Just because it does not look like a text book reversal doesn’t mean it won’t work.
I took one of these imperfect looking reversals today and I walked away with 93 pips.
Let’s take a look at some of these reversal patterns.
Good But Ugly Reversals
When reading about taking reversals you’re probably used to seeing patterns like this one:
This reversal pattern is quite sexy. It’s nice, clean, simple and obvious. However, what about when you see something like this:
This one is a little harder to see, however, the chance of a good reversal here is just as strong if not stronger. The trick is to stop looking at these as patterns but instead read the actual candles. So in the last example what are the candles telling us?
This is just the preceding trend nothing special here.
This is where it gets interesting. This is far from your normal clean reversal pattern. You’ve got four indecision candles and the last one actually makes a new low. A lot of newbie traders would look at this and not be sure what to do.
However, it is quite simple. Despite the messiness of these candles all we are seeing here is a period of indecision. The bulls and the bears are fighting it out, sometimes the bulls win sometimes the bears, but all their victories are short lived.
What we do know, for certain, is up until five candles ago the bears were in complete control of the market. However, for the past four candles, the bulls have been fighting back. It makes sense that we would see a reversal here.
The main idea of trading candles is to read what they tell us. Too many traders look for generic patterns such as Doji’s and hammers. However, the truth is you won’t always get a perfect reversal patterns. Sometimes you will get a bunch of candles at the end of a trend. A true candle trader can step back, look at the candles, and decide if a reversal is likely.
This is why it is essential to always think of candles as a struggle between the bulls and the bears. When you look at your chart you should ask yourself three simple questions:
Who was in power recently?
Has the balance of power changed?
What is likely to happen from here?
If you ask yourself these questions at a time the charts are showing you something similar to the picture below:
Your answers would be something like this:
1) The bulls were in power.
2) Yet the bears are fighting back.
3) It is possible we will see a reversal from this point.
So try to stop thinking of candles simply as patterns. You have to realize that you cannot concentrate on a single candle. It is so much easier when you look at them and you read them like you would a story.