Continuing in the Price Action series, I will have 2 articles about confirmation candle to enter orders. One article will talk about the uptrend and one about the downtrend. I divide them into 2 articles so that you can easily read, think and understand.
In my experience, please never predict market trends. This is extremely important so I repeat “ NEVER FORECAST THE MARKET”. All you need to do is analyze and plan, wait for the market to make a confirmation, and finally take action.
Reason: For example, if you predict a bull market, what comes to your mind will be BUY, BUY, BUY. Even if the market falls, you will still try to BUY and then BYE BYE your account. No one knows for sure what will happen. So you should come up with scenarios for the market and plan for each of them. Finally, wait for the market to tell its story.
Commitment: This confirmation candle article will focus on a single candle. I don’t use the term reversal candle to misunderstand the concept of trend reversal trading.
Confirmation candle in Uptrend
Features: Long body, green color, the closing price is near or equal to the highest price. The longer the candle, the better it is. Technically, it is called the Marubozu candlestick. For now, we will only use one term – Long body green candle.
Two positions of the confirmation candle:
(1) The long body green candle penetrates Key Level in Uptrend (Breakout).
(2) In the bull market, the price returns to the Key Level and bounces up with a long body green candle.
Theory and practice
Now I will go into more detail about the cases. By default, Uptrend + confirmation candle = BUY order.
Position 1: Breakout
Theory: The candle goes up and breaks out of Key Levels or Downtrend lines, confirming the uptrend of the market.
– It looks so simple but you will be afraid and not dare to enter the BUY order. Breakout candles appearing at Key Levels always make traders want to sell rather than buy. And that’s it.
– Some currency pairs have a habit of breaking out and then retesting back to the Key Level they just passed. Some do but some don’t. Let’s take gold as an example. Its habit is to accumulate peaks to increase further but it doesn’t retest the Key level. The habit is quite annoying because traders will not dare to BUY at high prices. They wait for the gold price to return to the low price range to BUY but it will not do that.
– You have to learn to accept buying at a higher but safer price. Most traders will try to buy low and sell high and of course… they all lose money. You should give up that mentality. To survive, practice the habit of buying safely at the right point.
– Do you still remember the tenet 2 of Dow Theory? If you missed the Breakout candle, wait for the secondary trend. Wait for the price to pull back to start new BUY positions. Don’t try to swing with the market.
Position 2: End of the retracement
Theory: The market is in an Uptrend. The price adjusts to a temporary decrease (to the Key level). A long body green candle appears, confirming the end of the retracement.
– The candle confirming the end of the market’s retracement wave usually increases strongly close to the old peak. Your psychology will be a bit cautious. Like if you enter an order, you need to put SL below the confirmation candle and the TP point will be at the old peak => R:R ratio is not good => Skip the opportunity
– The win rate when I enter BUY orders is not as high as SELL orders. With the same candlestick pattern and entry method, the SELL order gives a higher probability of winning. For example, Gold rising is slow and falling is fast. So if there is a confirmation of the decline (long bearish candle), it will usually continue to decrease.
– I prefer the Breakout strategy rather than the retracement strategy.
Orders I have executed
If you read this far, you will probably understand it. So now we’re going to learn how to enter an order, set stop loss and take profit with this strategy.
With Crypto market
I will talk about how I use it in the Crypto market first (Spot only, absolutely no Margin and Future). Current investment portfolio on Binance exchange.
With the Crypto market, I will use the H4 chart to identify the Trend and the Key Level. Trade on the H1 chart and combine with the Volume indicator (tenets 4 and 5 of Dow Theory).
Particularly for Coin, Price Action Breakout trading or long bullish candlesticks signaling the end of the retracement must be accompanied by high volume.
– FTT/USDT token of the FTX exchange. Two breakout candles with increased trading volume are reliable confirmation so that you can enter BUY orders.
– Coin Link/USDT (ChainLink) is similar. You can buy after strong green candles (Breakout), accompanied by a sudden increase in volume.
Enter as soon as the confirmation candle closes (a strong price increase comes with a spike in trading volume). Stop loss is placed below the confirmation candle. Don’t set TP. Most of these Coins, I will buy and buy more if there are confirmation candles. I only sell when the market officially enters the downtrend.
With Forex/Gold market
I will use the daily chart to determine the main trend and Key level. The H4 candlestick chart will be used to wait for the confirmation candle.
As I was writing these paragraphs, my account had a EUR/AUD position. I did not follow this order until September 14, 2021.
Daily chart: Uptrend + Retest Key Level
H4 chart: Confirmation candle (yellow arrow) broke out from the sideways zone and increased.
Entered as soon as the confirmation candle closed.
Placed Stop Loss just below the confirmation candle: 70 pips
Take Profit at the next Key Level. This order had a ratio of R:R = 1:2.
I will have an article to talk about the results of these orders.
Do you know why people use bull images to talk about uptrend?
Simply, you just look at how the bull attacks. It backs to gain the momentum, swipe the legs to create a charge, then lower the head to let the horns act as a combat weapon and stab the target. After that headbutt, the bull will slow down, pick up momentum and attack again.
This is also the characteristic of the Bull market (Uptrend). The long body green candles resemble the image of a bull accelerating, lowering its head and rushing forward. Following the bulls, following the uptrend, and waiting for the confirmation candle to enter BUY orders are considered one of the safest ways for you to survive and make money in the forex market.