The candlestick is a powerful tool used by participants not only in gold forex trading but in several other trading disciplines. It conveys a lot of information to the trader at a glance. You can see the high, low, opening, closing, relative strength and volatility of the instrument, and derive hints as to how the instrument may be moving in the near future. The great thing about sticks is that many of the principles are applicable to several other trading instruments other than gold forex trading.
*The Power of Confluence
Many novice traders make the mistake of entering only when they see a particular pattern. Just because a specific pattern prints (such as a pin-bar or engulfing bar) does not mean there are any other factors working towards pushing price in your favor. That is where confluence comes in. Confluence is the term used for when two or more indicators of a potential price movement appear. The most common confluence is the formation of a pattern on a support or resistance line.
Support and resistance are largely psychological points but often have roots in what major institutions and governments are doing with their assets. The reason these levels work so often is that other traders see them and respond accordingly. These lines have a relative strength based on how often price has touched off and been rejected. The more recent the touch offs, the stronger the level is. So if you see a pattern form on a support or resistance line in the direction of the dominant trend, then you are likely in position for a winning trade.
Another example of confluence would be a strategy’s indicators aligning together with a pattern to create a buy or sell signal.
*Additional Exploitable Price Movements
The candlestick chart presents interesting opportunities because it is one of the few things that can be used solely on its own. Price Action trading revolves around interpreting specific occurrences on the chart that may indicate a profitable opportunity. The thing to remember with any formation is that it must appear in specific locations to be valid. If you have a pin-bar that forms in the middle of a bunch of sideways noise, it’s probably not going anywhere meaningful. If the pin-bar forms at the extension of a long run, it’s probably hitting a reversal point.
One of the more common, profitable scenarios is the break out. A break out occurs when price hovers tightly in an area as it is consolidating and then springs out of that area. Break outs can be highly profitable if they are traded correctly. The savvy trader must avoid false break outs. How? A valid break out will push through and close away from the level it was hovering at. Should price pull back and leave a significant amount of wick on the stick then you can assume that the signal is not very strong. A close near the end of the stick indicates that price wants to continue in that direction.
Always remember that no matter how you use candlesticks in your strategy- the stick is not valid unless has closed. Always wait for the close before pulling the trigger while gold forex trading.