Candlestick Analysis for Professional Traders: This video (and article) will explain the differences on how Professional Traders trade Candlestick patterns as opposed to amateurs. This will give you valuable insights to avoid the pitfalls amateurs fall into.

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Candlestick Analysis for Professional Traders

Welcome my friends to this video on candlestick analysis for professional traders. What I’m going to share with you today is how professionals read candlesticks as opposed to amateurs. And, as usual, it requires a little more detail. What I find is that amateur traders are constantly focused on any one technique, whether it’s an indicator or candlestick pattern, moving average, they’re always asking, what’s the best candlestick pattern? What’s the best moving average? What’s the best indicator as though any one of these things is going to help them in their trading? And they are not. As the market comes back up here, what that really means is a rejection of value. So the market tested these price levels above this high and when we got that above that high, these prices over here of the market which is this area right here, those prices were rejected.

In other words, the market participants said, no, we’re not going to buy that. A few did, but the overall market sentiment said, no, we’re not willing to pay that high. So it’s basically supply demand – anything is worth what people are willing to pay for it. The vast majority of people were not willing to pay more than that price and therefore it comes down. Now we see the market coming off of these lows and we have a kind of an engulfing pattern here, at least the real bodies are engulfing, come on down. We run into another type of shooting star type pattern. And, again, the same idea – rejection of value down at these lows. And let’s see how that works out as the market goes up.

Candlestick patterns explained with examples

But wait a minute, it didn’t go up, it went down. What happened? I thought these were supposed to be bullish patterns. The fact, not only did it go down, but actually broke this low. It really was able to break through that support level. So what’s going on there? Why didn’t that turned into a bullish pattern? Well, there’s an issue here. Candlestick Patterns, this is the bottom line rule for today – actually there’s two rules. The step one rule is the candlestick patterns are very short-term patterns. They do not determine trend. I get a lot of people ask me about that “like how long is a candlestick pattern signal good for?”

And I always say very little time, it’s really just a short-term pattern. Could just be a bar or two even. But the key is, therefore, in order to use them effectively, we can’t just use them alone because that was a very short-term bullish pattern, rejecting these prices. But, guess what, again, we’re talking real market stuff here. So what happens is the market, meaning all of them are market participants across the globe for a while they’re like we are willing to pay more than that, but then just go sideways. So there’s indecision . Then finally, when the decision is made among the masses, the majority, it is to the bearish side. So these candlestick patterns are very short-term patterns – they do not tell you trend, they do not get you into new trend necessarily.

Candlestick patterns for day trading

Now they can, but not by themselves. Again, not in isolation, so we need other things. Trends are long-term moves, so you need a long term indicator to measure trend. By definition trend is a long-term move. Webster’s dictionary definition is to extend any general direction. Candlestick patterns do not give you long-term indications, give you very short-term. Now, again, you can use these in conjunction with other things. So use a longer term indicator to determine your trend and then use candlestick patterns that will get you in that direction. And that’s great. That’s a good way to use them. But don’t trade against the long-term. Or another thing you can do is to use it with the long-term momentum indicator. In fact, let’s do that. Let’s bring up the, RSI just as an example. So here we have what I call a spike high bar.

This is not technically a shooting star, but it’s a similar concept. Again, we’re rejecting the price levels up here. So why would I not take that short? Now, a couple of things that I will always look at is support and resistance. We do have resistance there and that would actually favor, that may be being a topping pattern. We’ve got some pretty good volumes so you could look at it as a bit of a spike high in your volume, but here’s the problem – RSI Momentum, you could see my settings over there, these are just default settings. So it’s moving up, it’s about 50. And this is just a simple little technique. There’s many different ways that you can apply the RSI and use it. In this case, what I’m doing is I’m just putting the mid-line here, 50. So we’re saying above 50, we’ll be bullish.

Candlestick pattern indicator

Momentum in below 50 will be bearish momentum, simple technique. You can use whatever technique you want. You can use other indicators for this as well. The point is, you need a long term indicator. And here, as you see, we get kind of a topping pattern that could be a reversal pattern except for one problem – it’s against the bullish momentum as measured by the RSI. And that is a long-term indicator or at least longer term. So this is the lesson to take away. You only will take bullish candlestick patterns when the longer term indicator, whether you used Rsi or whatever, is bullish. Only take bearish candlestick patterns when you’re long-term indicator is bearish. Rule 2B is that, also, you only want to do it early in the new signal. Well you’ve heard this slogan, the trend is your friend until the end, right?

So the trend is your friend until the end really means trade early in the direction of a new trend because the longer the trend continues, the more likely it’s going to turn into your enemy. The same thing here where they’re using the RS, we wait for, in this case, cross of 50, and that this is early in a new bullish momentum moves because it just crossed above 50 so we’re not interested in taking that short, we’re early adopters in long since we’re early in this new momentum move. Now, the longer it continues, less likely it is to continue. So I’m not going to continue to take bullish candlestick patterns. The longer this goes in, the longer it stays above 50, In other words.

Wrapping Up!

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