Candlestick patterns have little value without the right trend context. Hence, a popular trading setup uses candlestick stephen bigalow forex market with a moving average.
The moving average provides a simple way to find the trend context. This review assumes a basic understanding of candlestick patterns. Thomas Bulkowski for a solid reference on candlestick patterns. Despite their often mystical names like engulfing and shooting star, candlestick patterns are not magical.
They are simply well-defined price action patterns. Focus on the price action: high, low, open and close. We looked out for candlestick patterns with a moving average. A trade setup came as a bearish engulfing candlestick pattern formed at the 20-period EMA. The next day was a strong bear trend bar. It triggered our sell order at the low of the pattern. Look at the top of the chart.
After a test of the previous trend high, prices reversed down with strong momentum. The bearish engulfing pattern showed strong rejection by these resistances. This trade had the potential to catch the beginning of a new downwards trend. When trading candlestick patterns with a moving average, you can use the distance between the candlesticks and the EMA to judge the momentum. In this case, the large gap between the candlesticks and the EMA showed the bearish momentum.
We saw a bullish harami right on the 20-period EMA. The next day broke the high of the inside bar. We went long but the trade went against us. A key candlestick principle is to wait for confirmation. Many traders wait for one more candlestick after the pattern for confirmation.