Ten Golden Rules of Candlesticks

Ten Golden Rules When Trading Using Candlesticks

1.     Never use candlestick charts to bat against established, obvious trends. Some people like to use a chart as a way of backing up their view of a particular stock or market. You need to be totally objective when viewing charts. I have worked with people before who have asked me to look at charts for this and that. I’ve always requested that they don’t tell me what their view is at this point. I prefer the question “What do you think of Vodafone?” rather than “I think Vodafone is going up, what does the chart say?” I’m a big believer that the best traders and money managers in the world have a strong fundamental background and they use technicals to back this up and to help them time their trades. If they believe something’s undervalued and should go up they wait until the chart agrees!

2.    Never use candlesticks in isolation. I think this has been drummed home enough in the last few chapters; you need to combine candlesticks with at least one method of confirmation. Using candles on their own is unlikely to reap rewards.

3.    Don’t restrict yourself to one time frame. You can get different information from different time frame charts, and it adds an extra dimension to your reading of the markets. Short-term time frames can be good for entering into trades, while longer- term time frames can remove the apparent volatility from your viewing of the chart once you’re in a position.

4.    Remember your support and resistance levels. Looking for candlestick reversal patterns at former highs and lows, or near to an important level like a well watched moving average, can be extremely effective.

5.    Do your homework and find the patterns that work well for the chart you use. If Shooting Stars have hardly ever worked in the past on your chart, it’s probable that that poor run will continue - so don’t use them as reversal signals! Backtesting is so important when you’re searching for the candlesticks worth looking out for on your charts.

6.    Don’t kid yourself when backtesting. There’s nothing worse than thinking you’ve got the best system in the world, then finding out once you’re putting your money where your mouth is that you messed up when backtesting because you weren’t honest about entry and exit points. A “worst case scenario” approach towards where you get in and out of trades serves one well as this should mean results actually improve in the real world.

7.    Don’t enter into a trade without knowing where your stop is. I’ve seen this in many a “trading rules” list. It’s nothing new, and it’s essential! Having a stop is paramount in trading. Hopefully you can move your stop after a short time, so it’s no longer a Stop Loss but becomes a Stop Profit! I recommend you try to develop a trailing stop strategy.

8.    Refer to the “Cheat Sheet” regularly until you’ve learnt the patterns off by heart. This will save you from continually having to flick through the book.

9.    Don’t bother with bar charts ever again. Why would you want to look at bar charts when the candle chart can add so much extra information even at the first glance?

10.Always make sure you look at the candlestick chart in future when checking out a stock or a market. Even if you don’t want to learn the patterns (see rule number 8), surely you’re now going to afford yourself a brief glance at a chart from now on every time you’re thinking of doing something in the market. The chart can quickly give you an idea of the market’s overall thinking, and you can stop yourself from batting against an obvious trend.