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In this episode, you’ll discover the top 3 beginner’s mistakes to avoid when trading candlestick patterns.
So tune in now…
The Monster Guide to Candlestick Patterns
Hey, hey what’s up my friend?
In today’s episode, I want to share with you the top 3 beginners’ mistakes to avoid when trading candlestick patterns.
Here’s the thing:
I’m sure you can agree that candlestick patterns is one of the most popular ways to plot the prices on your chart. But just because it’s popular doesn’t mean that most traders are doing it the right way.
Let me share with you the top 3 mistakes that I see traders make.
Mistake #1: Chasing the markets
When traders look at the chart see a huge bullish momentum, they will think, “Oh Rayner, look how bullish the market is! The market is going to the moon, let’s buy!”
What’s the problem with this? Well, when you buy after the price has made such a huge move higher, you’ll face a problem – and that’s where to put your stop loss. There’s no price structure, no support, no swing low that you can reference to set your stop loss.
You end up setting a random stop loss on your chart, maybe 20 or 50 pips, or whatever you feel like. Now here’s the thing, the market doesn’t care where your stop loss is.
After the price made such a huge advancement, it needs to take a breather. So the price will retrace or even reverse altogether. And when that happens, someone’s gonna take profit where your stop loss is and you’ll get stopped out of your trade.
That’s the first mistake to avoid. When you see the price make a huge move, that’s a strong signal that you shouldn’t be entering a trade. It’s too late because that’s where the energy has been expanded. So don’t chase the markets.
Mistake #2: Trading candlestick patterns in isolation
For example, they look at a chart and think, “Oh, a bullish hammer, it’s time to buy! After all, the textbooks and courses say that if you see a hammer, it means the buyers are in control and I should buy!”
What’s the problem with this? Again, a bullish hammer simply tells you that the buyers are in control momentarily. But it doesn’t mean that the market has a high probability of going up.
Because you still must look at the current market conditions and the context of the markets.
For example, if for the last 200 candles, the market is in a downtrend, making lower highs and lower lows steadily, what are the odds of that one hammer winning against the last 200 bearish candles, winning against the downtrend? The odds are pretty slim.
If you think about it, it’s like having a Toyota Vios moving at 50 km/h towards a train that’s moving at 300 km/h. What’s gonna happen? The train will freaking eat the car up, the car would crash and burn.
And that’s what happens if you buy into that tiny weeny hammer in an existing downtrend. You should expect to get stopped out of your trade consistently. You don’t want to be trading candlestick patterns in isolation.
They’re not signals nor setups, they just simply tell you historically what has happened over the last one candle and that’s it. I’ll share more with you later on how you should trade candlestick patterns but first, don’t trade them in isolation.
Now, I’m also guilty of this next one…
Mistake #3: Blindly memorising all the different candlestick patterns
Let’s be honest, there are many variations of candlestick patterns, possibly hundreds of them. If you were to memorize all these patterns names and meanings, you’ll simply be burnt out unless you have a photographic memory.
I don’t have a photographic memory, so I was very frustrated for a long time.
Here’s the thing – don’t memorize candlestick patterns. Instead, ask yourself what’s the market trying to tell you and all you need to do is ask yourself these 2 questions:
1. Where did the price close relative to the range
A candlestick pattern has a high and a low. So ask yourself, did the price close near the highs? Then that means that buyers are temporarily in control.
Did it close near the middle of the range? Then maybe it’s undecided, buyers and sellers are pretty much on equal footing. Or did the price close near the lows? This shows that the sellers are in control.
2. What’s the size of the candlestick pattern relative to the previous ones
You want to see if there’s any conviction behind the move. Let’s say you spot a hammer on the chart. But the size of this hammer is about the same size as the last 5 candles, or even smaller, it’s telling you there isn’t any conviction behind the hammer.
On the other hand, let’s say you have another hammer that’s being formed which is 2, 3 times larger than the preceding candles. This tells you that this is clearly a strong price rejection and there’s conviction behind this move.
That’s how you read candlestick patterns. You want to analyse the size of this pattern relative to the earlier candles as well.
These are the top 3 mistakes to avoid when you’re trading candlestick patterns.
So you might be thinking, “How do I trade candlestick patterns?” I’m going to give you a very simple formula to trade candlestick patterns (and if you want more details, you can just search up my YouTube videos later on).
My secret sauce – The M.A.E.E. formula
The M.A.E.E. formula stands for:
- Market structure
- Areas of value
- Entry trigger
M – Market structure
If the market is in an uptrend, then you want to be buying market because the path of least resistance is towards the upside. You want to look for buying opportunities.
But by now you should know that just because the market is in an uptrend, doesn’t mean that you want to buy blindly. You have to buy at a good price level which is an area of value. That brings us to the second point – the area of value.
A – Area of value
There are many ways to define this. You can use a moving average, support, trendlines, trend channels. But generally, I like to use support, trendlines or even moving average.
Once the price has come to an area of value, like support, you’ll have no idea whether support will hold. So that brings us to the third point…
E – Entry trigger
You’re looking for a bullish candlestick pattern to show you that the buyers are stepping in to push the price higher. This could be in the form of a hammer or a bullish engulfing pattern, etc.
E – Exits
So where do you put your stop loss? Well, you can put your stop loss 1 ATR below the lows of the hammer, that’s one possible way.
Then how do you exit if the price moves in your favour? How do you exit the winners? Well, you can look to take profit at the nearest swing high, at resistance.
That’s in essence what the M.A.E.E. formula is all about. I know it might be hard to visualize the concept now. So just go to my YouTube channel or simply google “the M.A.E.E. formula TradingwithRayner” and you will see me explain all these in greater details.
Here’s a quick recap…
- Don’t buy after the market has made a huge move because that’s when it’s likely to make a pullback or reversal.
- Don’t trade candlestick patterns in isolation, it doesn’t work that way.
- Don’t memorize candlestick patterns. Just ask yourself: where did the price close relative to the range, and what’s the size of the candlestick pattern relative to the previous candles.
- The M.A.E.E. formula – For more details just search for it on YouTube and you’ll get a complete training on it.
With that said, I wish you good luck and good trading. I’ll talk to you soon