How to Pin Point Entries in a Trend Using Candlestick Formations

Being able to read candlestick formations is an important skill for trading successfully, and with a bit of practice you can spot profitable entry points. Someone who is skilled at reading candles within a trend can win up to 75% of their trades, and even an unskilled one can win about 50% of them, which can still make an account grow considerably if risk is properly managed.

First you want your charts to be set up properly and contain the information you want. Often the charts available from your broker will be blank when first downloaded, but those default settings can be changed. You will want your candlestick chart to include both the 10 ema and 21 ema. These are moving averages which change as price changes. Once those are showing up on your chart, here are some things you will want to look for to get a great entry.

You want to see both moving averages pointing in a clear direction, either up or down. This will give you confidence that the trend is strong. Typically, I look at the daily and the 4 hour, but this will work for any time frame. If the higher time frames are also pointing in the same direction, this will increase the probability that your trade will win. If they are pointing sideways then that is a good indication that a clear trend is yet to develop.

You also want the 10 ema and 21 ema to be separated. The closer they are can reduce the probability of the trade moving into profit.

In a fast-moving market, where price has taken off in a particular direction, price will tend to bounce off of the 10 ema, and in a slower-moving market it tends to bounce off of the 21 ema. Once you have identified a pair with a clear trend, it is important to determine whether the market is a fast-moving one or a slow-moving one. If the price goes past the moving averages too much, or the emas get close together and pointing sideways, that's when you should stay out of the market.

With the emas pointing clearly up or down and well separated, look for a spike in price against the overall trend. In an uptrend, look for price to come down at or just below the 21 ema in a slow-moving market, or at or just below the 10 ema in a fast-moving market. In a downtrend you will look for price to move up to these levels.

Once that has occurred, look at the formation of the most recent one or two candles. You will want the candle formation to support the trend. Look for pinbar or shooting star candles where the point of the pin or tail of the star is pointing down through the appropriate ema in an uptrend, or point up in a downtrend. Railroad, and bullish or bearish engulphing candles are formations that may also give evidence that a trade opportunity is developing.

If these conditions have been met upon candle close, you can enter the trade right away or hold out for a better price and wait for the price to come back 10 to 20 pips. Your stoploss can be placed just past the last candle, so it's important to realize that on big runs you could be risking a lot of pips to get your stop to sit beyond the last candle. In that case, it may be better to sit out of the trade or wait for a better price because the amount you must risk is too high.

It is also important to move your stop to break even once price has started to move or has made another big run, or even reached a round number. Otherwise, let your position run. When you start to see indecision candles consider closing your position. If you close too early you may be short-changing yourself.

Using the emas and candlestick formations in this way can make for very profitable forex trading. The key is to wait for these conditions to be met. This can be a true test in patience, but remember that if you can stay out of trouble and losing trades in forex, you are half-way there.