Oh great another post about candle stick formations.  Which one now Omar??  The “multiverse-reversal-with-a-flip formation??”

The internet is chocked full of blogs, sites and training courses that include a well-known approach to market analysis using candlestick formations.

For those of you who don’t know already, candlestick formation usage in trading attempts to look at a certain type of candle or group of candles and make a prediction on where the instrument may head after this given formation.

They have catchy names like “gravestone doji”, “hanging man”, and “shooting star” just to name a few of the myriad out there.

Problem is, when you go out and look for these formations, they don’t always seem to work as advertised. So are they useful or not? Depends on HOW you use them!  So instead of me sharing with you what is both available already on this site- which you can find here: Forex Candlesticks and a number of other sources, here is what ISN’T usually written to go along with the candlestick formation discussion.

So here are some tips in getting those well-talked about formations into action you can use in your trading decisions:

Take The Long View: Although candlestick formations theoretically should work on any timeframe, from my experience they really only consistently provide useful information on the bigger timeframes like daily and above. By focusing on higher timeframes, you will find the candlestick formations more relevant and with higher consistency in the information they provide.

Go With What You Know: Instead of trying to memorize 30 different formations and then attempt to recall them all in a live market, select 2-5 key formations and only focus on those. Personally, I only use 3: The pin-bar reversal candle (very long wick, body in opposite direction of wick); The engulfing candle (the body of the second candle completely engulfs prior candles body in opposite direction), and the “Railroad Track” (where second candle neatly reverses prior candle but doesn’t qualify as an engulfing). When you have less to look for, you will likely find more of them and be stricter on their usage.

The Past Impacts The Present: This is maybe the MOST important tip. Rather than simply finding candlestick formations that appear at “random”, try to locate candlestick formations AFTER a established move in one direction or another. It makes no sense to put too much stock into a reversal candle if price is moving sideways. It makes much more sense to find a big reversal candle after a move has been made, and henceforth, can be reversed.

It’s STILL About Support And Resistance: By continuing to view the market from its structural makeup around support and resistance, we can use candlestick formations to confirm a reversal or breakout against or through a particular major support and resistance area. For example, it makes no sense to put faith in a reversal formation if a breakout has just occurred, and likewise makes no sense in looking for a continuation formation if price has dramatically failed at a S/R point.

Use ALL Your Tools: Don’t depend on candlestick formations by themselves to make trading decisions. Just as you cannot build a house (or a birdhouse for that matter) by using one tool, great trades are generally not the result of any single piece of information. Use candlestick formations to complement or confirm trading decisions based on your complete use of many or all of the methods available to find a trade.Hopefully by following these tips you can turn those once obscure candlestick formations into actionable and usable trading information. Remember that like anything else in the trading world, they are not going to work 100% of the time so just because they don’t create a winning trade the first time you use them, doesn’t mean they don’t hold value. By using all your abilities and methods together in a synergistic way, you will surely find a place for candlestick formations in your trading toolkit.

In the next article Omar shows you how he uses candlesticks as “clues” for reversals as well as “entry signals”: CLICK HERE to see forex candlesticks in action