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The Journey Of A New Trader: Trading Market Structure

Trading resistance and support using candle patterns with indicators: 1hr timeframe

 

Price action in the market generally gives you all the information you need before your triggers and signals are even in sight. Support and resistance are almost always confirmed by candle or chart patterns. It is, therefore, vital to research and learn candle patterns long before you start trying to use complicated signals and indicators. Pure price movement can give you many opportunities which you could use as an entry before your indicators and signals fire. I personally would enter a trade based off of a candle pattern at a resistance level just before my indicator would trigger.

 

This enables an earlier entry and since you are on a trustworthy resistance/support area , your risk to reward can often be 1:2 holding until you get to the last resistance/support area. However, candle patterns during a consolidating market must only be viewed as a potential reversal or continuation until your indicators or signals fire. You must remember that consolidating markets are always difficult to trade so it is better to view it as a possible move in either direction rather than hoping it goes where you want it to. Be open minded and make moves according to what you are told over what you are expecting.

 

Note that I use this on longer timeframes only as I am more comfortable. A timeframe above 30m is more reliable in my opinion.

 

The first candle pattern would be the Doji candle. I use doji candles as a resting a point in my mind. A Doji is both a continuation and a reversal signal and marks neutrality in the current price movement. Therefore, I try to make my thoughts more Neutral as well and change from an expectation mindset to a more passive mindset. Allow the market to move around for a while longer and look for either a reversal or a continuation of trend for the last 10 candles. Doji candles are not reliable entries but if the doji is long enough you can use it as a stop loss on the top or bottom of the wick according to the direction you are moving in. Here is a simple Doji for reference for what comes next. Note that doji candles can be long or short but open and close is extremely tight. Below is an example of a doji candle.

 

 Doji candles are difficult to use and this strategy is spicifically used on support and resistance levels because of greater reliability. These candles are often misleading and you must be careful. This strategy is for support and resistance trading and often it could not even occur,but is definetley useful when it does.

Above is an example of an unreliable Doji. This is because after a consolidation period there was a sudden upward movement in price which some could say was foreshadowed by the bullish candle off of the 50ma as support. At the end of the move there was a small retracement and then the Doji formed. This doji is not on a support level nor is it on a resistance level. There is no prior trend for the last 10 candles meaning the Doji is not a continuation signal. This Doji also did not form a support level as the wick is shorter than the previous candle. Following that the market moves up and into a small consolidation.

 


Doji Rule 1: A doji not on a support or resistance level is invalid. Use other signals or indicators.

Here we can see after the consolidation there was a small upward  move and then the market reveses. Note, the Doji on the left was unreliable due to an invalid trend.The next day the market reverses down to where the spike occurred the day before. A doji candle forms on that support level. Note the length of the wicks of the prior candle (which is a spinning top) used the same support as the doji. These long wicks show buy hesitation and selling hesitation which is a sign of a slowing market. The doji forms, confirming that the markets downward trend is slowing down. It is a confirmation of possible reversal because it formed on support as well as the previous 10 candles being in a downward trend. Be careful. Dojis are not entry points, they are only signals and are used as a stop loss point to save capital assuming you enter later.

 


Doji rule 2: Doji are used only after prior trend and as stop loss points. Doji are good capital savers when used wisely.

 

Above is the full picture. Indulge me by looking over the picture from left to right. There is an upward spike after a consolidation then a small retracement ending on a doji. The doji is invalid because there is no prior trend nor is formed on resistance or support, although it does form an interim support level which is used to confirm the reversal that came the next day.

As the market breaks that interim support, 8EMA crosses over 2EMA, confirming change in an interim trend. The first High in this picture becomes a resistance level as soon as 8 crosses below 21.

Upon reaching the Doji on that support level we see the market moves up slightly and retraces slightly. Note how none of the bodies or wicks have broken the low of the Doji’s wick. This confirms strong support and you may be looking  for an entry. Then the market moves and breaks the high of the doji’s wick confirming the doji is now support.

As the candle closes above the doji’s high and the next candle opens above it, I would enter the trade and put my stop loss on the low of the doji’s wick. My target would be Just beneath the resistance level I confirmed the day before. My goal was further confirmed when 8 crossed above 21 confirming a change in trend. I entered this trade before my signal confirmed because price action formed a strong support. Entering on support levels saves capital and decreases risk, whilst increasing reward. Yes, the market will not always work like this, but when you have multiple confirmations following each other you can trade without stress, and if you lose, the loss is small.

Above is the new resistance level. Note that every time the market makes a move and retraces it forms smaller support levels. They are interim levels because they are not formed by big swings but by small swings.

 

Moving on you can see I have labelled a double doji on resistance although it is not truly at resistance. Look at the candle before Doji 1. Note the long upper wick, large body, and small lower wick. The candle prior to that one is long and has smaller wicks. This means that the candle opened, pushed close to resistance and the declined over 25% in the same move. Now a doji candle forms, pushes down then up and then down to close on candle open. The upper wick is lower than the wick closest to resistance which is signal 1 of potential reversal. The lower wick does not go far from open which shows strong buying power. This Doji is invalid. The wicks are too small and the price movement is too tight.

 

Now another doji forms. The upper wick forms to the same high as the previous Doji showing the same buying momentum. However, the lower wick forms lower showing a slightly stronger selling power. The very next candle engulfs the entirety of the candle bodies of the last 3 candles forming a lower wick and then retracing back but closing low. This is a signal that market is not fighting resistance anymore and the dojis now have one reversal confirmation.

 

As a collective dojis are stronger even though individually they are weak. The candles following the dojis make lower high wicks and show strong signs of selling potential which would now be confirmation 2 of doji reversal signal. Now you are looking for an entry short, whilst also not expecting it to happen as the candles are still too small for you to be positive. The moment candles are opening lower and lower you can enter on the open of the next candle. As we enter short, 8EMA crosses below 21EMA being the 3rd reversal confirmation. Now we set the stop loss at the resistance level and the target to the previous trends interim support. Your risk to reward  is now 1:3 on this short as you see the market reached the interim support level.

 

 

 

Doji rule 3: They are only valid on support and resistance.

 

  • They are invalid mid trend.
  • They are invalid if they are alone with no other patterns.
  • They are invalid during a consolidation.
  • They are only valid on support and resistance.

 

I will be discussing multiple patterns over the coming weeks as they have brought me some good trading ideas and confirmations. The doji is best used in conjunction with other candle patterns but are very strong when you already have a confirmed support or resistance. Be careful though. Dojis mid trend will fool you into a reversal trade and your risk to reward may be diminished as a result.

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