A candle that closes right at its high: what the next one has to do

[Fairman]

A candle that closes right at its high: what the next one has to do

Big M5 candle, closes at or very near its high, no upper wick. It looks like pure strength, and the instinct is to buy the next candle.

Sometimes that works. Often the next candle opens, pokes a little higher, and then fades back into the body of the strong candle. The buyers who built the move are taking profit, and late buyers get stuck at the top.

So I've started treating the strong close as a question rather than an answer. The next candle tells me which way it's going. If it holds above the midpoint of the strong candle and closes up again, even modestly, the move is being accepted. If it drops below the midpoint, the strong close was probably the end of a burst, not the start of a trend.

Where the candle happened matters a lot. A strong close out of a tight range, with room above, is more interesting than a strong close straight into yesterday's high. And one at the end of a long run is more likely to be exhaustion than one at the start.

The practical result is that I almost never buy the open of the candle after a strong close. Waiting one more candle costs a few pips sometimes. It saves a lot more when the burst fades.

[Fairman]

The midpoint test is simple but there's a version that's a bit stricter: wait for the next candle to make a small pullback and hold above the strong candle's midpoint, then enter on a break of that pullback candle's high. It gives a tighter stop, under the pullback low, and it filters out the cases where price just drifts sideways after the burst. The cost is you'll miss the moves that never pull back at all. Those exist, but they're less common than people remember, because the ones that ran without you tend to stick in your head.

[Fairman]

Session timing changes how much weight I give these candles. A strong close in the first few minutes of London has a different meaning than one at 11:30 when the market's quiet. Early in a session, a strong close often reflects real orders coming in. Later, one strong candle on thin volume can just be a single participant pushing price for a moment, and those fade more easily. I'd also be careful around round numbers. A strong close that stops right under one is often a candle that ran into resting orders and couldn't get through yet.

[FXS Prop Desk]

The next candle needs to hold above the previous close to confirm the strength. If it opens, pushes slightly higher and then closes back inside the strong candle's body, the strength was probably exhaustion rather than continuation.

Some traders wait for a small pullback after the strong candle and buy only if price holds above its midpoint. That avoids buying at the top of a burst, while still trading in the direction of the strength.

[Fairman]

Where the candle closes relative to the next level above matters a lot. A big candle that closes at its high right under yesterday's high or a round number hasn't really shown strength beyond anything yet. It's run into a wall. The same candle closing at its high with clear space above is a different story, since there's nothing obvious nearby to stop it. I'd check the distance to the next level before reading anything into the close itself. If the level is only a few pips away, I'd want to see it broken and held before buying, rather than buying the strong close straight into resistance.

[Fairman]

Does the size of the candle compared with recent ones change your read? A strong close on a candle that's three times the average M5 range is often an exhaustion move, especially if it comes late in a trend. A strong close on a candle that's only a bit bigger than average, after a quiet period, is more likely to be the start of something. I've started measuring the candle against the last twenty candles' average range before deciding what the next one has to do. The very large ones I treat with more suspicion, since they often get partly retraced before anything else happens.