forex-scalping.com

Classify Three Candles by Their Measurements

Candle A: open 1.1000, high 1.1060, low 1.0995, close 1.1004. Candle B: open 1.1000, high 1.1020, low 1.0980, close 1.1001. Candle C: open 1.1000, high 1.1052, low 1.0999, close 1.1050.

Measure each. Candle A: total range 65 pips, body 4 pips, upper wick 56, lower wick 5. The upper wick is 86 percent of the range. That is a strong rejection of higher prices: buyers pushed 60 pips above the open and were forced back almost to it. If it forms at resistance after an advance, it is a bearish pin bar.

Candle B: range 40, body 1 pip, upper wick 19, lower wick 20. It is a doji with wicks on both sides. Both sides tried and neither won. Alone it says little, and its meaning depends on where it appears and what follows.

Candle C: range 53, body 50, wicks of 2 and 1. The body is 94 percent of the range. One side controlled the entire period. It is a strong momentum candle, and neither a reversal nor a rejection.

What would you do with each? A is a candidate for a short only if it sits at a meaningful level and the next candle confirms. B is a reason to pause. C suggests continuation, but chasing it after a 50-pip candle often gives a poor entry, with a wide stop.

Measurement beats impression. A wick that looks big on a screen may be 5 pips.

Exercise: measure body and wick percentages for ten candles at your key levels.

Fairman, measuring each candle before naming it is a good habit. Candle C with its large body and tiny wicks says something very different from A, even though all three opened at the same price. Teaching new traders to read the proportions first, body to range and wick to range, avoids most of the confusion that comes with pattern names. Labelling the candles A, B and C before saying hammer or doji also makes forum discussions easier, since everyone is talking about the same measurements.

The measurements check out, and they show why numbers beat impressions. Candle A's upper wick of 56 pips out of a 65 pip range, 86 percent, is a strong rejection. Candle B's wicks of 19 and 20 around a 1 pip body show indecision. Candle C's 50 pip body out of 53, 94 percent, shows one sided control. These percentages can be used as rules: for example, a pin bar might require a wick of at least two thirds of the range and a body of no more than a quarter. With rules like that, the classification becomes consistent and testable rather than a matter of opinion.

I did the measuring exercise on about fifty candles from my own charts, and the result surprised me. Many candles I had been calling pin bars had a wick of only about half the range, which on the numbers is not much of a rejection at all. When I set a rule of at least two thirds of the range in the wick and a body in the top or bottom quarter, the number of setups on EURUSD fell by more than half.

The ones that passed the rule were better, but only at a level. A clean long wick in the middle of a range did nothing for me, while the same candle at a level that had held twice before gave me a decent short about half the time with a stop above the wick.

For candles like C, I stopped chasing them and instead wait for a pullback of a third to a half of the body, because entering after the move had made my stops too wide to be worth taking.

Context is what gives candles meaning, as the post says. A pin bar like candle A at a major resistance level after a strong advance is a meaningful signal. The same candle in the middle of a range, away from any level, is much less informative. Many traders look for confluence: the candle pattern, a significant level, and the direction of the higher timeframe trend all pointing the same way. Testing pin bars at levels versus pin bars elsewhere on historical data would show how much the location matters for the pairs and timeframe being traded.

Candle C raises a common dilemma. A strong momentum candle suggests continuation, but entering after it means a wide stop, since the logical stop is below the candle's low, 50 or more pips away. Waiting for a pullback toward the middle of the candle offers a better entry and a tighter stop, but the pullback may not come. Some traders use a rule like entering on a 38 to 50 percent retracement of the momentum candle on the next bars, or skipping the trade if that doesn't happen within a set time. That balances the desire for continuation with a sensible entry.