A smart beginner trader will look into different trading strategies before they begin trading, but the amount of trading strategies can be overwhelming. Which strategies should you start with? It important to start with a consistent, simple strategy. Amongst the thousands of forex strategies, only a handful have a high success rate over time.
Another beginner problem is that some strategies are complex and should only be used after gaining some experience. New traders should start with simple forex trading strategies that work well. After doing this, new forex traders can incorporate additional indicators to these strategies.
Some of the simplest strategies use candlesticks. These strategies are called Japanese Candlestick Trading Strategies. We will highlight three Candlestick trading strategies that have shown consistent success over time.
Doji Candlestick Reversing Strategy
When a doji candle is formed, it indicates that the price opened at a given level, the buyers and sellers tried both the upside and the downside and then called a truce – meaning that the closing price is very close to the opening price. The upper shadow means that the buyers tried their luck and pushed the price up, but the sellers pushed the price back to the opening level. Then, the sellers did the same thing, by trying to push the price lower. However, the buyers fought back and pushed the price back to the opening level, forming the lower shadow of the candlestick.
The doji candlestick is the perfect reversing signal. It has a high success rate in indicating a reversal in the upcoming period. The next period could be the next hourly candlestick or the next daily candlestick. The logic behind the strategy is that the price will likely reverse down – if you see a doji candlestick, on an uptrend or turn up if you see a doji candlestick in a downtrend.
The chart below is the daily EUR/USD chart. In the last two and a half months alone you can see five clear reversals after a doji. Sometimes, the reversal might hold for one or two candlesticks, such as the first four reversals. But often, the doji indicates a trend reversal, such as in the last example. In the last case, we see two dojis (the more dojis, the bigger the reversal). If we see a doji on an uptrend, we can sell with the stop above the top of the upper shadow. The opposite is true on a downtrend.
Hammer Candlestick Continuation Strategy
Hammer candlesticks can indicate both a reversal, like the doji candlestick, or a continuation of a trend. It all depends on the direction of the trend and the direction of the hammer. The hammer is a candlestick which looks like a real hammer with the wick/handle at the bottom and the body of the hammer at the top or bottom. The normal hammer looks like the picture below.
The logic behind the price action of the hammer is that the sellers tried to push the price down, and succeeded in doing so. Then, the buyers returned and overwhelmed the sellers, bringing the price back up and eventually closing above the opening price. This means that the buyers are stronger than the sellers at the current levels. If the buyers are stronger than the sellers, it is a signal to buy. If the trend is bullish and we see a hammer, it is a signal of a trend continuation. If on the other hand the trend is bearish and we see a hammer, it’s a signal for a possible reversal.
Just like a normal hammer, the upside-down hammer, or a reverse-hammer, indicates a continuation or a reversal. In the below case, an upside-down hammer indicates a reversal when the trend is bullish. When the trend is bearish, this sort of candlestick indicates a continuation.
In the picture above you can see a reverse-hammer in the middle of a downtrend. The trend had been bearish for more than a week when the candlestick was formed. The previous candlestick was bearish as well.
On the day that the upside-down hammer formed, the bulls pushed higher and tried to reverse the trend. But, the sellers returned and sent the price back down, closing the day even lower. That’s a clear sign that the sellers are in control and the downtrend will continue, which it did for about a month. If we went short right after the upside-down hammer, we could have made 500 pips on this trade.
Bullish/Bearish Engulfing Candlestick Reversing Strategy
The bullish engulfing candlestick is a strong reversing indicator. This is not just one candlestick. This chart formation is comprised of two consecutive candlesticks pointing to a reversal.
The logic is the same as the hammer candlestick strategy. When the engulfing pattern is bearish, the price opens at the bottom of the body of the first bullish candlestick and closes at the top of the body. The following bearish candlestick opens at the close of the previous one and eventually closes below the opening of the first candlestick.
Like the hammer which closes below the opening level, the bearish engulfing pattern ends below the opening price of the previous candle since the second candlestick closed lower than the opening level of the first one. This means that the sellers overwhelmed the buyers and are, therefore, stronger. The first example in the chart is a bearish engulfing pattern. As you can see, the trend eventually changed, despite the strong surge in the previous candlestick before the engulfing candlestick pattern.
Candlestick strategies are quite simple. You don’t need to be too experienced to understand or use them.
Remember when you see an inverted hammer on a downtrend you can sell at that point placing a stop-loss above the upper wick of the candlestick. Or you can buy when you see a bullish engulfing candlestick with a stop-loss below the low of that pattern.
As you gain experience you can add more indicators to this strategy like trend lines or moving averages. Beginners should begin by trading candlesticks for some time, before adding more indicators to the strategy.