The problem with relying on individual candles or groups of candles is the market will play psychological tricks with your mind and often cause you to change your trading plan; whether that be exiting a trade prematurely, entering a trade too early or passing on a good setup.
Even worse is letting a candle bar influence your trading decisions whilst it is still forming. A solid bull candle will often reverse and form a bearish pin in the last few seconds of whatever timeframe you’re trading.
This is why I am first and foremost a “levels” based trader and will always let my supply & demand and support & resistance levels guide me, rather than relying on the immediate price action.
Let’s see what I mean…
In this example on the daily S&P 500 (which I tweeted at the time), my Twitter stream was going crazy with bearish comments. The bull run was over – or so people thought. And according to standard technical analysis,we had 2 daily bearish candles with rejection wicks (circled). It takes guts to buy at a demand zone when faced with those 2 red bars.
But the market (as always) likes to throw a curveball when there’s a good setup, and price promptly reversed and rewarded traders who played the level and ignored the candle action.In fact the best setups are usually the ones that look the worst at the time!
On this GBP/USD 60 minute chart, traders shorted a break of the first circled pinbar. Then the market put a spanner in the works and threw a bullish candle. How do you think traders felt when the bull candle was solid green and hadn’t yet closed with a wick? Even with the wick, traders with their stop above the pin had been stopped out and I can bet others were panicking.
Then we got a small and rather insignificant looking pinbar and down price went, but this time with just the smart money.Of course, those who have been following my course or blog will know this was a Bull trap at supply!
On the 15 minute gold chart below, price spiked the demand zone multiple times. Now at one point, before the candles closed, each of those circled candles with wicks would have been solid red.
So what would you have done after the 2nd or 3rd time a big red candle was coming for your stoploss? Yet price eventually took off to the long side.
Of course, if your trading plan uses a time based stoploss and you closed the trade because of lack of progress, then that’s fair enough. But I’m advocating not getting unduly influenced by the candle action.
Its easy to look at static historical charts and pick out setups that would have worked. And likewise, it’s easy to run a market replayer on fast-forward and skip the boring stuff. But in doing this, you are missing something – the often agonising wait, the unclosed candles and mental tricks the market plays whilst we are sitting in a trade.
Training your mind to remain calm through all of this is part of becoming a good trader, I don’t think it’s possible to remain completely unemotional, after all it’s real money at stake. But what I find helps is being a “levels” trader and paying less attention to the candle action and more attention to supply and demand.