Japanese Candles is another kind of a different kind of tool (to the citations above) that can help us increase the likelihood of success of our signs.
One of the most important candle patterns are engulfing patterns.
Characteristics of the engulfing pattern:
- The second candle should completely cover the body of the first.
- In a bearish engulfing, there must be an upward movement to have more validity, engulfing the upside has to be a bearish move to have more validity.
- These patterns are much more valid when they are at the top of the range (bearish engulfing) or at the bottom of the range (bullish engulfing).
- The first small candle may have shadows.
The general idea of combining different types of technical tools is to increase the probability of more successful signals.
In this case, for example, the last signal is formed in a bearish engulfing the top of the range, the stochastic indicator and move from a situation of over-buying to neutral territory and the market is at significant levels. In this situation, there are three technical tools that are expected to show a decline is imminent.
If it is true that all these tools increase the likelihood of success of our signs, we should never interpret it as a complete certainty. There will be occasions where the three signals are in agreement on the movement of the market and the market is going to run against the expected direction. Simply talking about probabilities, when the three signals are more likely that the market is in the expected direction.
Two combinations of high probability
Always going to be very difficult to find signs in where all the above conditions are present, we must also consider reducing the variables to only two tools:
First combination: Levels significant candle patterns
Second combination signal indicators candle patterns.
Obviously the most effective combination would be to use the three tools mentioned above.
TIP: To operate more aggressively when three conditions are present.
