Having come from a 5-year background in the stock market prior to entering the forex market, there were certain skills I had acquired which I could NOT bring into the forex market.
One such area was candlestick patterns.
At least, so I thought.
If you’ve studied candlestick patterns before you know that there are some formations that rely on the opening bar to gap above or below the previous bar’s range.
Two examples of this would include the shooting star bearish reversal pattern, and the piercing line bullish reversal pattern. Both involve the market to gap at the open above the previous day’s bar or below the previous day’s bar respectively.
How can these candlestick formations exist in a market that does not gap?
Obviously they can’t.
But is the nature of these patterns still at work in this market?
One such candlestick phenomenon that I enjoy trading on are the engulfing patterns.
My definition of the engulfing pattern is when today’s price action totally engulfs the previous days’ body, making my definition redundant in the forex market – as I require the opening price to gap above the previous days’ close (for an engulfing bear) or below the previous days’ close (for an engulfing bull).
So when I came across to the forex market I threw this popular pattern away.
However, several months into my forex trading experience I began to see a certain phenomenon that looked very similar to the engulfing formations.
If you have come into the forex market with candlestick experience and wish to use this knowledge in the forex market, firstly, be aware gaps are an extreme rarity.
Secondly, just because there exists no gaps does not mean that those patterns are useless, they may just be in slightly different forms.
Finally, even if your candlestick pattern doesn’t involve gaps, test it to see whether it is tradable – just because certain candlestick patterns work in the stock and/or futures market does not necessarily mean they will in the forex (although human nature doesn’t change).
So, test to make certain.
If you would like to know more about candlestick patterns go to Litwick, which has a great exhaustive free resource on candlestick patterns.