the hAnDbook of technIcAl AnAlysIs
14.5 Trading with Candlesticks
trading Candlestick reversals reliably: trading
Cyclic‐barrier Confluences
It is best to combine both price and time elements when trading the markets. It
would be ideal if the dominant cycle could first be identified. This will allow the
trader to gauge the best moment of entry at the most overbought and oversold
conditions. Trading breakouts would also be more effective if the trader knew the
phase of the dominant cycle.
Having knowledge of the market cycle activity will also help the trader fine-
tune entries. For example, the period between 8 a.m. GMT to 5 p.m. GMT rep-
resents the impulsive period. This is when most action takes place in the markets,
leading to more trend activity where breakout trading is more reliable, as opposed
to the inertial period where prices tend to range and consolidate. See Figure 14.51.
Figure 14.52 shows potential reversal times across the trading day. Although
this is an idealized indication of potential reversals, it is based on the cycles of
trading activity in the market.
price‐error analysis
Consider a perfectly strong uptrend. The trend is strong and very symmetrical. It does
not vary and price action is very regular in time and price range. See Figure 14.53.
By shifting the time line, we can manipulate the type of candle/bar to represent
any formation. If we quantized price from between the Ys, that is, Y1 to Y2, Y2 to
Y3, and so on, we get a series of rising shooting stars. This may fool the novice trader
into believing that the uptrend was weak or flawed in some manner. See Figure 14.54.
If we quantized price from between the Xs, that is, X1 to X2, X2 to X3, and
so on, we get a series of rising Hangmans. See Figure 14.55.
figure 14.50 Heikin Ashi Candlesticks on the Daily AUDUSD Chart.
Source: MetaTrader 4
