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Candlestick reversal signals need confirmation




Candlestick signals are time tested and have been proven for a few centuries. The probability of trend reversal is high upon a candlestick signal formation. However, the key word here is 'probability'. Many traders new to candlestick charting analysis, often overlook this fact. They buy upon seeing a candlestick buy signal or sell short as soon as a candlestick sell signal appears. That is an incorrect, or rather theoretical way of trading.

Candlestick reversal signals need confirmation the next day. This is especially true if no other pattern like a Double Bottom pattern, is evident. The chart below shows JSWSTEEL forming a Doji, a potential reversal signal. However notice that the day after the Doji formation, the stock opened lower and closed as a bearish candle. This trade should never have been gotten into on the long side. A few days later, the stock formed a Bullish Harami. The bulls confirmed this signal with a strong bullish candle the day after. This was an ideal point of entry.

In cases where a candlestick signal appears as part of a pattern, like a Double Bottom, it would be ok to get in as soon as the signal is formed. In such cases there is already confirmation of previous support level being defended by the bulls.

Chart courtesy

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