by Vadim Pokhlebkin
Updated: September 03, 2014
Senior Analyst Jeffrey Kennedy is the editor of our Trader's Classroom service and one of our most popular instructors. This article is part 4 in our 6-part series, Find Trading Opportunities in Any Market. You can browse all articles here. Jeffrey's primary analytical method is the Elliott Wave Principle, but he also uses several other technical tools to supplement his analysis. In this lesson, he combines a Japanese candlestick pattern with a moving average to identify a high-confidence trade setup.
If you think you need years of experience to identify a high probability trade setup -- you're wrong.
To prove my point, let's examine three price charts using only a few popular Japanese Candlestick patterns and a single simple moving average (SMA).
Japanese Candlestick analysis was introduced to the West by Steve Nison. The information contained in a candlestick chart is the same that is contained in an open-high-low-close chart, except that the data is presented differently using "shadows" and "real bodies."
Moreover, these candlesticks form patterns which are important to traders. If you would like to learn more about candlesticks, I highly recommend the book Japanese Candlestick Charting Techniques by Steve Nison.
How do two tools -- candlesticks and a 20-period SMA -- identify high probability trade setups?
The answer is simple in that you use the 20-period SMA to identify the trend and then focus your attention on the appropriate candlestick patterns. If the trend is up, as defined by the slope of the 20-period SMA, focus your attention on bullish engulfing patterns, piercing lines and morning stars. If the trend is down, as defined by the slope of the 20-period SMA, focus your attention on bearish engulfing patterns, dark cloud cover patterns and evening stars.
Watch this video where I explain more: