This week’s question comes from Rahat, who asks:
What about indecision candlestick patterns that occur at support or resistance? Do you recommend using them?
This might surprise you, but I do in fact use indecision candlestick patterns such as dojis. But what may not be so surprising is how I use them.
As the name implies, an indecision candlestick is one with no directional bias. In other words, it doesn’t hint at the market’s likely path forward in the way a bullish or bearish pin bar does.
These formations usually occur during consolidation, but they can also form at support or resistance. They’re a sign that neither buyers nor sellers won the battle for that particular period.
So how do I deal with these candlesticks?
Well, the short answer is that I do nothing. But there’s more to it than that.
In fact, the question above touches on something that’s paramount to your success as a Forex trader. That something is your ability to identify and stay away from indecisive price action.
Moreover, it’s about finding and taking advantage of quality trade ideas and leaving the rest for someone else to deal with.
But as you’ve probably already discovered, that’s easier said than done.
The good news is that the tips I’ve put together in today’s post will help you recognize what to pursue and what to stay away from. In essence, I’m going to share what it takes to find the best quality trade setups in the least amount of time.
As always, please leave your question or comment at the bottom of this post.
Let’s get started!
If You Have to Ask...
A basic rule I use when considering a possible setup is that if I have to ask if it’s worth the risk, it probably isn’t.
For instance, if the EURUSD just retested support and formed a relatively small bullish pin bar, you might find yourself wondering if you should take the trade. The pin bar has piqued your interest, but its smallish size has you questioning its viability.
That second observation should be enough to dissuade you from taking the trade. If it were a setup of the highest quality and thus begging for you to trade it, you shouldn’t have to question its viability.
Indecision candlesticks such as a doji are the epitome of indecisive price action. They don’t offer insight into whether buyers or sellers are in control, which leaves you guessing at the market’s next move.
In these cases, it’s usually best to stay on the sideline. At least that’s how I approach indecisive price action.
But before we go too far, let me illustrate what indecision looks like in the Forex market.
As you can see in the chart above, the EURUSD carved several days worth of indecision candlesticks. Notice how the highlighted area above is full of small-bodied candlesticks that have relatively long wicks in both directions.
Any time you see price action like this, it’s a sign of indecision. It’s also usually a good idea to stay away, at least until the market can break from consolidation.
Also, note the difference between the bullish and bearish formations and the period of indecision.
The bottom line is that you have to let trade setups come to you. The best ones will always jump off the chart right away. You won’t have to question their validity, and they should always offer clues as to the market’s likely path forward.
In other words, you’ll know what to do right away. Of course, there’s a learning curve for those just starting out, but the most profitable candlestick patterns are the ones that stand out from the surrounding price action.
So How Will You 'Know'?
Luckily, there are things you can do that will help you stay patient and only take the very best setups. To clarify, that means staying away from indecision candlesticks and only committing capital to the signals that have a directional bias.
Here are a few pointers that have helped me over the years…
1. Use the daily time frame only
At least once a day I get an email from someone who took the free pin bar course and wants to know if it works on the 30-minute or 1-hour charts.
My response is always the same…
It can work but the daily time frame is superior.
That’s a pretty straightforward answer. However, there’s an underlying message here that applies to any trader who is still struggling to achieve consistent profits.
Stay away from the intraday charts.
Seriously. Don’t even look at them because if you do, you’re sure to make more mistakes than not.
Everyone has this idea that if you trade from the higher time frames, you have to drill down to the 1-hour chart or lower to “fine tune” your entries.
That simply isn’t true.
If I find a quality setup on the daily time frame, I almost never drop down to a lower one. That’s true about 80% to 90% of the time.
Is it possible to fine tune entries or spot second chance opportunities from an intraday time frame?
Sure, it’s doable. But if you haven’t mastered the daily charts, you have no business on a 4-hour or 1-hour chart. It’s like trying to run before you can walk.
It’s your choice, but I can tell you that after more than a decade of trading experience, the daily time frame is superior particularly for those still learning the ropes.
2. Limit your trading to just one setup each week
How many trade setups do you need each week to make a considerable amount of money from the Forex market?
Five, ten, twenty?
Not even close. Just one favorable setup will get the job done.
That might sound a little crazy especially for those of you coming from the 5 or 15-minute charts. You may even be wondering how you could call yourself a trader if you’re sitting on your hands for days at a time.
But here’s the deal…
The ability to put on trades does not make you a trader, at least not a profitable one.
I could teach my eight-year-old nephew to do that. However, the chances of him pulling out a profit by the end of the month and the in particular year are slim to none.
Also, crazy is good. If the 90% of Forex traders who lose money consistently decide what is “normal,” then I’ll take crazy any day!
If you want to be a part of the five to ten percent of successful traders, you have to stop following the crowd. Just because everyone in your favorite forum is trading 40 times a month doesn’t mean you should. In fact, it means you should probably do the opposite.
So how about one quality setup each week?
Now that sounds like something not too many Forex traders are doing which is a good thing for you.
The daily time frame is only going to give you a handful (sometimes two handfuls) of favorable setups each month. But that’s okay because it only takes one profitable setup each month to make it in this business.
3. Find something else to occupy your time
One of the more common questions I receive is, why start a website? After all, I should be busy trading, right?
Well, I trade, but I’m hardly “busy” trading.
There are a few reasons I started this website, and one is that I enjoy teaching and helping others. It’s my way of giving something back.
But I’d be omitting part of the story if I didn’t also admit that I had a lot of free time on my hands back in 2014 when Daily Price Action was born.
And honestly, the time I put into this site, and the member’s area far outweighs the time I spend trading. I’d bet it only takes me 20 to 30 minutes each day on average to manage any open positions and check for new opportunities.
But here’s the thing…
Having a hobby (no, I don’t consider this work) has only improved my trading performance over the years. Yes, even after eight years trading currencies I’m still looking for ways to improve.
Now, the fact that my “hobby” involves analyzing charts is neither here nor there. The point is that I’ve got plenty to keep me busy between running two websites that I’m not tempted to check my charts every two minutes.
As you may well know, checking your charts that frequently can be detrimental to your success. It leads to overtrading and emotional decision making, two of the most common destroyers of trading accounts.
So the moral of the story here is to find something else to occupy your time.
Don’t get me wrong; you should read certain trading books and spend time studying price action. But staring at charts all day hoping for a favorable setup to magically appear is not only a waste of time but also damaging to your overall performance as a trader.
So there you have it. I do use indecision candlestick patterns but not to form an opinion about which direction the market might move next. Instead, I use them as a signal to stay on the sideline and wait for a better opportunity.
The very best price action signals will jump off the chart. You shouldn’t have to look hard to find them, and if you find yourself debating whether a setup is worthwhile, it probably isn’t.
Capital preservation is key to becoming a successful Forex trader. This is why I say that your number one job is to protect your capital, making money always comes second.
Using the daily time frame is one of the best ways to rid yourself of overtrading. It will also produce some of the most reliable and profitable setups of any time frame.
If you find yourself struggling to stay patient, find something else to occupy your time until a favorable opportunity presents itself. Finding things to do outside of trading will help reduce your trading frequency which will result in better quality opportunities.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.