Using Candlestick Patterns To Identify Entry Points In Range-Bound Markets
Written by Bert De Graaf
In range-bound market conditions or sideways trend, the currency pair price swings back and forth for a prolonged period between easily seen upper and lower limits. There is no apparent direction to the price movement on the chart and there will be little or no rate of price change.
Trading range-bound markets result in capturing smaller profits but currency traders may trade the market's range over and over again until the price violates the range (breakout) and start trending again. Stoploss orders will always be placed below support when going long or above resistance if going short.
Now, let's take a look how to identify possible entry points using candlestick patterns in range-bound markets:
Identify the overall trend drawing trendlines
If you forgotten already, a trendline is a line that connects a series of highs or lows in the market. The trendline can represent support in an uptrend or resistance in a downtrend. Horizontal trendlines mark support-resistance and range-bound market conditions (sideways trend) .
Find an entry point(s) to go long/short near support/resistance level
Look for candlestick patterns that suggest a possible reversal at or near support or resistance levels:
Looking to the above chart:
We have spotted four possible reversal patterns: Evening Doij Star, Morning Star, Hammer and Marubozu Candle.
How to trade these patterns?
1) Evening Doij Star
Go short at the close of candle 3 with stop 1 pip above the high of candle 2.
2) Morning Star
Go long at the close of candle 3 with stop 1 pip below the low of candle 2.
3) Hammer
Go long at the close of the hammer candlestick with stop 1 pip below support line.
4) Marubozu Candle
Go short at the close of the Marubozu Candle with stop 1 pip above the high of the Marubozu.
The Evening Doji Star reversal pattern consists of three candlesticks:
1. A large white body
2. A Doji that gaps above the white body
3. Black body that closes 50% or more into the white body.
Interpretation: A top (bearish) reversal signal
The Morning Star reversal pattern consists of three candlesticks:
1. A large black body
2. A Doji that gaps below the black body
3. Whithe body that closes 50% or more into the large black body.
Interpretation: A top (bearish) reversal signal
Hammer candlestick
A bullish pattern during a downtrend (long lower wick and small or no body); Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick);
Interpretation: A top (bullish) reversal signal
Black Marubozu candlestick
An unusually long black body with a wide range. Prices open near the high and close near the low. ( A Black Marubozu when the candlestick doesn't has lower / upper shadows (wicks).
