I wanted to share this chart with you, as it highlights some important issues regarding timing, and in particular the need to be patient and not rush in and open a position as soon as we see a signal. Candlestick analysis is all about waiting for the signal to be confirmed as true or false – once this has happened then we have a much better chance of success, rather than rush in at the first opportunity without bothering to wait, frightened that the move will get away from us.
In this case we are looking at the daily chart for the CHF/JPY currency pair, and let’s start with the bearish engulfing signal on the 21st December 2008, following a shooting star candle. Had you been looking at this chart without the benefit of hindsight you would have seen the signal, and been waiting for prices to fall the following day, and no doubt rushed in to open a short position based on one candle. Your position would have closed at a loss, as prices moved higher in the day. On the other hand had you waited, then by the end of the day’s trading you would have known that the signal was false, as the charts were now telling you, loud and clear. Six days later we see another bearish signal, a shooting star after a long rally – a sign of weakness, when combined with the earlier bearish signal, this now starts to create a picture. Finally on the 5th January 2009, we receive a bearish engulfing signal which now confirms the weakness, and we would now be looking to trade short with a much better chance of success. Being patient is one of the hardest lessons to learn in trading, but it is one you need to learn, and learn fast. Chasing the market is the quick way to lose all your capital! So be patient and wait for the signal to be confirmed, and if it isn’t just remember that the signal is still there, and could be the first sign of a change, but only the FIRST sign!
Now the second example is really confirming the above in reverse with a bullish engulfing signal on the 27th February – a great signal and we open our position on the 28th February and go long – well in this case we may have survived, or we may not, depending on how tight our stop loss was, but again we are too early because we have been too impatient, and frightened that the move will get away from us. Had we waited, six days later we see another bullish engulfing candle, which when added to the first signal gives extra weight to our decision, and therefore a better chance of success. Now that bull rally is still continuing today, over one month later. So the moral is, be patient – I know it can be hard at times, but if you are constantly chasing the market you will lose – be patient and wait, and then use the earlier signal as a confirmation of a later one, adding weight to the decision. You may still be wrong, but at least you have waited and not rushed in at the first opportunity.
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