In the previous post I provided a review of how to read a candle identifying the high, low, open and close levels. Now let’s examine how we can identify those candles that offer the best potential. If the wicks of a candle show us the extremes then candles with very long wicks provide a view of where price action is potently rejected.
There are multiple candle patterns that offer potential reversal signals but let’s start with the most basic. A candle with a small body and large wick where the wick is 50 % or more than that of the body and it pierces or roughly touches and retreats from a barrier or trend-line where a reversal would be expected. This provides an entry point and the stop is placed at the extreme of the candle.
Tip: Remember to wait until the candle has closed to make your trade. Also, this works on all time frames but becomes more effective from the 1 hour candles and greater.
Here’s an example on the EUR/USD 1 hour chart from just last week: You can see where a barrier had rejected the price on two previous occasions and the the trade would have produced a substantial risk reward ratio.