Key K-line usage skills
Everyone knows that the candlestick is the most sensitive and the earliest technical standard to identify the trend change. However, the chart is composed of thousands of candlestick lines, and most of them are similar. Many people feel overwhelmed when looking at the densely packed candlestick lines on the chart. Which candlestick line can represent the trend change, how to identify it, and how to use it?
At this time, we need to know which candlestick line is the key candlestick line. Because the key candlestick line is the most important and valuable among all the candlestick lines. As long as we grasp the key candlestick line, we can grasp the key point of the market trend change, which is very important for our profit.
Today, I will start from the actual combat, explain the standards of 4 key candlestick lines, and their use skills in actual combat. I believe it will help everyone's trading.
1. What is the key candlestick line?
The key candlestick line refers to a candlestick line that may change the current trend, such as a candlestick line that accelerates in the trend, enlarges the space, suddenly changes the trend slope and rhythm, breaks through the candlestick line that changes the oscillation pattern, forms the direction change of the reversal candlestick line, etc., these are all key candlestick lines.
I will use a picture to simply illustrate.
The picture is a 15-minute candlestick chart of spot gold. After the market rose sharply the day before, a horizontal rectangular consolidation structure was formed at a high position. The consolidation continued until 8:30 pm Beijing time the next day. A large positive candlestick line broke through the consolidation range, confirming the market break and continuing to rise.
This large positive candlestick line is the key candlestick line, with a very obvious feature. The space of the entire consolidation pattern is only 9.5 US dollars, and the space of that break candlestick line is 9 US dollars. It is very obvious that the rhythm of the candlestick line has changed, and the trend has become much stronger. The market sentiment has appeared, and the effectiveness of the break is very strong.
Why do we use the key candlestick line?
The profit and loss ratio is good. The candlestick line is the smallest unit of the trend. A trend is composed of dozens or even hundreds of candlestick lines. Finding the change of the market from a key candlestick line and entering the market for trading is the most cost-effective technical standard. Compared with the lag of other indicators, it will waste the market space, and the advantage of the key candlestick line is very large.Additionally, the recognition of key candlestick patterns clearly defines trends, while many indicators only provide a general area where the market may reverse, such as overbought or oversold zones, making it difficult to trade directly due to their broadness and requiring the use of other indicators. Key candlestick patterns, however, do not necessitate this.
Next, I will explain the technical criteria for four types of key candlestick patterns and their practical application techniques.
2. Key candlestick patterns at significant support and resistance levels
Trading at support and resistance levels is a pattern many friends use, which is relatively simple and effective. However, many friends also encounter various issues in this trading pattern.
For instance, how should one enter the market when the price reaches a support or resistance level? If you enter directly, you might get caught in a continuous trend; if you wait, you might miss the opportunity.
Another example is whether to stop loss on positions caught at key levels. Logically, the higher the price falls, the higher the probability of a reversal, right? What if you stop loss at the low point? How to stop loss most reasonably?
Sometimes, support and resistance levels are not very standard positions but rather a small range, making it technically more challenging to find entry and stop loss points within this range.
However, at significant support and resistance levels, combining key candlestick patterns can greatly improve the situation.
The chart shows the candlestick chart of the US dollar against the Japanese yen, with the left side being the daily chart and the right side being the 4-hour chart.
The market started to decline from 145, testing the support below. There are two relatively obvious support levels, one being the previous low at 138.3 and the break point at 137.9, forming a support area.The entire area is relatively wide, making it impossible to enter the market with precision.
After the market tests the support area, do not enter for the time being. Switch the candlestick chart to a 4-hour timeframe. After a key candlestick appears at the 4-hour level, open a position.
On the right, after breaking through the support at 137.9 at the 4-hour level, a doji candlestick quickly forms. The amplitude of this doji is significantly larger than that of the previous bearish candles.
After the closing, you can open a position. Set the stop-loss for going long below the key candlestick. Then, a large bullish candle quickly forms, and the increase continues to expand, indicating a market reversal upwards.
If you do not use the key candlestick to enter, when the market first tests 138.37, you open a long position. The market then continues to move downward by 100 points, and the order would be trapped by 100 points. The order might be stopped out due to the loss, or the trapped position could affect the mindset, leading to a failure to capitalize on the reversal opportunity.
Incorporating key candlesticks makes the trading criteria clearer and significantly reduces the difficulty of execution.
3. Key candlesticks at breakout points
Breakouts are another popular trading pattern, suitable for entering the market after a consolidation phase ends and a trend begins.
The biggest issue in breakout trading is encountering false breakouts, where the market feints, lures the orders in, and then returns to the consolidation range, or even moves in the opposite direction, leading to losses. Grasping key candlesticks can help distinguish between genuine and false breakouts, increasing the success rate of breakout trades.
In the chart, it's a 15-minute candlestick chart of the Euro to US Dollar. After a narrow range consolidation, the market breaks downward. The key candlestick for the breakout is a solid bearish candle with no upper or lower wicks, indicating a strong breakout momentum. Moreover, the space of this breakout key candlestick accounts for about 75% of the entire consolidation range, further validating the strength of the breakout. After the breakout, the market continues to decline.You may have noticed that the key candlestick at the breakout point is similar to the example given at the beginning of the article, except that one is for going long and the other is for going short. These two examples further illustrate the importance and effectiveness of the key candlestick in breakout trading.
The key candlestick at the breakout point is applicable to different levels and different patterns of breakout trading.
I have also summarized the technical details of the key candlestick at the breakout point.
(1) The breakout candlestick is a solid bullish or bearish candlestick, or a candlestick with very small wicks.
(2) The amplitude of the breakout candlestick should be at least 60% or more of the consolidation range (for narrow consolidation patterns such as rectangle consolidation and flag consolidation), for broader patterns like triangle consolidation and top/bottom consolidation, the proportion can be appropriately reduced, but should still be above 40%.
4. After a significant one-way movement in the market, a candlestick signaling a halt in the rise or fall appears.
Catching reversals is one of the most enticing trading patterns, as it is essentially done at the tops and bottoms, where profits are substantial after the market reverses, and capturing the market's tops and bottoms is the most satisfying.
However, many friends end up with unsystematic guessing of tops and bottoms, either being inaccurate and frequently stopped out, or not stopping out and getting deeply trapped.
We can use key candlestick patterns to catch reversals and increase the success rate.
The chart shows a 1-hour candlestick chart of the British Pound against the US Dollar, where the market started from 1.260 and continued to rise until it formed a high-volume bullish candlestick near 1.288.The fluctuation range of this bullish candlestick is larger than that of any other bullish candlestick in an uptrend, representing a pattern of exhaustion after a surge. Subsequently, the market formed a significant bearish candlestick moving downwards, confirming the trend reversal. At this point, it is possible to enter a short position, with the stop-loss placed above the high point, and the market then experiences a substantial decline.
There are two key points to note when using this critical candlestick:
(1) There was a sustained one-way upward trend before the reversal.
(2) The fluctuation range of the critical candlestick has noticeably increased.
In the chart above, throughout the entire upward trend, the largest bullish candlestick is the one I have marked, which is about 40 points, while the space of the last surge reached over 70 points, and the subsequent bearish reversal also had a space of nearly 40 points.
5. Key Candlesticks for Percentage Pullback
Trading on pullback entry offers the advantages of better pricing, smaller stop-loss space, and a larger reward-to-risk ratio, and it is widely used in trading.
However, in practice, where exactly should one enter on a pullback? How should one set the stop-loss for a pullback entry? Many people struggle with these details, either being stopped out frequently or missing opportunities. In fact, using percentage pullbacks in combination with key candlesticks can effectively manage pullback entries.
The chart shows a 1-hour candlestick chart of spot gold, where the consolidation in the previous three to four days formed a triangular pattern. The triangular consolidation was broken by a strong bullish key candlestick, confirming the bullish trend. The space of the breaking key candlestick was very large, reaching 180 points. Entering directly would result in a too-large stop-loss, so it is better to wait for a pullback entry.
Connect the previous low point from the break to the upward golden ratio line to find the percentage pullback position.After the market trend tested the 38.2 percent Fibonacci retracement level downward, a significant bullish candlestick emerged, with its body engulfing the entire space of the retracement candles. The entire retracement spanned 110 points, while the key bullish candlestick accounted for 80 points of that space, making it quite prominent.
Upon the emergence of the key candlestick, one should enter the market with a stop loss set below the low of the preceding candlestick, after which the market can experience a substantial uptrend.
The key candlestick for percentage retracements should be a large bullish or bearish candlestick or a doji with a long wick, indicating a strong reversal. Additionally, the volatility space should be large and noticeably greater than the space of the candles within the retracement trend.
6. Precautions for using key candlesticks:
(1) When trading with different time frames, combining the key candlesticks with the smaller time frame while the larger time frame trend is clear can yield more ideal results.
(2) It is essential to select clear and recognizable patterns for trading with key candlesticks. If a pattern is unclear, twisted, or ambiguous, it is better to refrain from trading. It's better to miss an opportunity than to force a trade. Stick to what you understand.
(3) The core of effectively using key candlesticks lies in mastering the fundamental knowledge of candlestick charts. "Japanese Candlestick Charting Techniques," translated by Ding Sheng Yuan, is currently the best book I find for learning about candlesticks. I recommend everyone to take a look.
In conclusion, I would like to reiterate that in our brief lives, we will experience many things. However, you will find that sometimes, making the right choice is far more important than hard work.
For instance, if you choose to study diligently and get into a good school, forgoing immediate pleasures, your future life will be much smoother. Or, if you choose to delve deeply into trading from the start, understand the facts and patterns, grasp some key points, and clarify the overall logic of trading, you will find it easier to achieve profitability than others.
Thus, in any endeavor, it is crucial to think and learn first before making so-called efforts. Otherwise, if the direction is wrong, all efforts will be in vain. Let us all encourage each other in this regard.