5 most useful K-line patterns
Many people say that trading based on a single candlestick is too difficult because the changes are rapid, the sensitivity is high, and sometimes before you can figure out a pattern, the trading opportunity has slipped away.
However, some argue that the essence of trading is simplicity itself, and those who can profit from a single candlestick are the chosen ones who have achieved mastery.
In reality, only those of us who have been trading for years know that trading is not such a mystical thing; it's all about mastering some key points and practicing continuously.
The status of candlestick charts among all technical indicators is naturally high because they directly represent the changes in price on the chart. Compared to other indicators, they are the most flexible and also the most intuitive.
But correspondingly, behind this flexibility lies a disadvantage: the signals given by candlestick charts are not stable enough, and the patterns can be quite unpredictable, making it feel like no matter how you trade, you can't do it well.
So today, I will combine some of the difficulties in candlestick trading, along with my many years of trading experience, to share 5 candlestick patterns that I find most useful for different scenarios. I will also mark the points to note, so you can learn on your own.
The 4 criteria for a good candlestick pattern are:
(1) High frequency of occurrence. Only when a candlestick pattern is common can it ensure the frequency of trading. Patterns that don't appear once a year will make people wait so long that they lose patience and confidence, and the trading will go awry.
(2) Easy to trade. The pattern of the candlestick is well-defined, and it is easy to define the details of the trading system according to the standard of the pattern. It can identify clear entry points and stop-loss points, making it easy to execute and trade.
(3) Suitable for different varieties. These candlestick patterns can be used across different varieties, which can increase the frequency of trading and also facilitate the diversification of risks.(4) Suitable for different cycles. This pattern can be used across various cycles, providing greater flexibility in trading. We can then choose short-term, medium-term, or long-term trading strategies that suit our own circumstances.
1. Decapitation K-line
This pattern is more often used in the downtrend where a bullish market transitions to a bearish one, and it is considered a bearish signal.
The term "decapitation K-line" can be understood literally, as it refers to a K-line that severs the bullish trend and pattern. In a continuous uptrend, a phase of consolidation forms at the top. At the end of this consolidation, a large bearish candlestick directly breaks through the consolidation pattern and breaches the support, also cutting through the 5, 10, and 20 moving averages in one K-line.
The chart shows the 1-hour K-line chart of the A50 index.
After a series of consecutive rises, the market formed a consolidation pattern at a high level. At the end of this pattern, a large-bodied bearish candlestick forcefully broke through the consolidation and cut through the three moving averages, forming a decapitation K-line. Subsequently, the market experienced a significant decline.
The entire consolidation pattern spanned 108 points, while the breaching bearish candlestick covered 170 points, indicating a strong and clear bearish confirmation.
After the breach, the bearish trend was established, and one could trade in line with the 1-hour trend in a bearish direction, or also trade in bearish waves in smaller timeframes.
The following image shows the subsequent trend, using the death cross of the 15 and 30 moving averages in the 15-minute timeframe for wave trading, which has a high success rate and a favorable risk-reward ratio.
The chart illustrates the 15-minute K-line trend following the 1-hour decapitation K-line.Trading with a double moving average for short positions, with a stop loss at the high point of the pullback, there are three profitable opportunities in the chart, and the profit space is quite large. Although there will also be stop loss signals, the number of stop losses is small, and the stop loss space is limited, so the overall profit effect will be very good.
Points to note:
1. The space of the "decapitation" candlestick should be large, greater than the consolidation pattern. This candlestick pattern can be used in different time frames.
2. The pattern of rising after a downtrend, combined with MACD
This is also a candlestick pattern that indicates a change from bearish to bullish, and it should be combined with MACD as a technical criterion. Once the pattern is formed, the probability of a subsequent price rise is relatively high.
(1) During the one-sided downtrend, the candlestick is a continuous small candlestick downtrend (there is no reasonable pullback in the downtrend, and the trend continues to decline with small candlesticks, the space of the small candlesticks is relatively uniform, and the probability of a pullback or reversal is high after the trend stops).
(2) The MACD energy column has been running below the zero axis and has not crossed above the zero axis.
(3) At the end of the trend, there is a larger candlestick with increased volume, followed by a bottoming consolidation on the candlestick chart, during which the MACD energy column begins to shrink and remains below the zero axis.
(4) Until the energy column turns above the zero axis and the MACD moving average crosses above the zero axis, it signifies a reversal to a bullish trend.
At this point, look for opportunities to enter long positions on the candlestick chart.The chart shows the 15-minute candlestick chart of the A50 index.
After a wave of bearish decline, the candlestick shows a pattern of volume increase followed by a stabilization after a drop, then it enters a consolidation phase, with the MACD energy column consistently staying below the zero axis throughout this period.
At the end of the candlestick consolidation pattern, the space between the candlesticks narrows, and the MACD energy column and moving averages gradually cross above the zero axis. At this point, there is a possibility of a price increase. On the candlestick chart, one can consider entering a long position by breaking the downtrend line, with a stop loss set at the previous low point.
Points to note:
After a bearish decline, it is crucial for the market to consolidate at the bottom, as this is an important indicator of potential stabilization and reversal.
This pattern can also be used for operations at the top to turn bearish.
3. Small candlestick arrangement for consolidation pattern
A clear pattern of small space consolidation with candlestick formations appears, with a series of small candlesticks lined up in a row, numbering more than 10. The probability of the subsequent market breaking out in the direction of the trend is high.
The chart is the 30-minute candlestick chart of the A50 index.
On the left side of the chart, after the market fell on the previous day, it entered a horizontal consolidation phase. At the end of the consolidation, the space between the candlesticks contracted significantly, and then it chose to break out in the direction of the trend and continue to fall.On the right side of the chart, a similar trend is observed, with a persistent bearish market operation. However, the consolidation period is longer, and the consolidation ends with a small arrangement of K-lines, eventually leading to a breakdown and decline.
At the end of the consolidation, the contraction of the K-line space is a manifestation of accumulating strength, much like a spring being compressed, and once it breaks through, it will result in a significant movement.
Points to note:
There should be a clear bullish or bearish trend beforehand, and trades should be conducted in line with the trend.
The space of the K-lines arranged in a row should be noticeably smaller than the previous K-line patterns, and the size of the consolidation K-line space should also be similar.
This technical pattern tends to perform better in commodities with strong trends.
4. The pattern of bullish and bearish washing around the moving average
There is a recognizable pattern of oscillating K-lines, and when this pattern appears, it indicates that the trend is in a state of oscillation. In practical operations, focus on the breakout trades after the oscillation pattern is completed.
Set a 60-period moving average on the chart. When the moving average is flat, and the K-lines run above and below the moving average with it as the central point, it indicates that the market has entered an oscillating trend. At this time, you can draw the pattern of the market oscillation, which is usually a rectangular consolidation or a triangular consolidation, and enter the trade after the pattern breaks.
The chart is a 1-hour K-line chart of the A50 index.The 60-day moving average begins to flatten after a continuous rise. During the phase of persistent flattening, the K-line oscillates around the moving average, with the moving average as the midpoint, creating a wide-range fluctuation and forming a rectangular consolidation structure. At the end of the oscillation, the moving average gradually rises, indicating that the trend is developing towards a bullish direction. Pay attention to the trading opportunities for a bullish breakout.
After the final bullish breakout, enter a long position. You can aggressively set the stop loss at the previous low point of the breakout (since the oscillation period is long, the breakout success rate is relatively high, and the stop loss can be aggressive). Subsequently, the market rises rapidly.
Points to note:
Observing the flattening of the moving average is a key point in trading. There is a trick to use: take 40 K-lines as a standard. If the moving average has been flat for more than 40 K-lines, then pay attention to the market's consolidation pattern, whether it is a rectangle or a triangle, and formulate a trading plan. Patterns with less than 40 K-lines should be disregarded.
Try to use this technical standard at a K-line level of 15 minutes or higher.
5. The K-line pattern of stopping and turning back
Among all bottom reversal patterns, the V-shaped reversal is very rare. Most reversal K-lines will retest after stopping and turning upward, and this retest is called the stop and turn back. It is only after the second rise that the real trend is established.
This kind of turning back pattern is a very valuable K-line pattern for trading, especially when there is a deep retracement during the turn back, and the low point of the retracement is very close to the previous low. After entering the market, place the stop loss at the previous low, and the safety will be very high, and the stop loss space will not be large. After the market stabilizes in a deep retracement, the success rate of trading and the profit-to-loss ratio are both good.
In the figure is the 1-hour K-line chart of the A50 index, with two trading opportunities shown in the chart.
On the left side of the chart, after a significant drop in the market, a retracement occurred from 12499 to 12696. After the first wave of the retracement, the market underwent a deep retracement. The market consolidated at the 61.8% Fibonacci retracement level, showing signs of stabilization. At this point, going long with a stop loss at the previous low would be appropriate. After the market rallied to a high point, it did not continue to rise.The market trend on the right side of the chart continues to decline. The market rose from 12,353 to 12,527, forming the first wave. Subsequently, the market underwent a deep correction, also reaching the 61.8% Fibonacci retracement level, and then began a contraction and consolidation with small candlestick patterns. The entry stop-loss was set at the previous low point, and after that, the market rose and broke through the high point.
Summarizing these two trades:
The first order, although the market only broke through the previous high, had a risk-reward ratio of nearly 2:1 due to the entry at the 61.8% retracement level, which allowed for stop-loss protection.
The second order saw the market break through the previous high, with a risk-reward ratio of over 3:1, which is quite reasonable.
Points to note:
One should selectively trade patterns that indicate a reversal after a stop. This should be done when the market has a significant drop with increased volume, gains bottom support, and multiple indicators resonate, indicating a high probability of a reversal.
Aggressive traders can place orders directly at the 61.8% level, while conservative traders should observe the market's performance at the 61.8% level and enter after it stabilizes.
Not all markets will retrace to the 61.8% level. More aggressive traders can enter at both the 50% and 61.8% levels to avoid missing opportunities.
Regarding the five types of candlestick patterns discussed today, I have two more points to mention:
All patterns can be used for direct trading or as a standard for judging direction. For example, patterns around the moving average that indicate a wash of long and short positions. After a 1-hour market break and consolidation, the 1-hour bullish trend is established. After breaking in, one can also switch to a 15-minute candlestick chart and trade in the direction of the 15-minute uptrend.Additionally, candlestick trading is a technical method that improves with practice. Before engaging in actual trading, it is essential to review past trades and practice frequently. Please always remember that sharpening the knife does not delay the chopping of wood.