In the world of trading nothing is guaranteed. Each order placed represents a guess. The key to profits lies in probabilities. Candlestick confirmation is important in Forex because it increases the chances of success.
Confirmation candle definition
As the name suggests, a confirmation candle confirms a trend, breakout or chart pattern. Traders wait for the confirmation candle to fully form in order to avoid trading false breakouts and false patterns.
Why is understanding the Confirmation candle important for traders?
- Trading using confirmation candles can reduce your risks and help you avoid false breakouts.
- Integrating confirmation candles into your trading strategies can save you from overtrading.
- Confirmation candles can help you in selecting more quality trades.
Thorough Confirmation candle Explanation
Candlesticks are dominant charting options in trading. And no wonder, candlesticks provide traders with important information such as Open price, Close price, Maximum and Minimum prices within a given candle.
Often sharp and volatile moves in price can produce a lot of false signals. Confirmation candles represent the close price. Many experienced traders are waiting for the candle to close to see whether bulls or bears are winning and join the trade afterwards. If pattern or breakout is confirmed, newly joined traders place their orders in the breakout direction increasing the probability of success even more.
Example of Confirmation candle in Forex
In the British Pound vs US Dollar example the first candle that closed outside the resistance line represents the breakout confirmation. The trade can be entered right after the candle closes above the line. Stop Loss can be placed below the previous resistance line which can now become the support.
In the scenario when you don’t wait for the candle to fully close, an unfinished candle can give the impression of a breakout, trick traders into placing orders, only to reverse later and leave a shadow. False breakouts are common in trading.
The same kind of thinking is true for chart patterns. Most chart patterns are ready to be traded once they reach the breakout point. It’s important to wait for the confirmation candle to close before joining the trade. As already mentioned, the candle increases your chances of successfully closing orders.
Keep in mind the higher the time frame, the better confirmation candles work. The reason behind this is a fact that lower than 1 hour time frames have a lot of noise.
FAQs on Confirmation candle in Trading
Does a confirmation candle really work?
Confirmation candle increases the likelihood of success. Traders wait for the confirmation candle to fully close in order to keep themselves from entering false breakouts and false pattern formations.
How long does it take for a confirmation candle to form?
The answer depends on your time frame of choice. In case you are 1 min candles, it takes 1 min to fully form a confirmation candle. Just keep in mind that most patterns work better in higher time frames.