All newcomers who just try to understand the basics if the trading market and to predict its direction of moving pay more attention to the range pattern, which can be considered as one of the most famous price patterns. The principal of the range trading is the following: the price is moving from a horizontal line which is lower and from the upper horizontal line too. These directions are called “support” and “resistance”. What can be interesting not only for beginners but for experienced traders too is that such approach shows sideways and “trend-less” price movement. Because of that traders expect easy income.
While this condition of prices stays, traders have a big opportunity to earn more and more money by downplaying the resistance area and loom long around the support area.
Every trader with experience knows that there is a big risk relying only on these points when prices reach one of the two lines. Because of that, they use some more additional information. Top method is to use reversal candlestick patterns, they can make a trader more confident, just look how effective they are.
And we can give you some examples.
It is a well-known bullish reversal candlestick. How does it look like? It has not a big body in black and white colors, the body is a half or three times smaller than a lower shadow. The upper shadow considered to be non-existent because of its tiny size.
How does it work? When the price reaches the high of the candlestick, a hammer will signal by an alert. If we move a take profit order to the other place (at the resistance level), we can also set a protective stop-loss to the bottom.
The Shooting Star
How does it look like? It’s quite different from the previous one: the body is also small but has only one of two colors, now a lower shadow is non-existent because of the size and the body length is 2-3 times shorter comparing to an upper shadow. In fact, it is a hammer turned upside down, which can be found by the resistance line not far from the upper part the of range.
Also, the hammer signals about buying, the shooting star is focused on the selling if it was recognized near the resistance.
The signal is alerted when prices reached the lower part of the candlestick. On the other hand, when the direction of prices’ moving is opposite, a trader can set a protective stop-loss above the resistance. By doing this they can save money.
The Bullish Harami
The body of this pattern is long and can be of any color. After that, there is a small body of any color too, which follows the first one immediately. It should be smaller for being enclosed by the bigger body.
The pattern can be called “bullish” only when it is seen near the range bottom part. To make the signal triggering the price should exceed the longer body upper part. Using this pattern the best solution is to set a stop-loss under the support line and take gains at the top of the range, this will help you to increase safety for profits.
The Bearish Harami
One more pattern, which has an opposite way of working compared to the previous one. Its signal focuses on selling, the pattern itself can be found near the resistance line. A sell signal can be usually triggered when the price falls below the longer body below.
A stop loss for protection a trader can set near the top range area, however, the take profit levels can be on the opposite side – at the lower range part.
In the last part of this article, we will be talking about traditional indicators and reversal patterns. Stochastics and other traditional indicators can recognize when the market is oversold or vice versa overbought. Using them you get some confirmation that the candlestick patterns do not lie.
How to understand the traditional indicators? They have a scale of 100 points, and when the level is fewer than 20 it means the market is oversold. If the level is 80 and more the market is overbought.
When you have understood that the market is oversold or overbought use some reversal patterns because they really help to predict the pattern. Let’s look at the following situation: one of the patterns which we mentioned before is seen near the range’s top and the Stochastic indicator is more than 80, you can trust the pattern more. It works in the opposite direction too: the combination of the low Stochastic indicator (under 20) and reversal pattern near the support line can be a good signal.
These patterns are not trustful when they show absolutely opposite numbers and positions. For example, the Stochastic indicators can be fewer than 20 and more than 80 at the same time, if you see such situation do not rely on the numbers.
It does not matter whether you are a newcomer or a master of trading if you want to use range trading, it will bring profits to everyone. But, of course, there are a lot of risks and you should be aware of them checking the results of all patterns.
Remember that price can never be predicted even if you use such a good method.
Also, do not forget to use traditional bounded indicators in order to enhance the reversal patterns’ reliability. It is a common practice to use Oscillators with the reversal candlestick patterns when the market is in oversold or overbought condition. The first helps to prove the second one and if there is an obvious result you can trust them.