Candlestick Patterns in Futures
Candlestick charts provide traders a visualization of price movements since the 18th century. Certain candlestick patterns can help finding reversal or continuation points in the futures market.
Here are my favorite Candlestick Patterns in the Futures Market:
In every one of these patterns the price performs a clear turnaround. Don’t focus on only one of these. If you overlap multiple candles, for example bullish engulfing and morning star you’ll notice that these are in fact the same patterns.
The Stopout Pattern
This is an interesting one. It’s called stopout pattern because it implies that in the second candle people get stopped out at the previous high (long) or low (short), then it forms an engulfing where again stop outs happen at the low (long) and high (short). The third candle then indicates the beginning of the real move after too early positioned traders were knocked out of the market.
The price in the second candle performs a 50% correction into the previous one and then closes around 25% of the previous candle range above (long) or below (short). This is a momentum pattern, which should not be used to predict long moves, but rather short ones with a tight stop.
What is inside the candle?
A candlestick is a representation of Open, High, Low and Close price of rather random points in time with a fixed frequency. To further examine what happened during the fight of bulls and bears inside the candle you can look at the market profile inside. It can help also to set important levels for the next candle.
How to get into these patterns?
There are different ways to enter and where to place the stop loss. You can enter directly at the first tick of the next bar or place a stop order a few points away from the high or low of the candle pattern. The stop can be set very tight at 25% 50% of the last bar or over the high/low of the last bar. You see there are many options. I like to use a scaling in technique with 3 orders to avoid getting stopped out at the top unnecessary and to deal best with multiple situations that can happen after the formation took shape. You can see an example in the screenshot.
How much volume was traded inside a candle is a very valuable information. If you do a clean analysis of all the occurrences of certain, well defined reversal patterns you can also spot volume levels that can result to a reversed position eventually.
Where is the pattern?
An important point, because reversal patterns can be part of a primary trend, outside or on an Exponential Moving Average, Trendline, Support or resistance level etc. This should be taken into the analysis of the pattern and can easily be listed in an excel sheet for a full probability analysis of the setup.
Summing it up
Here’s a checklist of the points that can help your candlestick trading:
Learn new patterns (from others or your own charts)
Market profile analysis
Excel Sheet or automated analysis of the patterns to find out where it works (trend filter, on certain lines etc.)
Scaling-in-technique to be able to deal with more situations