The fundamental premise of this CFD trading strategy hinges on harnessing the power of Japanese candlestick patterns to pinpoint a price level that has been 'rejected' by the market. This strategy, also known as Rejection Candle Trading, is a crucial aspect of understanding price action in CFD trading.
It focuses on the intricate components of a rejection candle and emphasizes the significance of 'support' and 'resistance' levels. Comprehending these levels enables traders to discern potential turning points in the market, thereby providing invaluable insight into market sentiment. This strategy also provides guidance on how to trade effectively using rejection candles, underscoring the importance of risk management in CFD trading to mitigate potential losses.
Furthermore, it highlights common pitfalls traders often encounter and provides practical advice on how to steer clear of them. Delve deeper to arm yourself with this comprehensive strategy that will enhance your trading prowess and decision-making abilities in the dynamic world of CFD trading.
Contents: Price Action CFD Trading Strategy: Rejection Candles
A ‘rejection candlestick’ communicates the rejection (or reversal from) higher or lower prices. Naturally, it is found when using Japanese candlestick charts. The candlestick shows that the market has pushed in one direction but then been rejected.
In the realm of Contract for Difference (CFD) trading, price action refers to the movement of a security's price. Price action is often represented graphically on a chart and is a key tool for CFD traders to predict future price movements. It's crucial to understand the concept of price action and how it can be used to make informed trading decisions.
The ‘rejection candlestick’ looks exactly like a shooting star bearish reversal candlestick or the bullish hammer reversal candlestick pattern. It is also known as ‘pin bar’ pattern (short for Pinocchio!). The main characteristic is the long wick in contrast with a short body.
What distinguishes this strategy from the identical Japanese candlestick pattern is where it happens on the price chart. The rejection must take place at a significant high or low in the market.
A rejection candle is a crucial component of price action trading. It represents a scenario where the market attempted to move in a particular direction but was rejected.
In this chart it can be seen that the evening star pattern happen at the previous high in the price. What it shows us is that bulls tried to take the market higher but bears took control and forced the price back down again.
The fact that it happened all within one timeframe (whatever timeframe the candle is) shows us that there has been rejection. The previous high in this case shows us that the rejection was of something significant – an attempt by the market to make a higher high - a characteristic of an uptrend.
The point of the above chart is to show what is integral to this trading system. The rejection candle must occur at an area on the chart that is worth rejecting.
NOTE: A common mistake by newbie traders upon learning a candlestick pattern is to trade every candlestick pattern they see. A cursory glance at any price chart will quickly show that there are many ‘failed’ candlestick patterns. The point is this – the candlestick reversal pattern will only consistently work at important price levels.
This leads us to the next question. What is an ‘important’ price level?
The list below highlights six areas of the chart in which rejections should happen. So make sure the rejection you are considering as using as a trigger to enter a trade is at one of these areas on the chart in order to increase your overall probability of success.
There are other things like pivot points but this strategy is better as KISS (keep it simple stupid!)
Support and resistance levels are crucial in understanding market sentiment and making trading decisions. These levels represent price points at which a stock typically does not move beyond.
Understanding market sentiment is crucial in making trading decisions. It refers to the overall attitude of investors toward a specific security or financial market. It is the tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market.
Market sentiment is typically considered as being bullish when prices are expected to rise, or bearish when prices are expected to fall. It can be influenced by a variety of factors such as economic indicators, natural disasters, political instability, and many more.
The below chart has been picked at random to give some indication as to how this strategy can be employed, giving examples of each of the above price areas.
Let's run through the price action ---
No trading strategy works perfectly – and that’s without consideration of important ingredients to trading including risk management and trader psychology. But there are some rules of thumb to increase the probability of each trade by avoiding some common pitfalls.
When looking at good examples, we focused on finding ‘important areas’ on the price chart in which to take the rejection signals. In the bad examples, we are focusing on some reasons that might increase the probability that the patterns fail in order to decide which rejections to ignore.
These are four rules of thumb for which rejections to ignore:
By ignoring trades that meet one of the four previously listed criteria, we can filter out the ‘bad trades’. It’s no mistake that top of the list is going against the trend. Counter-trend trading is very difficult and typically something that should only be attempted by advanced traders with a very fine-tuned system with very well-defined risk: reward criteria for when to take such trades. The other three are really about the 'quality' of the setup in which the rejection is happening. Taking only the highest quality setups means fewer trades but greatly improves the win:loss ratio of the trading system.
Rejection candles, also known as pin bars, are a type of candlestick pattern that signal a potential reversal in the market trend. They are characterized by a small body and a long wick, indicating that the market rejected higher or lower prices.
Trading using rejection candles involves identifying these patterns and then entering a trade based on the expected reversal. For a bullish rejection candle, you might consider entering a 'buy' trade after the candle closes, with a stop loss below the low of the candle. For a bearish rejection candle, you might consider entering a 'sell' trade with a stop loss above the high of the candle.
Risk management is a critical aspect of CFD (Contract for Difference) trading. Some risk management techniques include:
By employing these strategies, traders can protect their capital and potentially improve their trading performance.
Despite the potential profits, CFD trading also comes with its fair share of risks. Here are some common mistakes that traders make and how to avoid them: