Solution for such a common problem as finding the right spot for position opening is fairly simple – a confirmation candle. The first candle always triggers the strategy or indicator’s signal that informs you how you should open position according to the strategy rules. You have to wait for this candle to end in order to know what you deal with.
This is where most of inexperienced traders make a mistake. They think how signal is activated; they open position just to see the candlestick to go in the opposite direction. So, the first step is to wait for candle to close. It is so-called alert candle which alerts you that strategy conditions are fulfilled. Then it’s necessary to wait for confirmation candle to confirm everything’s fine. This is when you open position.
Use candlesticks in all the strategies and always wait for the second one to confirm the good signal you are receiving. If the signal is fake don’t open position. You should always wait for the second confirmation candle regardless of whether you use support and resistance lines, channels, pivot points or applying rules of any other strategy.
When I say confirmation, what I mean is waiting for the second day, following the signal day, to prove the move.
In other words, if a sell signal is given, traders who wait for confirmation, would take the trade on the third day, after the signal was created (day one), only if the day following the signal (day two), the instrument in question, closed below the signal day’s low.
There are ‘Four Corners of Confirmation’ that must be addressed at this
point.
1. Waiting for confirmation takes patience…and can sometimes lead to missing a trade.
2. Missed money is always better than lost money. Even if waiting for confirmation means letting an opportunity slip by, it’s a whole lot better than jumping the gun into a losing trade.
3. Confirmation does not mean a trade is a sure thing. Pre-determined stops are vital to profitable trading and effective money management.
4. Even with confirmation, more work is required. Traders must take the time to research underlying fundamentals and news with every signal generated. Trading blindly on technicals is just plain stupid.
Here’s what it all really comes down to, waiting for confirmation can save you money and potentially increase your profitability. Why?
When a signal is ‘confirmed’, the market is saying Wall Street believes in the signal and a trend is likely to ensue.And that’s what it all really comes down to…knowing that a signal is more than volatility, something that happens all too often in today’s market.
I want to now take a moment to show you a chart where the ‘signal’ lied, and traders who jumped the gun, probably may be losing.
Signal called a Hammer. The signal is widely accepted as alluding to a pending reversal (the opposite of a Hammer bottom would be a Hangman top.)
Confirmation traders, however, would have never taken a position at all, and would most likely be very happy that they didn't, as of now. At the end of the day, waiting for confirmation is just good housekeeping, at least when trading from candlestick chart-derived signals.
