Imagine this,
The market forms an evening star in an extended bullish market, signaling that the price will start to decline. However, after the next candles, the price continues to trade upward, so the supposed bearish signal didn’t happen.
That scenario shows the false signal of the pattern, and it’s very common in the market.
You're setting yourself up for losses if you’ve traded solely based on the pattern.
So, how do you avoid that from happening? You must use candlesticks with support and resistance levels.
Read on this lesson to learn the importance of support and resistance when trading candlestick patterns.
If you’ve read TradeGeek from the start, you’ve probably encountered support and resistance a thousand times. Give yourself a tap on the shoulder if you already know, or master, this concept.
But if you’re still unaware, don’t worry, I got you!
Briefly, support and resistance levels are among the most integral tools for predicting future market movement. They’re the backbones of the price action analysis.
What do these levels tell you about the market? It will reverse once the price touches either level.
Despite being the most popular and used indicator in the forex market, support and resistance could still provide false signals. Additionally, you may not be seeing the bigger picture in the market.
Always use multi-indicator analysis or ask the community to confirm the signal.
| Preceding Trend | Signal |
| Uptrend | Bearish reversal |
This is the level where the bears enter the market to create a surge of short (selling) positions.
Thus, the resistance level is at which the bulls are having a hard time pushing the price higher due to the immense selling pressure.
| Preceding Trend | Signal |
| Downtrend | Bullish reversal |
The support level is at which the bears run its course due to the invention of the bulls. The price touches this level, it signals an entry signal for the buyers to execute long (buying) positions.
The surge of buying pressure makes it hard for the bears to drag the price lower – making the price trade in an uptrend.
Okay, you’ve reviewed the support and resistance levels. Now, let’s look at their critical role in candlestick trading, specifically confirming the pattern's signal.
Support and resistance are the backbone of the price action analysis because these levels tell you about the threshold at which the price can’t trade beyond.
Let’s see how profitable it is to use candlestick patterns and support and resistance to predict the price movement.
Say you’ve noticed that the EUR/USD price is already touching its support level at 1.1000, the usual indicator of that the bearish market will reverse to bullish.
However, the candle that touches the support level is very bullish. Since you’ve learned so much about trend trading, you know that this could be a breakout trend.
You decided to wait a little while to confirm whether the price will break out or reverse as the support level suggests. Two candles later, you’ve noticed that the market forms a small candle with an extended lower wick and a long bullish candle – a morning star pattern!
This suggests that the market will indeed reverse to bullish because the pattern is complemented by the support level.
To be safe, you place a stop below the support level in case the market goes against your position (and analysis!).
Now, the support and pattern signals have come through, and the price has climbed to 1.1500. You now have a floating profit of 500 pips!
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