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MOVING AVERAGE

CANDLESTICK PATTERNS WITH A

MOVING AVERAGE
By Galen Woods in Trading Setups on March 18, 2012

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Candlestick patterns have little value without the right trend context. Hence, a
popular trading setup uses candlestick patterns with a moving average. The moving
average provides a simple way to find the trend context.

This review assumes a basic understanding of candlestick patterns. Look

at the Encyclopedia of Candlestick Charts (Wiley Trading) by Thomas Bulkowski for a
solid reference on candlestick patterns.

Despite their often mystical names like engulfing and shooting star, candlestick
patterns are not magical. They are simply well-defined price action patterns. Focus
on the price action: high, low, open and close. Forget the names.

In our trading examples, we will use a 20-period exponential moving average (EMA)
to define the trend and support/resistance levels.

Learn: Day Trading With Only The Moving Average

TRADING RULES FOR CANDLESTICK WITH

MOVING AVERAGE
LONG TRADING SETUP
1. A pullback down to the 20 EMA

2. A bullish candlestick pattern overlapping with the 20 EMA

3. Buy as price breaks above the high of the last bar of the candlestick pattern

SHORT TRADING SETUP

1. A pullback up to the 20 EMA

2. A bearish candlestick pattern overlapping with the 20 EMA

3. Sell as price breaks below the low of the last bar of the candlestick pattern

CANDLESTICK PATTERNS WITH MOVING

AVERAGE TRADE EXAMPLES
WINNING TRADE – BEARISH ENGULFING
This is a candlestick chart of EUR/USD forex. We looked out for candlestick patterns
with a moving average.

A trade setup came as a bearish engulfing candlestick pattern formed at the 20-
period EMA. The next day was a strong bear trend bar. It triggered our sell order at
the low of the pattern. This trade followed through quickly.

Look at the top of the chart. After a test of the previous trend high, prices reversed
down with strong momentum.

The pullback upwards tested the 20-period EMA and the low of a prior trading range
(the blue horizontal line). The bearish engulfing pattern showed strong rejection by
these resistances. This trade had the potential to catch the beginning of a new
downwards trend.

When trading candlestick patterns with a moving average, you can use the distance
between the candlesticks and the EMA to judge the momentum. In this case, the
large gap between the candlesticks and the EMA showed the bearish momentum.

LOSING TRADE – BULLISH HARAMI

This is a daily chart of Marshall & Ilsley Corporation. We saw a bullish harami right
on the 20-period EMA. The next day broke the high of the inside bar. We went long
but the trade went against us.

A key candlestick principle is to wait for confirmation. Many traders wait for one
more candlestick after the pattern for confirmation.

However, waiting for confirmation indiscriminately is not a good idea. This is

why my trading rules are to enter upon break of the high or low of the pattern. Of
course, for the weaker trading setups, waiting for confirmation is prudent.

Here, we saw clear downwards momentum. Prices also closed below the EMA with
ease. Given such strong momentum downwards, it was wiser to wait for bullish
confirmation.

The confirmation never came. Hence, an astute trader could have avoided this trade
by demanding some signs of returning bulls.

REVIEW – TRADING CANDLESTICK

PATTERNS WITH A MOVING AVERAGE
Candlestick patterns are well-defined pieces of price action with clear underlying
market concepts. Beginners will find candlestick patterns useful for picking up price
action.

Using candlestick patterns with a moving average helps to clarify the trend. It also
helps us assess the candlestick patterns better. Hence, combining candlestick
patterns with a moving average is a simple yet effective trading approach.

However, candlestick patterns are for clarifying price action.

Do not use them to force rigid interpretation on price bars, give them mystical
names, and expect predictable results. Focus on the context, understand the
nuances within each pattern, and be flexible when trading them.

Only For Candlestick Enthusiasts: Trading Candlesticks With RSI & The Sakata
Method Review.

For more information on trading candlestick patterns with a moving average, take a
look at the following:
 An experienced trader shares how he trades using candlestick patterns with a
moving average.

Profitable Candlestick Trading: Pinpointing Market Opportunities to Maximize

Profits (Wiley Trading) by Stephen Bigalow, a widely cited candlesticks expert.

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Read more about Candlestick Patterns, Moving Average, Trading Trend

Serious Traders Only!

Day Trading With Price Action – A complete course that teaches you the art of
price action trading.

Perfectly structured with step-by-step guides to help you understand the

principles of price action analysis.

CLICK HERE FOR THE COURSE SYLLABUS

COMMENTS

wai says
July 10, 2016 at 7:17 PM

How to trade profitably using combination of directional movement, macd

& candlesticks.
Reply

Galen Woods says

July 12, 2016 at 12:35 PM

Hi Wai, you can take a look at these strategies for some ideas – 4-Hour
MACD and Holy Grail.

Reply

Vito says
August 23, 2017 at 4:38 PM

Hi Galen
Thank you for content.

i have a question:
What type of apply use in EMA setting ? Close, Open, High, Low or other ?

i used ( Medium Price ( HL/2 ) ) in my EMA setting because this setting was
average between all other but i,m not sure about this, are you any
suggestion for this ?

Thanks …

Reply

Galen Woods says

August 24, 2017 at 5:46 PM

Hi Vito, the median price is a good choice. The close price is usually
used due to its significance on daily charts. It helps to understand their
differences. The median price MA is smoother but less responsive
 compared to an MA constructed with closing prices. I think placing
both on your charts is a good way to determine which one works
better with your trading approach.

Reply

Vito says
August 30, 2017 at 4:05 PM

Hi Galen
Thanks for reply. yes your idea is a best idea
i place both MA on chart for comprasion.

Thanks …

Reply

U4 says
October 1, 2017 at 7:42 PM

Galen I cannot thank you enough for this tutorial. Being a novice in trading,
I have a question on waiting for confirmation once I notice a reversal/
trading signal: instead of waiting for confirmation candle in my time frame,
is it ok if I switch to a lower time frame to see how the market is trending?
My aim in this case is to be able to enter the trade a little bit earlier. Again
thanks

Reply

Galen Woods says

October 3, 2017 at 2:52 PM
 Glad to help! It’s definitely possible for you to drill down to a lower time
frame to refine your entry. That will potentially allow you to set a
tighter stop-loss. But due to an increased possibility of whipsaws, you
must be prepared to re-enter your position. Looking at multiple time
frames tend to create confusion. Hence, you must have a clear trigger
defined for the lower time frame.

Reply

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