If you are a scalper and you are not using candlestick patterns to make your entry and exit decision while scalping, you are making a serious mistake. Most of the indicators that we use in technical analysis are lagging in nature. There are only a few indicators that are considered to be leading and candlestick patterns are considered to be one of the leading indicators. Another advantage of mastering candlestick patterns is that you can use them in scalping as well as swing trading. There are a number of candlestick patterns that you must master. Some of these patterns are the hammer, hanging man, engulfing pattern and the shooting star. Watch the video below that explains these candlestick patterns in some detail.
Always keep this fact in mind as pointed out in this video that you must wait for the next candle in order for the confirmation. For example, if a bullish engulfing pattern appears wait for the next candle. It should also be a bullish candle. If it is a bullish candle, you can then enter into a long trade. When a bullish candle forms after a bullish engulfing pattern, this pattern is known as Three Outside Up Pattern. In the same manner when a bearish engulfing pattern appear, wait for the next candle. It should be a bearish candle. If the next candle is a bearish candle, you can enter into a short trade. When a bearish candle appears after a bearish engulfing pattern, this pattern is called a Three Outside Down Pattern.
One way to confirm and filter these patterns is using the Stochastic Oscillator. When a bearish pattern forms, Stochastic should show a reading above 80. If the Stochastic reading is below 80, ignore this pattern and consider it to be a false signal. In the same manner, when the bullish candlestick pattern forms, the Stochastic reading should be below 20. If the Stochastic reading is above 20, ignore the pattern as a false signal.
As you might be knowing, Stochastic readings above 80 indicates an overbought area meaning it’s time to stop buying as the price will be heading down in the near future. This is what your bearish candlestick pattern is also indicating that the price is about to head down. So you have the confirmation from the Stochastic that the candlestick pattern is giving the right signal.
In the same manner, Stochastic reading below 20 means the market is oversold. Oversold is a market condition when there are too many buyers in the market and very few sellers. When there are few sellers, it means the price is going to shoot up pretty soon. The bullish candlestick pattern is also telling that the market is poised to head up. So both the Stochastic and the candlestick pattern are confirming each other.
You can use this scalping strategy using candlestick patterns on almost any timeframe. If you are using it on the lower timeframes like M1 and M5, go for a 10-15 pips take profit target. If you are using it on H1 timeframe, go for 30-50 pips take profit. Just making 2-4 trades each day will make you around 40-100 pips which should be enough to make a successful living as a scalper. You must practice this scalping strategy on the demo account first. Once you master this scalping strategy on the demo account, only then trade live with it!