How to use a candle filter to spot the buy signal

There isn’t one trader in the securities market who does not aspire to buy low and sell high and each trader uses a different strategy to reach this goal. When trading in the forex market most trend traders will try to buy strength when the price line breaks out while they will try to sell weakness when the price line breaks down. And history has shown that trend traders often rake in the money but trend trading is anything but simple. It is not unusual to see higher than normal price levels now when most traders see such levels they only see the loss they will incur which is a basic human sentiment ‘fear’. And of course the whipsaws make many trades go awry and certainly don’t help the trader’s confidence.

Inside day trading while it is a great way for people to make lots of money but at the same time it is also a great way for people to lose a lot of money. Therefore, your reward should be proportional to its risk. If you are able to do so, then inside day trading could produce huge profits for you. But what are the steps that you need to take in order to make sure you are going to win the trade and gain the reward?

Knowing what inside day is trading actually, you must know the categorization. Inside day trading is when the traders do trades in a day time of course, just like any other trading markets when the markets are open during office hours. However, it is beyond that. The distinctive thing about inside day trading is that the traders will buy and sell all of their positions within a day and they do not hold any currency when the forex market closes by the end of the trading day. In other words, within a day, a trader does not own any currency on the forex market.

In short, inside day trading allows traders to make some profits by trying to make the full use of small forex market fluctuations. To practice inside day trading you need skills, luck, dedication and a lot of capital. To get the best result out of inside day trading, traders need trading accounts with a platform which is in real time or else you can not place trading orders accurately for the exact price with delayed price data. Together with real time trading platform, if you can have a static IP address provided by your internet service provider is the better.

The next strategy on the cards includes picking the tops and bottoms but most traders do not have the knowledge or the method to do so. Bollinger Band is one technical indicator that can help traders emphatically determine the highs and lows.

Bollinger bands use the simple moving average and a typical period to be used is 20. If you wish to trade the big moves you should let the pair trade through the 20 period SMA and use the moving averages for trailing the stop. You can go for closing trades on the close only when the pair crosses the SMA.

To explain this further lets say the trader is interested in establishing a long position so what he needs to do is wait for the currency pair candle to hit the lower BB band. Once a candle does so wait for the candle whose highs and lows are completely engulfed by the previous candle. This is the inside day now the next move should be to place a stop a few pips below the low of the preceding candle and finally you will need to trail the stop with a 20 period SMA on a closing basis.

Identically if you looking to enter a short position wait for the price to hit the upper Bollinger Band and once this happens, wait for the inside day to develop and once you see it, you can place the stop a few pips above the high of the preceding candle and then again trail the stop on a closing basis.

Combining Bollinger band and Inside Days is a potent strategy to predict the highs and lows. To begin with let’s talk about Inside days. Normally when the price reaches the upper Bollinger Band it is considered high and when it reaches the lower band it’s considered low. And most traders use these signals for buying and selling. To put it simply when the price is at the upper band traders will sell and when it is at the lower band they will buy. The only problem with this approach is that many times strong trends will take the prices through the Bands and the trader may lose out on the extra profit that he would have made had he waited. But then the question is how one can emphatically determine the highest high or lowest low. Generally in an uptrend the price will reach new highs and it will reach new lows in a downtrend. What the trader can do here is set a filter. The filter will require that the buy signal should only be generated if the candle that comes after the one that hit the Bollinger band stays at the same level as the previous candle or goes higher or lower than the previous candle. This candle is called the inside day. This strategy works the best with a daily chart however there are no hard and fast rules and it can be used with an equal success rate even with month weekly or even hourly charts.

Since candles are used to indicate the market sentiment an uptrend will usually bring with it decreasing volatility and this will be reflected by the inside day which will usually be at the same level as the candle preceding it. This indicates that the momentum is decreasing and the price may move downwards. So you don’t always have to sell at the candle that reaches the Bollinger bands instead buying near the relative bottom or relative top is a better strategy.