When it comes to trading strategies used in financial markets, the first thing that comes to mind is complex systems using several technical indicators that are inaccessible to a novice trader. However, this is not entirely true.
Before the advent of such a type of chart as Japanese candlesticks, methods for making money in financial markets were indeed quite complex. Today, you can make a profit simply by observing the shape and position of the candle on the chart. Among traders, this trend even received a separate name “Candlestick Analysis” or Price Action.
It is worth noting that such a trading system is ideally suited for the electronic contracts market, as it allows you to make many transactions in one trading session.
In this article we will look at one of the models indicating a reversal of the current movement and called Pinocchio.
What are Japanese candlesticks?
In most cases, a candlestick formation is called a rectangle, the upper and lower parts of which follow the same line. The latter are called thorns or shadows.
The rectangle itself is called the body of the candle and it is formed during the time period selected by the user. For example, if the chart timeframe is M1, then each new candle will be formed for exactly one minute.
The candle body is the distance between the closing price and the opening price. If the first is below and the second is above, the candle is downward, and if vice versa, then it is upward. However, often the downward candle in the terminals is colored red, and the upward candle – green.
But that is not all. For example, the price could open, begin to rise, and then return and close below the opening price. In this case, a spike appears above the candle, indicating where the price was during the formation of the candle.
How to trade using the Pinocchio strategy?
Now we smoothly come to the most important thing. Let’s imagine a situation where the chart is moving upward, the candles are colored green, but after the last one closes, a spike has formed above it, significantly larger than the size of its body.
From this we can conclude that something prevented the upward impulse movement. Perhaps a large trader has fixed a position, or perhaps the chart has reached a psychological level or important news has come out. Be that as it may, this situation indicates a high probability of a market reversal.
CALL contract is done when a red candle with a long spike at the bottom appears on a downward movement.
PUT contract is done when a green candle with a long tail on top appears on an upward movement, as described above.
As for the name of the strategy, it just got it because of the long shadows or spikes. When Pinocchio lied in the fairy tale, his nose grew bigger. By analogy, when the market is about to reverse and leave traders with a loss, the spike at the last candle grows.
It is worth noting that price models’ action are a popular but very risky trading method. Therefore, be sure to adhere to the rules of money management.
