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What is a Confirmation Candle and How to Use It in Trading?
A confirmation candle is an important element in technical analysis that is used to confirm an entry or exit signal in the market. Traders rely on it to determine whether an expected trend or technical pattern appearing on the chart will come into effect or not.
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Confirmation candle concept
A confirmation candle is a candle that appears after a technical pattern (either a reversal or continuation pattern) has formed to confirm whether or not to enter into a trade. If resistance or support levels are broken and the candle closes above or below these levels, it serves as a confirmation signal for the new trend.
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How to identify confirmation candle?
In case of buying (Buy Confirmation): If a green (bullish) candle appears and closes above an important resistance level, it is a signal that the upward trend may continue.
In case of sell confirmation: If a red (bearish) candle appears and closes below an important support level, it is a signal that the downward trend may continue.
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Its importance in trading
1. Reduce errors: Confirmation candle helps to avoid false entry into the market. For example, instead of entering the trade based on a false break, it ensures that the break was real.
2. Increased confidence in decisions: When you follow your strategy and wait for confirmation of the pattern, you are more confident in the decision you make.
3. Accurately identify entry and exit points: The candle provides a clear level for entry or exit based on its close.
Types of candles used for confirmation
1. Engulfing Candle: It appears when the current candle completely engulfs the body of the previous candle, indicating a strong change in momentum.
2. Hammer and Hanging Man candles: They give strong reversal signals when they appear at support or resistance levels.
3. Doji candles: They show indecision in the market, but confirmation of the trend comes from the candle that follows.
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Confirmation Candle Strategies
1. With support and resistance lines: If the confirmation candle closes above the resistance, it is a buy signal. If it closes below the support, it is a sell signal.
2. With technical patterns: such as head and shoulders or triangles; confirmation candle is used to confirm the breakout or reversal.
3. With technical indicators: The confirmation candle can be combined with indicators such as the Relative Strength Index (RSI) to determine trend momentum.
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Tips when using confirmation candle
Always wait for the candle to close to avoid a false breakout.
Make sure there is a large trading volume with the candle to confirm the momentum.
Don't rely solely on the confirmation candle, combine it with other analysis tools.
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Confirmation candlesticks are a powerful tool for analyzing financial markets, helping you make informed decisions instead of guesswork. When used correctly, they can reduce risk and increase your chances of trading success. However, candlesticks should always be combined with other analysis tools to ensure the best results.