Candlestick reversal patterns are essentially just candles that show signs of exhaustion, or a sudden shift in momentum. In other words, we may have been going higher, but suddenly looks as if we are either running out of momentum to the upside, or than the sellers have come in and absolutely taken over. Either one is reason enough to think that we are going to turn things back around. Of course, the opposite is true as well. For example, we may have been falling rather rapidly but eventually the market bounces in the way during the course of the candle that tells us perhaps the buyers are about to take over again. One of the great things about reversal candles is that they can give you a bit of a “heads up” as to trouble ahead. For example, perhaps you were short of a particular currency pair and it forms what is known as a hammer. The hammer is simply a candle that shows that the sellers ran out of momentum, and ended up reversing quite a bit of the momentum. This often can be the sign of the market turning back around to the upside. So if you are already short, this may give you the idea to either exit the market, or at least move your stop loss is to lower levels. You also have the same thing in an uptrend, we form what is known as a shooting star, which is essentially a market going fairly high, and then dropping back down to form a candle with a very long wick. You can move your stop losses higher. On the other hand, when you see the signals you can start trading in the other direction. It’s a great way to pick up trend changes.

The Average Directional Index or ADX, is a momentum indicator that you can use trade financial instruments. It comes with 3 lines, two which shows the directional strength of both positive and negative movement, and then the ADX indicator itself. Most traders ignore the other 2 lines, and for the purposes of this video I will focus on the actual indicator line itself. It is the solid green line, and what it measures it is the actual strength of the trend. It is not dependent on whether or not the trend is up or down, just that it has strength. In other words, it rises when the trend strength is strong, and declines when it may be weakening. The weaker the trend, the more likely you are to see consolidation. When traders use the ADX, they are trying to find a real momentum. So in other words, if we get a break out or some other type of buying signal, traders will often use the indicator to see if there’s any real indication of underlying strength. After all, there are such things as “false breakouts”, which are sudden moves that completely reverse themselves. By using this indicator, you can perhaps avoid some of those. Also, it can tell you sometimes when we are starting to run out of steam, and therefore might be time to step away from the trend and close your position.