Why It’s Better To Wait For The Candle Close
Yesterday bitcoin dropped by $2,000 in 35 seconds. At 6:00 PM UK time the price was ~$62,450, and by 6:00:35 PM it was ~$60,360. But by 7:00 PM, bitcoin was back above $63,000.
Traders who waited for the 1-hour candle close at 7 PM were still long.
In this article, we will explore a few reasons why it is (usually) better to wait for a price candle to close before making a trading decision.
The anatomy of a price candle:
The chart below shows the green bitcoin candle in question. Notice how the “wick” at the bottom went much further down than the candle body.
The bottom of the wick was the low price for the hour and the top of the candle body is where the bitcoin price closed at 7 PM.
The next diagram explains how price candles work in more detail:
Why it is good to wait for a candle close when trading
Intra-candle price moves can be extremely volatile. By trading based on candle closing prices, you can cut out a lot of the noise.
Most trading activity takes place inside the candle body (between the open and the close), so it’s better to focus on the price action within this area. This way, you are less likely to:
- Get scared out of your trade prematurely
- Enter a trade before proper confirmation
Going back to the bitcoin example from earlier, we can see how point 1 above would have applied. Here, many traders would have panic sold when the price dropped $2,000 in 35 seconds. I’ll venture a guess that some of them then bought back higher at 7 PM!
As for point 2, some traders would have gone short at 35 seconds past 6, and immediately regretted that decision.
On the other hand, those who had waited for the bitcoin 1-hour close at 7 PM were a lot better off.
Choose your trading time frame and stick to it
The candles you use in trading will depend on your trading style. If you are a long term investor, stick with the longer-term candles (daily, weekly and monthly candles). And if you like trading shorter-term, focus on the 1 hour and 4-hour region.
The table below shows different candles for different styles of trading. Note – high frequency is not recommended!
Can you still use a stop loss and exit on a candle close?
Stop losses can be effective tools for managing risks when trading. But if your stop-loss is too close to your entry price, this can have the opposite effect.
Getting stopped out on a nasty price wick before the price runs the other way is common with traders who set their stop losses too tight. Personally, I prefer to use wider stop losses that give my trades more breathing broom to do their thing. This also means I can exit trades based on candle closes if and when required.
Is it better to wait for a candle close before entering a trade?
In my opinion, it is a lot safer to wait for candle closes to confirm a valid trade idea. But there are some instances where setting an automated “low ball” limit order on an exchange can work well.
When entering a trade based on a candle close, there is always a chance of getting a worse entry price. Sadly, that is the price we must sometimes pay for confirmation of a good trade setup.
The usual disclaimer: Nothing you read here is investment advice. It’s just for information and entertainment.