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Trading strategy

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Squat Candle Strategy

Overview

The Squat Candle Strategy identifies potential reversals or points of market exhaustion.
This strategy relies on spotting a unique candlestick with high volume but limited price movement.
Squat candles often appear near the end of trends or around support and resistance levels, signaling indecision.

1. Identifying a Squat Candle

A squat candle has a small body, indicating little price movement from open to close.
It is accompanied by relatively long wicks, showing price rejection on both ends.
The volume is high, suggesting significant market interest or struggle between buyers and sellers.
Often appears near key support or resistance levels, hinting at potential reversals or breakouts.

2. Squat Candle in an Uptrend

Formation: Appears during an uptrend near a resistance level, with a high volume and small body candle.
Interpretation: Signals potential buyer exhaustion as the price struggles to break through resistance.
Confirmation: A bearish candle following the squat candle confirms a potential reversal.
Trade Execution: Traders may enter a short position when the next candle closes below the squat candle’s low.

3. Squat Candle in a Downtrend

Formation: Appears during a downtrend near a support level, with high volume and small body candle.
Interpretation: Indicates potential seller exhaustion as the price fails to push lower.
Confirmation: A bullish candle following the squat candle confirms a possible reversal.
Trade Execution: Traders may enter a long position when the next candle closes above the squat candle’s high.

Using the Squat Candle Strategy

Combine squat candles with volume indicators to confirm the strength of the signal.
Look for squat candles near significant support or resistance levels for a higher probability of reversals.
Apply stop-loss orders just beyond the high or low of the squat candle to manage risk effectively.

Pros

Early Reversal Signal: Indicates potential market exhaustion before a trend reversal.
High Volume Confirmation: The presence of high volume strengthens the reliability of the signal.
Works Well with Other Indicators: Complements volume and support/resistance levels.

Cons

Requires Confirmation: Needs a follow-up candle for confirmation to avoid false signals.
Less Effective in Ranging Markets: May produce false signals in sideways markets.
Volume Sensitivity: High volume without price action can be misleading in certain conditions.