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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 candles 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.
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