In momentum trading, a follow-up candle refers to a specific candlestick pattern that traders use to confirm the continuation of a momentum move in the market. A follow-up candle typically occurs after an initial momentum move, such as a strong upward or downward price movement. It confirms that the momentum is likely to continue in the same direction as the preceding move. The trick is how to identify them. Here are a few hints on how to do it.
The follow-up candle should move in the same direction as the preceding momentum move. For example, if the previous candle was bullish (indicating upward momentum), the follow-up candle should also be bullish.
The size of the follow-up candle relative to the preceding candle can provide further confirmation of momentum continuation. In an uptrend, for instance, a follow-up candle with a larger body and longer wick on the upper side may suggest strong bullish momentum.
Increasing volume accompanying the follow-up candle can add additional confirmation to the momentum continuation. Higher volume suggests increased market participation and conviction in the direction of the trend.
Traders may also look for specific candlestick patterns within the follow-up candle that confirm the momentum continuation. These patterns could include bullish engulfing patterns, hammer patterns, or long white candles in an uptrend, and bearish engulfing patterns, shooting star patterns, or long black candles in a downtrend.
The position of the follow-up candle within the overall price action context is also important. It should occur within the broader trend or pattern that the trader is observing. For example, in an uptrend, the follow-up candle should ideally occur after a pullback or consolidation phase, confirming the resumption of the upward momentum.
If we summarise, a follow-up candle in momentum trading serves as a signal to traders that the momentum established by the preceding price move is likely to continue, providing an opportunity to enter or add to positions in the direction of the trend. We can also use follow-up candles in conjunction with other technical analysis tools and indicators to make informed more trading decisions.