'RESUME' the trend journey with a 'PAUSE' candleDefinition:- As the name suggests pause candle is the candle formed in between the trend, the change is usually opposite the trend
i.e. if the underlined script is moving in an uptrend then the pause candle will be of negative change and the color will be red and vice-versa.
The pause candle indicates a pause in fresh positions by market participants and an entry chance for players expecting reversals.
Also, it's an opportunity for new players to enter the trend i.e. for those who have missed the initial trend.
Rules or Characteristics of a pause candle:-
1. Prior candles should be aggressive i.e. large candles of the opposite color.
2. It is generally of very small size as compared to the previous one and of the opposite color.
3. Volume is considerably low as compared to previous candles.
4. The RSI level of the spot where this candle originates is usually between the band of 35-75.
The psychology behind the pause candle:- In the market everything has a cause and a reason similar pause candle also conveys its message to the market players.
The generation of the pause candle signifies that there is fatigue among the participants who were driving the stock or are taking some break.
Also, it alerts that new hands have entered into the trend and are trying to offer resistance. Those who are looking for reversals spot this candle and enter into
trade with the hope of reversals, they are generally weaker hands.
Bigger hands those who were the driving force of the trend also want the new player to enter the trend so that they hunt them down and resume the
rally at a lower price.
How to trade pause candle:- Now, as small players, we don't know what goes inside but try to predict the message through the candle. If a pause candle
is formed it doesn't mean the exhaustion of trend or reversal rather indicates a pause in fresh market position.
But, here the aggressive trader enters with trades opposite to the trend. At this stage, two cases arise, note talking for an uptrend:-
-> The next candle's high crosses above the high of the pause candle:
Maximum times this is the case that arises, here the candle after the pause candle crosses the high of the pause candle now what does this indicate?
The indication is that the trend drivers or bigger hands are active again and those who have taken a position against the trend are trapped and will
try to escape hence, the move will be much sharper as compared to the initial trend.
How to benefit in this case? When you spot such a pause candle that is formed after a continuous trend set it to alert candle and wait for the next candle
to form. If the next candle crosses the high of the pause candle take the position along the trend and your stop would be the low of the pause candle which is generally
too small and ride the sharper trend which is usually equal to the initial one.
-> The next candle's low crosses below the low of the pause candle:
Though not arises usually sometimes it does occur, here the candle after the pause candle crosses the high of the pause candle now what does this
indicate?
The indication is that the trend drivers or bigger hands are in the backseat and are not seeing further upside also there is a chance that they can book
profits at this level.
How to benefit in this case? When you spot such a pause candle that is formed after a continuous trend set it to alert candle and wait for the next candle
to form. If the next candle crosses below the low of the pause candle take the position against the trend and your stop would be the high of the pause candle which is generally
too small and ride the reversal trend which is usually half of the initial one. This case comes under the reversal candlestick patterns on which earlier an article was published
by me but here we are concerned about a pause candle after which rally resumes.
Here, is an example of a different scenario though it doesn't match the above said cases but still the background is of a pause candle.
HIL was trading above a rising trendline and suddenly breakdown the line after which we see continue 2-3 red candles following the candles a pause candle is
formed with all the above-discussed properties but rather than showing the sharp downfall it again forms a pause candle but note stop loss is not triggered.
Here 3-4 pause candles are formed and finally it breakdown all the low with a big red candle and then afterward we saw a huge, sharp downfall.
The motive to explain the above example was that though sometimes we don't see rapid action but if your stop is not triggered and the candles are with
the low volume then you can assure that a sharp move is pending and sooner or later it will happen.
Note: The only constraint is to identify the correct pause candle for which you can refer to the above-said rules are very important. Sometimes the candle after the pause candle
crosses both the high and low of the pause candle in that circumstance you have to check the color of the candle, for uptrend it should be green then you can
take the position else if it's red then wait for the next candle, and vice-versa for the downtrend.
