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Practical Application of Candlesticks: Gold Short

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Gold (XAUUSD) Daily Chart
Gold (XAUUSD) Daily Chart

Practical Use of Candlesticks: Gold Short

This article is the first in a series of articles over the practical use of Japanese candlesticks. Japanese candlesticks are an excellent and powerful analytical tool. Candlesticks are three-dimensional because, to interpret and use candlesticks properly, we need price, time, and volume.

Each of these guides will utilize a trade idea I’ve shared on TradingView in the past. The nice thing about trade ideas that you share on TradingView is that you can hit ‘play’ and watch how price action played out after your idea. It’s one thing to say, “I called Gold dropping to this level, and it did” – it’s another to show evidence of that idea. I will also share some of my trade results from that same time period.


Identifying a Trade

I am a Gann-based trader through and through. I believe that time is the most important factor in the market, and that time is the reason why trends change. Gann Analysis is the study of cycles and finding the rhythm of a market. It is almost singular in its approach to financial analysis in that Gann Analysis is a Leading form of analysis. In other words, Gann Analysis seeks to predict what will happen in the future. We do that through the use of natural cycles like Lunar Phases, the cycles of Planets, Gann’s cycles, and numerous other measurements. I can’t get into all the details of what Gann analysis is but suffice to say; it is how I identify when I should take a trade.

In the trade idea for this setup, I identified the following reasons for wanting to short XAUUSD on Feb 19, 2019:

Feb 19, 2019

Time is the reason for trend changes.

Feb 18 was a time pivot in the current Law of Vibration cycle, a powerful 6/8th time-harmonic which acts as a source of resistance in time to the trend in force.

Feb 19 is a Full Moon, and the Moon is Apogee – trends reverse violently if these two astronomical cycles occur near a swing low/high.

Gold has been an uptrend for 186-days – which is well within the 180-day Gann Cycle of the Inner Year.

Violent short term reversal ahead.

Additionally, not shown is the Longitudinal position of Jupiter, which rests at 1330. When it comes to Gann’s Planetary Lines, I’ve learned to give equal weight to those levels as I would to Gann’s time cycle. Price has moved above that line – so the time cycles could just be conditions for further and swifter moves higher.

I updated the trade idea with an additional short:

Added to shorts at 1345.30 – 1235 CST

Ultimately, I took profits on Mar 6, 2019.

 

Using Candlesticks

Gold (XAUUSD) Daily Chart
Gold (XAUUSD) Daily Chart

The image above is the daily chart for Gold (XAUUSD). I’ve highlighted in a light blue box the trading period of this trade idea. Observe the first candlestick on the chart (red triangle above it). I consider that top candlestick a shooting star. Now, there are some real sticklers out there who are very dogmatic about what is an actual candlestick pattern and what isn’t. Japanese analysis is very dynamic and allows for a significant amount of interpretation. I only need to know a couple of things about the shooting start pattern:

  1. Did it show up at the top of a move?
  2. Is the shadow at least twice as long as the body?

Both 1 and 2 are true. The small wick below the body is irrelevant. When I combine this candlestick pattern – which is one of the most bearish candlestick patterns – to my Gann analysis, I get a very high probability setup for a short. But then I added to the short again, one day later on the 20th.

Gold (XAUUSD) 30-minute chart.
Gold (XAUUSD) 30-minute chart.

Switching to the 30-minute chart, I’ve labeled the additional short entry. Why did I enter that short? First, there is a rising wedge against the prior swing high. Second is the nature of the candlestick itself. The candlestick with the price label on it is two different patterns – but both are bearish. That candlestick is both a shooting star and a bearish engulfing candlestick. When we add the bearish engulfing candlestick to the shooting star and a break of the rising wedge, we get handed one of the highest probability short setups that you could see.

The results of this trading period are below:

Trade Results
Trade Results

 

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