Tag: candlesticks

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Forex Elliott Wave Forex Market Analysis

Is GBPUSD Ready for a New Decline?

Overview

Overview

Overview

The GBPUSD pair advances in an incomplete bearish corrective formation that corresponds to a wave B of Minor degree. In this context, the completion of wave B could lead to a new decline, which could drag the price below Septembers’ low.

Market Sentiment

The GBPUSD pair suffered another drop for the second day in a row, falling from the extreme bullish to a bullish sentiment zone, where it found support in the psychological barrier of level 1.31.

The following daily chart illustrates the 90-day high and low range, revealing the mid-term market participant’s sentiment. The figure shows the price action moving mostly sideways in a range that oscillates between the bearish and bullish sentiment zones; that is, between 1.27204 and 1.32289.

Furthermore, the 60-day weighted moving average is seen moving below the Pound’s price, which confirms the short-term bullish bias that carries the price.

Considering the indecision, the cable is exhibiting since last August. The intraday bias will stay neutral until the GBPUSD pair confirms its next movement, for example, through a breakout.

Technical Overview

The GBPUSD price reveals a yearly long-tailed candlestick that suggests the price will continue being dominated by the upward bias. As exposed in the following 2-day chart, the Pound erased the first 2020 quarter losses that reached up to 13.89%. The cable currently eases 0.67%(YTD).

The big picture of GBPUSD and under the Dow Theory unfolded in the next daily chart illustrates the cable developing a primary upward trend in progress, which currently could be forming a corrective secondary trend.

In this context, according to Dow Theory, the price retraced below 33% of the first upward movement, which accomplishes with the minimum requirement for a correction of the previous move of a similar level.

Nevertheless, considering that the price remains in a short-term downward trend, the price could continue developing a new bearish sequence.

Short-term Technical Outlook

The short-term Elliott wave outlook for GBPUSD unfolded in its 8-hour chart reveals the corrective rally that corresponds to an incomplete wave B of Minor degree identified in green, which leads us to expect a decline in a five-wave sequence for the following trading sessions.

 

The previous chart exposes a corrective structural series that began on September 01st when the price found fresh sellers at 1.34832 and dragged the cable until 1.26751 on September 23rd, where the pound started to advance in its wave B that remains in progress. 

In this regard, the current upward movement could find resistance in the first supply zone between 1.32069 and 1.32280. If the price extends its previous progression, creating a bull trap, it could climb until 1.33195. There, the price could start to decline in a five-wave sequence corresponding to wave C identified in green.

The potential next wave C could extend until the demand zone between 1.25658 and 1.24796, which corresponds with the mid-term descending channel’s base.

Finally, the bearish scenario’s invalidation level locates at 1.34832, which agrees with the origin of wave A in green. Nevertheless, before positioning on the downward side, the GBPUSD pair should confirm (or discard) the bearish entry. 

 

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Forex Education

Setting up a Trading Strategy using Candlesticks

Introduction

Introduction

Introduction

Candlestick Analysis is likely the most popular analysis method to read the market and allow the market analyst to understand the traders’ sentiment over time.

In this educational article, we will review some candlestick patterns, which could be used as technical formations to spot market turn, recognize and enter early in the new trend.

Candlesticks Basics

Candlesticks use the same information that OHLC bars; however, candlestick charts show the market information differently. The components of candlesticks are the open price, high, low, and close in a specific range of time, such as weekly, daily, and intraday. The following figure represents the structure of a candlestick in a bullish and bearish context.

In the previous figure, we observe that the range between the open and close prices of the candlestick forms the body of the candle. If the close of the session is higher than the open, then the candle is bullish (white). If the close price level is lower than the open price level, then the candle will be bearish (Black).

The range of the prices that moves above and below the body of the candle is called the shadow or wick, whose length can be from very short to quite long. The span between the high and low of the candle reveals how volatile it has been the trading session or intraday period.

Candlesticks Formations to Trade

Candlesticks formations provide a variety of information concerning the market movements. For instance, it can reveal when the price is in a slowdown, in trend, or soon to reverse in the next trading sessions. The understanding of these formations is essential to chart analysis because candlesticks charts can be analyzed without lag.

Hammer and Hanging Man

A Hammer is a candlestick pattern that shows a small body and a long shadow, with its close is near the high of the day. When the Hammer is located at the end of a bearish trend, the Hammer is considered a bullish reversal signal.

The Hanging Man is similar to the Hammer, but it appears at the end of an uptrend; this pattern reveals the possibility of a reversion of the uptrend.

Both Hammer and Hanging Man should have a large shadow compared to its body. The shadow extension will be indicative of the volatility of a trading session where the price plummeted and then recovered to close the session at the top of the trading range.

Belt-Hold Pattern

The Bullish Belt-Hold pattern is a formation in which the opening price is at the low of the session. Prices start to rally and close near the top of the session’s range with higher momentum. The opposite occurs on the bearish pattern, where the price opens at the high of the range and closes near the low.

If the next open is higher than the close of the bearish belt-hold candle, then it is likely that the price will continue moving higher. If the price opens below the bullish belt-hold close, then it is likely the market will continue moving bearish.

Engulfing Pattern

The engulfing pattern is a formation that requires a pair of candlesticks to complete the formation. The bullish engulfing pattern is a formation that suggests the reversion of the downtrend and surges at the end of a bearish trend. The opposite case occurs when the market moves in an uptrend. An engulfing pattern is one of the most powerful of the candlestick reversal signals.

The formation is completed once that large bullish candlestick body completely covers the body of a smaller candle of the previous trading session. The larger is the timeframe where the engulfing pattern appears, the more significative will be the reversal. The following figure represents the bullish and bearish engulfing pattern.

Harami Pattern & Harami Cross

The harami pattern, also known as an inside bar, requires two candlesticks to complete the formation—however, the harami pattern, or inside bar, the weakest of the reversal patterns.

The harami pattern is a formation with a small body that fits entirely into a large body candle. This pattern is indicative of the reversion of the trend, and its importance grows if the formation appears after a prolonged trend. The harami cross is a particular case of the harami pattern; the pattern consists of almost identical opening and closing levels.

The Doji Pattern

The doji pattern appears when the trend moves in an exhaustion stage. This pattern is characterized by a vanishing body, where the session’s open and close prices are almost identical.

The importance of a doji grows after an extended uptrend or downtrend. If following a doji, it appears an engulfing pattern, the possibility of a potential reversal move will increase.

Piercing Pattern and Dark-Cloud Cover

The piercing formation has similarities with the bullish engulfing pattern and is characterized by its appearance at the bottom of a downtrend. The main difference from the bullish engulfing pattern is that the bullish candle on the Piercing Pattern does not fully cover the previous candlestick. Instead, it closes above the 50% level.

The dark cloud cover is a bearish reversal formation. In this case, the bearish candle is a big body candlestick that covers at least 50% of the previous trading session’s candle. The strength of the reversal signal will be stronger, as more extension is covered.

Morning Star and Evening Star

The star candlestick pattern is a formation where a price gap separates a small body candle from the body of the previous candlestick. The star could be a doji or a narrow range candle. This formation warns the market analyst of an imminent reversion of the trend.

A Morning Star pattern is a bullish reversal formation that appears in the bottom of a downtrend and requires three candlesticks. The first candle is a powerful bearish candle with a body of wide range. The second candle corresponds to the star, and it is a candlestick of a narrow range, separated by a gap with the previous candle. The third candle is a bullish candle with upward momentum. The body of this candle should surpass 50% of the first candlestick.

The Evening Star pattern is a bearish reversal formation that appears at the end of a bullish trend. similarly to a morning star pattern, the range of the third candle will be indicative of the strength of the reversal movement

Conclusions

In this educational article, we reviewed seven candlesticks patterns that show trend reversals in a specific range of time. One of the pros of these candlestick patterns is that it is not a lagging indicator, and its analysis could provide the information the market sentiment without delay.

However, although the candlestick analysis could provide an entry setup, they can not provide a target level by itself. This type of study should be accompanied by complementary techniques to improve the odds of success and determine potential profit targets.

In the following article, we will review the use of chart patterns to determine the trend.

Suggested Readings

  • Fischer, R., Fischer J.; Candlesticks, Fibonacci, and Chart Patterns Trading Tools; John Wiley & Sons; 1st Edition (2003).
Categories
Forex Course Guides

Forex Course 3.0 – Complete Guide

Hello everyone,

Hello everyone,

Hello everyone,

Firstly, we want to thank you guys for following us throughout the course so well. We feel privileged that we are helping you guys in becoming better traders. Especially in Course 3.0, we have discussed some of the most crucial aspects of technical trading, which are essential for every aspiring technical trader to know. We have seen the quiz results for all the course articles that you guys have taken, and that gave us a gist of how well you’ll be following the topics discussed.

However, for the people who want to revisit a few topics, we would like to make their lives easier. So we are putting up a list of topics that we have discussed in this course. Also, this article will act as a quick revision guide for all the basics involved in Technical Analysis.

In this course, we have started by discussing the concept of Candlesticks and its fundamentals. Then we learned how to trade various candlestick patterns along with their importance. Introduction to Fibonacci trading has been done, and we also have paired the Fib levels with various indicators to generate accurate trading signals. We extended that discussion to Moving Averages and its types. Finally, we have learned the principles of indicator-based trading, where at least 10 of the most popular indicators have been discussed.

Below are the corresponding links for each of the topics that we have discussed in this course.

Candlestick Charts

Concept of Candlesticks – Introduction | Anatomy | Fundamentals

Trading Candlestick Patterns – Single Continuous | Single Reversal | Dual Continuous                                                   Dual Reversal | Triple Continuous | Triple Reversal

Deeper Insight – Candlestick Patterns Cheat Sheet | Candlestick + S&R

Fibonacci Trading

Introduction | Entry Using Fib Levels | Challenges of using Fib levels | Fib + S&R Candlestick Patterns + Fib Levels | Fib + Trendlines | Fib for TP & Fib for SL | Summary

Moving Averages

Introduction | SMA | EMA | SMA vs. EMA | MAs to identify the trend | MA Crossover Strategy | MA + S&R | Summary 

Indicator-Based Trading

Introduction | Pros & Cons | Bollinger Bands | RSI | MACD | Donchain Channel | RVI | TSI | Stochastic | Ichimoku Cloud | Parabolic SAR | ADX | ATR 

With this, we have ended our Course 3.0, and soon we will be starting our Course 4.0, where we will be discussing some of the advanced topics in Technical Trading. So stay tuned and watch this space for more interesting and informative content. Cheers!

Categories
Forex Course

75. Using Moving Average Crossovers To Take Trades

Introduction

Introduction

Introduction

In the previous article, we learned how to use the moving average for determining the direction trend. The Moving Average lines not only helps us in identifying the direction of the market but also tells us when a trend is about to end and potentially reverse. In today’s lesson, we will see how the moving averages can be used to enter trades at the reversal of a trend.

The principle of the strategy is to discover the crossover of the two moving averages on the chart. When the moving averages crossover, it is a sign of market reversal halting the existing trend. So at this point, we need to find a suitable ‘entry.’

Moving Average Crossover Strategy

Let us consider an example to explain the above-discussed strategy. Below, we have a daily chart of USD/CHF on which we have plotted the two moving averages (10-Period & 20-period). We can see the market being in a strong downtrend, and it is also confirmed by the two moving averages, where the ‘faster’ MA is below the ‘slower’ MA.

The next step is to find the overlap of ‘faster’ MA with the ‘slower’ MA from above, which is also known as the crossover of MAs. Once the crossover happens, there is a higher chance of the trend reversing. The below chart shows precisely how the crossover takes place, which means the trend can potentially reverse anytime now.

But, we shouldn’t be directly going long soon after the crossover. We need to confirm the trend reversal. A ‘higher low’ after the crossover validates the trend reversal, and this could be the perfect setup for going ‘long’ in this currency pair.

The below chart shows the ‘higher low,’ which is formed exactly after the crossover. Therefore, we now have confirmation from the market, so we can take some risk-free positions.

As we can see, in the below chart, the trade goes in our favor and hits our initial target. However, aggressive traders can aim for a higher ‘take-profit‘ as the new uptrend can reverse the entire downtrend, which is seen on the left-hand side. The reversal is also confirmed by moving averages where the ‘faster’ MA is above the ‘slower’ MA. The stop-loss for this trade is placed below the identified ‘higher low’ with a take-profit at a new high or significant S&R area.

Conclusion

The crossover strategy works beautifully in both volatile and trending markets, but they do not work that well in ranging markets. This is because the crossover takes place multiple times in the ranging market, and this leads to confusion about the market direction. To find high probability trades, one can also combine the strategy with other technical indicators to get additional confirmation of the trend reversal. In the next article, we shall see how moving averages can act as key support and resistance levels.

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Forex Course

66. Pairing The Fibonacci Levels With Trendlines

Introduction In the previous articles, we learned how Fibonacci retracements give extra confirmations while trading the support & resistance levels. We also know that Fibonacci levels can be used as a confirmation tool to trade many candlestick patterns as well. Now we shall extend this discussion and understand how Fibonacci retracements can be traded using […]

Introduction In the previous articles, we learned how Fibonacci retracements give extra confirmations while trading the support & resistance levels. We also know that Fibonacci levels can be used as a confirmation tool to trade many candlestick patterns as well. Now we shall extend this discussion and understand how Fibonacci retracements can be traded using […]

Introduction

In the previous articles, we learned how Fibonacci retracements give extra confirmations while trading the support & resistance levels. We also know that Fibonacci levels can be used as a confirmation tool to trade many candlestick patterns as well. Now we shall extend this discussion and understand how Fibonacci retracements can be traded using the trendlines.

Trendlines are a crucial part of technical analysis. They are primarily used to identify trends, be it up or down. Trendlines being such an important part of trading, when combined with the Fibonacci indicator, can produce trades that have the highest probability of winning. So let us see how this can be done.

Combining Fibonacci Levels & Trendlines

In the below chart, we have, firstly, identified an uptrend and drew a supporting trendline to it. The next step is to plot Fibonacci on the chart by identifying a swing low and a swing high. The marked area shows where all our trading is going to take place and the region in which we will find our swing low and swing high.

The traditional way of selecting a swing low is when the point intersects with the trendline, just as we have done in this case (below image). The swing high will be the point where the market halts and reverses for a while.

In the below chart, we have used the chosen a swing low and swing high to plot our Fibonacci indicator. In order to combine the Fibonacci with trendline, we must wait to see if the retracement from the swing high touches the 50% or 61.8% Fib level. After touching any of these levels, if the market gives a confirmation candle, it could be a perfect setup to go long. The retracement, in this case, touches the 50% level, which coincides exactly with the upward trendline. The next and final step is to look for a confirmation candle, if any.

We have gotten a confirmation sign from the market after the second green candle closes above the 23.6% Fib level (below image). Hence traders can now take risk-free positions on the ‘long’ side of the market with a stop-loss below the 61.8% Fib level and with an aggressive target above the recent high. This trade results in a risk to reward ratio of 1.5.

We should not forget that if the retracement does not take support at the 50% or 61.8% Fib level and goes further down, breaking all the levels, it could be a potential reversal sign. Thus the retracement that is coinciding with the trendline and reacting from 50% or 61.8% Fib level is the thumb of the rule of this strategy.

The above is a more widened image of the chart shows that the market continues to trend upwards, crossing our ‘take-profit‘ area. To take advantage of the market’s trending nature, we can place a trailing stop-loss order to maximize our profits.

Conclusion

When trends start to develop in the market, one should start looking for ways to go ‘long’ or ‘short’ by using necessary technical indicators that give a better chance of a profitable trade. The Fibonacci indicator is one such powerful tool to help traders find potential entry points. We hope you understood this concept clearly. Let us know if you have any questions in the comments below. Do not forget to take the quiz before you go. Cheers!

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Forex Course

59. Trading The Candlestick Charts Using Support and Resistance Levels

Introduction

Introduction

Introduction

In the previous few lessons, we have discussed many candlestick patterns and how to trade them. Those basics are very important for us to master Technical Analysis. Before leaving the Candlestick topics, let’s discuss THE most important concept in technical trading i.e., Support & Resistance. We shall first understand what Support and Resistance are, and will learn how to trade them on the Candlestick charts.

What Is Support?

Support is the level at which the price finds it difficult to fall below. Eventually, the price will bounce back up at this particular level. The support level acts as a floor that restricts price action to go down further. Some technical traders describe ‘Support’ as an area where demand overcomes supply. Because at this level, the demand for any currency will be more, hence the selling stops, and buying continues. The price reaction of any given asset would look something like the image below at the Support level. We can clearly see the price bouncing back up once it reaches the support level. (Blue Line = Support Level)

What Is Resistance?

Resistance is just the opposite of the support level. It is the level where price finds it difficult to break through to rise above until it is pushed back down. It acts as a ceiling restricting the price action to go up further. Basically, it is an area where supply overcomes demand. The price reaction of any underlying currency at a resistance looks something like the image below. We can see the price reaching the resistance line many times but unable to break through it. We must remember that at any point, Support can turn into Resistance and Resistance can turn into support. Hene, it is called S&R.

Pairing candlesticks with S&R

The fundamental method of technical trading is to buy at Support and Sell at Resistance. But this does not always work as there is no sure shot assurance that the Support and Resistance levels will hold for long. Hence traders need to look at other important factors while trading at Support and Resistance.

When buying near Support, we must wait for the consolidation at that area and only buy when the price breaks above that small consolidation. In that way, we can be sure that the price is respecting that level and is starting to move higher. The same concept applies when selling at resistance. Wait for consolidation and then enter a short trade when the price drops below the low of the small consolidation.

Below is an example of a short trade.

After entering the trade, make sure to place the stop-loss just below the low and above the high of Support & Resistance, respectively.

According to technical analysis principles, if a Support level or Resistance level is broken, their role is reversed, i.e., Support becomes Resistance and Resistance becomes Support. The psychology behind this phenomenon is that, when price breaches a key area, some will get out, and some hold on to their trades to see what happens. When price retraces back to the key area, people who have held it, go out and making the price bounce at the previous Support and Resistance.

Conclusion 

Traders always suspect a reversal at the key Support and Resistance as there is a high probability that price will reverse at these key levels. Some traders who had open positions exit at these price levels and others initiate new positions at these levels, depending on which side the price are they. Support and resistance levels are psychological levels at which many traders place orders to buy (support) or sell (resistance) making them supply or demand levels. That is why it is crucial to learn about Support and Resistance.  Also, support and resistance levels can be identified more easily using candlesticks, as a candle is very graphical, displaying wicks when the price bounces back from bottoms or tops. Identifying these significant levels forms the basis for Technical Analysis. Cheers!

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Forex Course

53. Trading The Single Candlestick Patterns – Part 2

Introduction

Introduction

Introduction

In the previous lesson, we discussed some basic single candlestick patterns, which gave us trend continuation signals. In this lesson, we will look at reversal patterns that are formed by a single candlestick and how traders should perceive them.

These patterns are very important to learn as they indicate clear market reversals. So essentially, when we find these patterns on the charts, we should anticipate a reversal and take our trades accordingly.

The Hanging Man Candlestick Pattern

A Hanging Man is a single candlestick pattern that occurs during an uptrend. They give warning signals that markets are going to fall. This candlestick pattern is composed of a small body, a long lower shadow, and no upper shadow. Since it is a reversal pattern that reverses the current uptrend, The Hanging Man indicates the selling pressure that is starting to increase. Below is how the Hanging Man candlestick would look like.

Below is a picture of how this pattern would like on the chart and how the trend reversal takes place.

Pattern Confirmation Criteria

  • Hanging Man is a single candlestick pattern that forms after a small rally in the price. The price rally can also be big, but it should at least be composed of few candles moving higher overall.
  • The candle must have a small body and a lower shadow at least twice the size of the real body.
  • This pattern is only a warning and a bearish candle after the formation of this pattern is highly desired. This is necessary for the Hanging Man pattern to prove to be a valid reversal. This is called confirmation.

The Hanging Man pattern is used by traders to exit long positions or enter into new short positions. After entering for a short position, stop loss can be placed above the high of the Hanging Man candle.

The Shooting Star Candlestick Pattern 

A Shooting Star is a bearish single candlestick pattern which also indicates a market reversal. It has a long upper shadow with little or no lower shadow and a small body.

This pattern typically occurs after an uptrend and forms near the lowest price of the day. The Shooting Star pattern can be seen as the market creating potential resistance around the price range. It implies that the sellers stepped in, erasing all the gains, and pushed the price near the open. Basically, at the appearance of this pattern, buyers are losing control, and sellers are taking over.

Below is a picture of how the pattern would look like on a chart

Pattern Confirmation Criteria

  • The pattern must appear after an advance in price. The price must rally in at least alternate green and red candles if not in all green candles.
  • The distance between the highest price of the candle and the opening price must be twice the length of the body of the candle.
  • It is best if there is no shadow below the body of the candle.

Traders should not take immediate action after the formation of this pattern. They should wait to see what the next candle does following the Shooting Star. If they see a further price decline, they may sell or short that currency pair. However, if the price continues to rise, it means the uptrend is still intact. So traders must favor long positions over shorting.

The difference between the Hanging Man and the Shooting Star is in the length of upper and lower shadows along with the context. By now, we have understood how continuous and reversal single candlestick patterns work. In the upcoming lessons, we will be learning dual candlestick patterns and their implication. Cheers!

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Forex Course

51. Fundamentals Of Candlestick Patterns

Introduction

Introduction

Introduction

In the previous course lessons, we have discussed the basics of candlesticks along with the pros and cons of using them. From this lesson, we will learn the basic candlestick patterns and their usage. As discussed, the idea of candlesticks charts has started in Japan in the late 1870s. These charts were then introduced to the outside world by Steve Nison through his first book, ‘Japanese Candlestick Charting Technique.’

In this lesson, let’s discuss the primary advantage of using candlestick charts. Although a single candlestick gives us many details about the price movement of an asset, a sequential set of candlesticks is more powerful. These sets are also known as patterns in simple trading language, and using these patterns, traders across the world take trading decisions.

Expert traders have decoded many such patterns and rigorously backtested them to analyze what those patterns will eventually result in. They also examined how the market direction will change after the appearance of these patterns on the charts. Now, let’s see the different candlestick patterns one must know.

Different types of candlestick patterns

There are single, dual, and triple candlestick patterns depending on how many candlesticks are involved in them. For example, if there are the candlestick pattern is formed by three candlesticks, it is known as the triple candlestick pattern. Every single pattern has its own significance and can be found in most of the Forex charts.

The main intention of identifying any candlestick pattern is to understand the further price movement in the market. Hence these patterns are classified into two different types – Continuation Patterns & Reversal Patterns. When we identify a continuation candlestick pattern on the chart, it means that the market will continue in the same direction as the underlying trend. Contrarily, if we identify a reversal pattern on the charts, we can expect the price to change its direction. Also, these patterns are internally classified as bullish and bearish continuous/reversal patterns, which will be discussed in the upcoming lessons.

Examples of Continuation Candlestick Patterns

  • Deliberation Pattern
  • Concealing Baby Swallow Pattern
  • Rising Three Methods Pattern
  • Separating Lines Pattern
  • Doji Star Pattern

Examples of Reversal Candlestick Patterns  

Some of these are single candlestick patterns, while some are multiple candlestick patterns. We shall be discussing each of these patterns in detail in our future articles.

Psychological context of candlestick patterns

The candlestick patterns demonstrate the psychological trading that takes place during the period represented by a single or multiple candles. We need to start imagining the price movement as a battle between buyers and sellers. Typically, Buyers expect that prices will increase and drive the price up through their trades. Whereas sellers bet on falling prices and push the price down with their selling interest.

Also, the Japanese gave very visual names to these patterns so that it impacts the mentality of a trader. For instance, pattern names like Hanging Man and Dark Cloud Cover represent negativity, while the patterns like Three White Soldiers and Morning Star indicate positive market results. Hence, as soon as we hear the names of these patterns, our sub-conscious memory will know whether the forecast of the market is positive or negative.

Benefits of trading candlestick patterns

Although initially conceived for daily timeframes, Candlestick patterns can be used by swing traders, day traders, and even long term investors. Below are some of the significant advantages of these patterns.

  • They are very easy to identify and comprehend. They provide a detailed description of the occurrences and happenings in the markets.
  • Interaction between the buyers and sellers can easily be understood just by reading the pattern and without having to analyze the market entirely.
  • Candlestick patterns can be used in conjunction with other indicators for extra confirmation on the trading signals generated.
  • They display reversal patterns that cannot be seen in other charts like Line & Bar charts.

That’s about the introduction to Candlestick patterns. In our upcoming lessons, we will discuss different candlestick patterns and how to generate trading signals using these patterns. So, stay tuned.

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Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns: Refresh your Knowledge

After our last articles on candlestick reversal patterns, test your kowledge.

After our last articles on candlestick reversal patterns, test your kowledge.

After our last articles on candlestick reversal patterns, test your knowledge.

If you need to give a second read, these are the links:

 

 

Let’s begin

 

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Reference:

The Candlestick Course: Steve Nison

 

Categories
Forex Basic Strategies

Identify Reliable Trading Signals Using ‘Piercing Line’ Candlestick Pattern

Introduction

Introduction

Introduction

The Piercing Line is a simple and effective candlestick pattern, and it is used to trade the bullish reversals in the market. This pattern typically appears in a downtrend. Also, when it appears in a significant support area, we can consider it more reliable. Piercing Line is a two candlestick pattern where the sellers influence the first candle, and the second candle is responded by enthusiastic buyers. Piercing Line essentially indicates the bears losing control, and bulls taking over the market.

  1. First of all, in a downtrend, the first candle of the pattern should be bearish.
  2. The second candle should be bullish, and it should open lower than the closing of the previous candle, and it must close above the midpoint of the bearish candle.

This indicates that buyers now overwhelmed the sellers. In terms of supply-demand, this pattern shows that the supply is depleted somewhere, and the demand for buying has increased. Remember not to trade this pattern alone. Always use it in conjunction with some credible indicators or other trading tools to further enhance the probability of winning.

Piercing Line Pattern Trading Strategies

Piercing Line Pattern + Percentage Price Oscillator

In this strategy, we have paired the Piercing Line pattern with the Percentage Price Oscillator to generate credible trading signals. The Percentage Price Oscillator is a momentum indicator. It consists of a centerline, histogram, and the two moving averages. Just like the MACD indicator, the PPO also represents the convergence and divergence in price action. This indicator gives a crossover at the overbought and oversold market conditions.

When price action crosses the centerline, it means that the bullish or bearish momentum is super strong. We want to let you know that PPO is not that popular in the industry. Also, it is not available in the MT4 terminal. However, you can download this indicator from this link and add it to your MT4 terminal. If you are a Tradingview user, search the PPO indicator in the indicators tab, and you should be able to find it.

Step 1 – Find out the Piercing Line pattern in a downtrend.

Step 2 – Once you find the Piercing Line pattern, the next step is to wait for the reversal to happen on the PPO indicator at the oversold market conditions.

In the below CHFJPY chart, the market was in an overall downtrend. We can see the market printing Piercing Line pattern, and that is an indication of a trend reversal. We can also see the PPO indicator giving crossover in the overbought area at the same time. Both of these clues indicate a clear buy signal in this pair. We can also see the price action showing divergence, which is another clue to go long. If we are able to find all of these clues on a single price chart, we shouldn’t mind placing bigger trades.

Step 3 – Stop-loss and Take Profit

PPO indicator quite often gives high probability trading signals. So when we take trades of that kind, most of the time, we must place the stop loss just below the first candle of the Piercing Line indicator.

There are several ways to book profits. For this particular strategy, we can close our position when the PPO reversed at the overbought area or when the market starts printing the opposite pattern. If you plan to make more money in a single trade with extra risk, it is advisable to book the profit at the higher timeframe’s major resistance area.

In the below chart, we can see that we have closed our whole position at the major resistance area and the stop-loss order was just below the recent low.

Piercing Line Pattern + Double Moving Average

In this strategy, we have paired the Piercing Line pattern with the Double Moving Average. Moving Average is a very well-known indicator in the industry. Many average indicators are available in the market. If you are using the lower period average, expect more trading signals. Contrarily, if you are using the higher period average, expect fewer but accurate signals.

Step 1 – First of all, find out the Piercing Line pattern in a downtrend.

Step 2 – Activate the buy trade when the lower period MA crosses the higher period MA. In the below EURAUD Forex chart, the price action was in a downtrend, and around the 22nd of December, the market prints the Piercing Line pattern. This means that the sellers now have a hard time to go lower, and buyers took over the market. Furthermore, when a lower period moving average crosses the higher period moving average, it is a clear indication to go long. After our entry, price action immediately prints a brand new higher high.

Step3 – Stop-loss and Take Profit

If you are an aggressive trader, use the recent low for stop loss. But if you are a conservative trader, make sure to place wider stop losses. If you plan to ride the longer moves, wait for the price action to hit the daily support area. But if you plan to go for intraday trades only, we suggest you exit your position when the double MA gives the opposite signal.

In the below chart, we can see that we have closed our full positions at the higher timeframe major resistance area, and stop-loss was just below the recent low. Overall, it was a 3R trade.

Bottom Line

Piercing Line pattern is a bottom reversal pattern, and it is one of the very well-known bullish reversal patterns. We can say that this pattern is exactly the opposite of the Dark Cloud Cover pattern. We won’t be able to see this pattern very frequently on the price chart, but when it appears, a trend reversal is guaranteed. Sometimes you will find this pattern in the consolidation phase, but it’s not worth your time to trade it in ranges. So it is always recommended to find this pattern in a clear trending market because that’s where we can generate more effective signals. The only limitation of this pattern is that it requires the use of other technical tools to confirm the signal and cannot be used stand-alone. But that’s the case of most of the candlestick patterns, so that’s not a major limitation.

That’s about the Piercing Line candlestick pattern. Let us know if you have any questions in the comments below. Cheers!

Categories
Forex Course

49. Quick History & Introduction To Japanese Candlesticks

What are Candlestick Charts?

What are Candlestick Charts?

What are Candlestick Charts?

A candlestick chart is simply a way of depicting the price moment’s information. Since these chats are very famous, they are available on almost every trading platform. Candlestick charts were first developed by a Japanese rice trader Sokyu Honma in the late 17th century. He is known as the father of candlesticks. Yes, it has been more than 250 years since this chart has been devised and yet they are so relevant even today.

Sokyu Honma – Father of Candlesticks

(Photo Credits – Alchetron)

Japanese are huge technical traders. They use a combination of candlestick techniques & western charts to analyze the market. The primary advantage of a candlestick chart is that it identifies the underlying psychology of traders in the market. This feature differentiates candlesticks from the other chart types we know today.

Have you come across terminologies like ‘hanging-man,’ ‘dark-cloud,’ and ‘evening-star’ but not sure what they are? Good. In the first part of this course lessons, we will be discussing everything about candlesticks and its patterns. We will also discuss how to use these charts & patterns to make profitable trades, as it will open a new way of analysis for you and show how Japanese candlesticks can enhance your trading performance.

Why do most of the traders use candlestick charts? 

There is a great interest in candlesticks by top traders. There are many reasons for that, and few of them are listed below:

🕯️ Candlestick charts are flexible. This is because they can be used as standalone or in combination with other technical indicators. These charts provide an extra dimension to the analysis.

🕯️ This technical approach is an age-old tradition of analysis, which has evolved from centuries of trial and error.

🕯️ Japanese are quite visual on the terms used to describe the patterns. A term like ‘hanging-man’ will spark interest among traders. There are hundreds of such names. Once a trader gets an understanding of what that pattern is, they will not be able to trade without using them.

🕯️ Another important reason for using the candlestick chart is that it can be paired along with the bar charts for people who see bar charts alone.

🕯️ All the usual technical analysis tools can be easily used with candlestick chartings, such as moving averages, trend lines, Elliot waves, retracements, and more. These charts provide a unique way of analysis, which is not provided by any other charting tool.

Limitations of using the Candlestick charts

🕯️ As with all other charting methods, candlestick pattern depends on the interpretation of the trader. This could be one of their limitations. As a trader gain experience, they discover which candlestick pattern suits them the best.

🕯️ Every candlestick has a close. Therefore, traders will have to wait for the close to get a valid trading signal. However, a trader might try and anticipate what the close would be a few minutes before the actual close.

🕯️ The opening price is vital in candlestick. Traders with no access to live market data might not be able to get the opening price of a security.

That’s about the introduction to Candlestick charts, its pros & cons. In the next article, we will learn the anatomy of a single candlestick chart so that you can read the chart better. Make sure to take the quiz below before moving on. Cheers!

[wp_quiz id=”59568″]
Categories
Forex Course Forex Daily Topic

Introduction To Forex Course 3.0

Hola Readers! We have successfully completed the first two courses and received an amazing response for both of them. We can’t thank you enough for that. Also, we hope these first two courses have helped you in understanding the most fundamentals basics of the Forex market. It is very important to know these basics in order to succeed in the Forex market. We have made a quick navigation guide for both the courses just for you to access the articles easily.

Hola Readers! We have successfully completed the first two courses and received an amazing response for both of them. We can’t thank you enough for that. Also, we hope these first two courses have helped you in understanding the most fundamentals basics of the Forex market. It is very important to know these basics in order to succeed in the Forex market. We have made a quick navigation guide for both the courses just for you to access the articles easily.

Hola Readers! We have successfully completed the first two courses and received an amazing response for both of them. We can’t thank you enough for that. Also, we hope these first two courses have helped you in understanding the most fundamentals basics of the Forex market. It is very important to know these basics in order to succeed in the Forex market. We have made a quick navigation guide for both the courses just for you to access the articles easily.

You can find them here the guides for – Course 1.0 | Course 2.0

With all these basics in mind, we will be moving on to our new course, which is a bit different than the other two courses. We are saying this because the first two courses are more inclined towards information and theory. But Course 3.0 is all about Technical Analysis. Hence most part of it deals with the practical applications that are involved rather than just theory. The quizzes and everything remain as is, but a lot more effort from your side is required to ace the knowledge that we are going to provide in the lessons.

Having said that, Technical Analysis has the most logical approach to the prediction of price movement than the Fundamental & Sentimental Analysis. There are a lot of components within the technical analysis, and some of them include Price-Action trading, technical tools such as Indicators & Oscillators, Volume based trading, etc. In this course, we will be going through all of them in detail.

Topics that will be covered in this course 

✫ Everything About Candlesticks

✫ Support & Resistance Levels

✫ Moving Averages

✫ Popular Indicators & Oscillators

✫ Fibonacci Trading

In each of the topics, there will be about 7 – 10 article lessons where complete information is provided related to the topics. Quizzes will be available for each of the articles like before.

We are proud to present this course to you as it is prepared by some of the top technical traders with great expertise in this field. Aren’t you excited? We wish you all the best in studying and learning the concepts with at most interest. Cheers!

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Forex Basic Strategies

Trading The ‘Three White Soldiers’ Candlestick Pattern (With RSI & EMA)

Introduction

Introduction

Introduction

The Three White Soldiers is a bullish candlestick pattern. This pattern is highly reliable and quite potent when it is found at a significant support area in a downtrend, which indicates sharp price reversals from a bear market to a bull market.

  1. Three White Soldiers pattern consists of three consecutive bullish candles; typically, this pattern should be traded when found at the end of a downtrend.
  2. Each candle should open and close higher than the previous candle.
  3. The candles must have small or no wicks. Because that indicates, the buyers managed to close the price of the currency pair at the high of a candle. If the third candle is smaller than the preceding two candles, it indicates that the buyers do not have much strength, and the market can easily print a new lower low.

Candles get printed on every trading chart in all the timeframe. But only the candlestick patterns in the right context of the market will be rewarded. The Three White Soldiers pattern that we are going to discuss is one of the most credible and reliable patterns we have come across. Trading legend Gregory L. Morris, in his book ‘Candlestick Charting Explained,’ said that the Three White Soldiers is extremely rewarding if traded correctly and it should never be ignored.

Trading Strategies

Three White Soldiers + RSI indicator

In this strategy, we have paired the Three White Soldiers pattern with the RSI indicator to identify good trading signals. RSI is a well-known oscillator, and it stands for the Relative Strength Index. The RSI indicator has a reading from 0 to 100. When the indicator line goes above the 70, it indicates the overbought conditions. When the indicator lines go below the 30 levels, it means the market is in an oversold condition.

Step 1 – First of all, find the Three White Soldiers pattern in a downtrend.

Step 2 – When market prints the Three White Soldiers, our next step is to check the RSI indicator. If the RSI indicator is at the oversold area and gives a sharp reversal, it means that both of the trading tools support the buying entry in any underlying currency pair.

In the example below, GBPNZD was in an overall downtrend. At first, market prints the Three White Soldiers pattern, and the RSI was at the oversold area. This condition indicates a potential trend reversal. We can see that the pattern candles are quite strong, and the RSI indicator also supported our strategy. This aspect creates an illusion for novice traders to take the trade immediately. However, it is not a good way to enter the trade. We suggest you always wait for 2-3 candles to confirm the stability of the pattern.

Step 3 – Step Loss & Take Profit

In this example, we have put the stop loss just below the low of the first candle of three green candles. When two leading trading tools indicate the same signal, always use smaller stops so that you can maximize your profits.

For this strategy, there are several ways to book the profit. We can close our position at a significant resistance area or when the RSI indicator reaches the overbought area. If your plan is to ride the longer moves, we suggest you closing your position when the market prints the Three Black Crows patterns. This pattern is the complete opposite of the Three White Soldiers pattern.

The example below belongs to the daily chart. Keep in mind that stronger the support/resistance area on the higher timeframe, more chances the market has to respect that area. In our example, the last time price respects the resistance line, so we decided to close our full position at a resistance area. Overall it was 1500+ pip move on the daily chart. These kinds of higher timeframe trades are suitable only for big investors.

Three White Soldiers + EMA

In this strategy, we have paired the Three White Soldiers pattern with the EMA to filter out the bad trading signals. EMA stands for Exponential Moving Average. The EMA is used to highlight the current trend and to spot the trend reversals. Trading signals can also be generated when the EMAs are read correctly. Generally, when the EMA goes above the price action, it indicates a sell signal, and when it goes below the price action, it indicates a buying signal.

Step 1 – Of course, the first step here is to identify the Three White Soldiers pattern on the charts.

Step 2 – When market prints, the Three White Soldiers, and EMA go below the price action, it indicates the buying signal.

In the below EURAUD weekly Forex chart, when the market prints the Three White Soldiers pattern, EMA was also below the price action. This indicates a potential price reversal of this currency pair. Even when both the pattern and EMA indicates the signal, we decided to wait for 3 to 4 candles to confirm the strength of the pattern. We can see that the market holds there for a couple of candles, which is a clear cut sign to go long on this pair.

Initially, the market goes higher for some candles, but it didn’t reach our major target. Our position goes into the loss a couple of times. Do not panic and lose trust in your strategy because the price didn’t hit the stop loss yet. Trading is a game of patience and only close your position when the market hit the stop loss or take profit. In this case, waiting patiently led to fruitful results as our trade hits the take profit.

Step 3 – Stop Loss & Take Profit

In the above chart, we have placed the stop loss above the exponential moving average because it works as a dynamic support/resistance to price action. We closed our full position when EMA goes above the price action.

Conclusion

Most of the times, Three White Soldiers pattern appears at the end of a downtrend. Sometimes it also prints after a lengthy consolidation phase. Although it is not a strong bullish sign if you want to trade the consolidation phase, always pair this pattern with other technical tools to filter out the negative signals. The volume is the most critical thing to enhance the reliability of the pattern when the market is in a consolidation phase.

Categories
Candlestick patterns Forex Basic Strategies Forex Trading Strategies

Pairing The Hanging Man Candlestick Pattern With MACD Indicator

Introduction

Introduction

Introduction

The Hanging Man is a visual candlestick pattern which is used by traders and chartists in all type of markets. The term ‘Hanging Man’ refers to the shape of the candlestick. Visually the hanging man looks like a ‘T,’ and it appears in an uptrend. The formation of this candlestick is an indication that the uptrend is losing its strength. Meaning, sellers started showing interest, and the current trend of an asset is going to get reversed. Anyone can easily predict from the name of this pattern that it is viewed as a bearish sign.

The Hanging Man candle composes of a small body and a long lower shadow with little or no upper shadow. The vital point to remember is that the hanging man pattern is a warning of the upcoming price change, so do not take it as a signal to go short. Also, trading solely based on one pattern is risky. To confirm the sign given by the Hanging Man pattern, traders must pair it with support resistance or any other trading indicator.

This pattern is not confirmed unless the price falls shortly after the Hanging Man. If the next candle closes above the high of the Hanging Man, this pattern is not valid. After the pattern, if the very next candlestick falls, then it’s a clear indication of the reversal. Now, if you see a Hanging Man candlestick and the above-discussed rules apply, you can go ahead and take the trade. But since it is crucial to have an extra confirmation, let’s pair this pattern with a technical indicator.

Pairing the Hanging Man Pattern With MACD Indicator

In this strategy, we have paired the Hanging Man pattern with the MACD indicator so that we can filter out the low probability trades. MACD stands for Moving Average Convergence and Divergence, and it is one of the most popular indicators in the market. It is essentially an oscillator that is used for trading ranges, trend pullbacks, etc. Also, this indicator identifies the overbought and oversold market conditions. In this strategy, we are using the default setting of the MACD indicator to identify the trades.

Step 1 – Confirm the uptrend first on your trading timeframe

We can’t use the Hanging Man pattern to take the buy trades. Since it is a reversal pattern, it only signals the selling trades. So first of all, find out the uptrend in any currency pair. One more primary thing to remember when trading this pattern is this – After finding a clear uptrend, if you see the market printing the Hanging Man, then try not to trade that pair. Because, in a strong trend, it’s not easy for a single candle to change the direction of the entire trend. But if you find this pattern when the uptrend is a bit choppy, it has higher chances to perform. As we can see in the image below, the uptrend in USD/CHF was not strong enough.

Step 2 - Find out the Hanging Man pattern on your trading timeframe

Some traders use two or three timeframes to trade patterns. But that’s not the right way of pattern trading. If you are an intraday trader, use only lower timeframes to identify the pattern. So the next step here is to find out the Hanging Man in this chart. Also, apply the MACD indicator. For us to go short, the MACD indicator must be in the overbought area.

As you can see in the image below, the USD/CHF Forex pair prints a Hanging Man pattern. This is the first clue for us that the buyers aren’t able to push the market higher. Soon after the crossover happened on the MACD indicator, we can say that this forex pair is in the overbought condition. So now, two forces are aligned, and they are indicating us to go short. Within a few hours, the pair rolls over, and it prints brand new lower low.

Step 3 – Entry, Take Profit & Stop Loss

We go short as soon as we see the Hanging Man candlesticks and MACD indicator at the overbought area, we can go short. In this pair, buyers were quite weak, and this is an indication for us to place deeper targets. As we suggest in every strategy, often close your position at significant support/resistance area, or when the market starts to print the opposite pattern. In this pair, we closed our full trade at 0.9844. Overall it was 7R trade, and we made nearly 140+ pips.

Placing the stop loss depends on what kind of trader you are. Some advanced traders use their intuition to close their positions, while some use logical ways such as checking the power of the opposite party. In this trade, we know that the buyers are not strong enough, so there is no need to use the spacious stop loss.

Difference Between Hanging Man and Hammer Patterns

The Hanging Man and Hammer both look the same terms of size and shape. Both of these patterns have long, lower shadows and small bodies. But the Hanging Man forms in an uptrend, and it is a bearish reversal pattern. Whereas the Hammer forms in a downtrend, and it is a bullish reversal pattern. These two patterns appear in both short and long term trends. Do not use these patterns alone to trade the market. Always use them in conjunction with some other reliable indicators or any other trading tool.

Bottom Line

Most of the professional traders never see this pattern alone as a predictor of a potential trend reversal. Because there will be times when the price action continues to move upward even after the appearance of the Hanging Man. Hence technical indicator support is required to confirm the reversal of the trend. Make sure to stick to the rules of the pattern so that you can use it to your advantage. This pattern forms in all the timeframes, but we suggest you master it on a single timeframe first. Cheers!

Categories
Candlestick patterns Forex Daily Topic

Candlestick Trading Patterns I – The Story

The Financial markets are an exciting place for many people, attracted by dreams of infinite wealth. However, these markets are one of the most complicated environments on earth. The fact that millions of people exchange assets in financial markets makes them very difficult to predict, as each of the participants has its own vision, interests, and objectives.

The Financial markets are an exciting place for many people, attracted by dreams of infinite wealth. However, these markets are one of the most complicated environments on earth. The fact that millions of people exchange assets in financial markets makes them very difficult to predict, as each of the participants has its own vision, interests, and objectives.

The Financial markets are an exciting place for many people, attracted by dreams of infinite wealth. However, these markets are one of the most complicated environments on earth. The fact that millions of people exchange assets in financial markets makes them very difficult to predict, as each of the participants has its own vision, interests, and objectives.
That is why traders are always investigating the best tools to allow them to detect market sentiment in every situation.

Fundamental versus Technical

In the past, fundamental analysis was the only tool that allowed investors to detect whether a value was overvalued or undervalued. That gave them the keys to future trends, and to be able to overtake other investors with less information.
Then, at some point, the theory arises that the analysis of price history shows everything necessary for an informed investment. According to this theory, launched by Charles Dow, the price is already included in the fundamental analysis, since the chart is the trace left by investors about the consensus value of the good.

That said, there is a consensus that fundamental analysis is still necessary to detect the macro trend and to position the buying and selling actions in favor of the primary trend, while technical analysis is essential to generate the timing of trading activities.

Fig 1- Old NY Stock Exchange price table and Average chart. Source (https://pix-media.priceonomics-media.com/blog/1230/image04.png)

Chartism was encouraged in the early 1970s and 1980s by the emergence of personal computers, which allowed graphs to be automatically generated, instead of manually drawn, and also analyzed in time frames shorter than the daily.

The OHLC Chart

The technical analysis popularized the use of OHLC graphs that not only indicated the closing value of each interval but also gave the opening, maximum, and minimum data. This allowed chartists to observe the range of movements of the period and obtain an assessment of the volatility.

Fig 2- OHLC Chart in its classical B&W style.

The use of OHLC charts was a big advancement in the analysis of the price action. Soon analysts began to define profitable patterns such as reversal bar, key reversal bar, Doble and triple tops and bottoms, head and shoulders pattern round bottoms, Cup and handle, and many more.

Candlestick Charts

A centuries-old hidden way to analyze the markets came from Japan helped by Steve Nison’s studies of candlestick charting methods. According to him, centuries back, Japanese merchants were at the bottom of Japan’s social scale, well below soldiers, artisans, and farmers. But a prominent merchant began rising in status by the XVIIth century. His name was Munehisa Homma. At that time rice was a medium of exchange. Feudal Lords would store it in Osaka’s warehouses to, then, exchange the receipts when it was convenient for them, thus, becoming a de-facto futures market. Homa’s trading techniques, which included analysis through a primitive form of candlestick charts to gauge the psychology of the marker would earn him an immense fortune.

Fig 3- Candlestick Chart in its modern colorful style.

The major advantage of a candlestick chart over an OHLC chart is the ability to assess at a glance the overall trend and, also many hints about the current sentiment or psychological mood of the trader collective. Color is key to assess the current trend. Also, large bodies signify genuine momentum, short bodies and large wicks mean indecision and fight between buyers and sellers to control the price action.

Candlestick Patterns

Many of the western analysis methods can be applied also to candlestick charts, but these Japanese charts have brought a brand new batch of new patterns to assess market turns and continuations.  We will try to cover most of them, including obviously all major trading candlestick patterns such as Morning and evening stars, haramis, engulfing, three soldiers, and so on.

To refresh your basic knowledge of candlesticks, we recommend the following articles:

https://www.forex.academy/all-you-need-to-be-introduced-to-trading-charts-part-1-line-bar-and-candlestick-charts/

https://www.forex.academy/facts-about-candlesticks-you-never-knew/

https://www.forex.academy/dissection-of-candlestick/

https://www.forex.academy/candlestick-charts-and-its-advantages-in-financial-trading/

 

 

Categories
Forex Videos

Predicting The Future Of The Forex Market With These Candlestick Formations

[embed]https://youtu.be/pCh8iSCS8kk[/embed]

Candlestick formations – The display of price information

There are many different ways that a trader can have access to the price of an asset.

[embed]https://youtu.be/pCh8iSCS8kk[/embed]

Candlestick formations – The display of price information

There are many different ways that a trader can have access to the price of an asset.

Candlestick formations – The display of price information

There are many different ways that a trader can have access to the price of an asset. In the Forex market, the most common ways that traders monitor the movements of exchange rates are by using line graphs, bar charts, Renko charts, tick or ticker tape charts. And one of the most popular ways of deciphering price movements is the Japanese candlestick.

Let’s look at some examples of exchange rate price action via three commonly used technical analysis tools.

Example ‘A’ is a basic line graph of the daily time frame of the GBPUSD pair, as denoted in the top left-hand corner of our chart. Time frames are shown here too. At the bottom of the chart along a horizontal axis, we can see time and the date, and the exchange rate of this pair is shown in the vertical axis on the right-hand side of the chart.

The line graph converts the price action of a currency pair onto a continuous line on a chart. As you would expect, the line goes up and down and sideways. However, just by looking at the line graph alone, it would appear to be almost impossible to try and ascertain future movements by this tool.

Example ‘B’ is the same daily time frame of the GBPUSD pair, but this time we are looking at a bar chart. Each bar opens at the beginning of the given timeframe, and in this case, opens and closes every 24 hours. Each bar consists of three lines: A vertical line to the left of the horizontal line, which denotes the opening of the bar; the vertical line which tells the trader the up-and-down movement of price action during this time frame; and another horizontal line to the right of the vertical which tells the trader where price action finished.

Let’s now turn our attention to example ‘C’: The Japanese candlestick. Each candlestick opens and closes along a vertical line. Again, this is the daily time frame of the GBPUSD pair. The candlestick offers a much greater visual representation of the exchange rate and therefore presents many opportunities to a trader with regard to potential future trends. The Japanese candlestick is the most widely used technical tool used by traders across the globe.

Japanese candlesticks were invented in the early 15th century by the Japanese government of the time. They were used to record price movements on Japan’s rice exchange. At this time, rice was not only the primary dietary staple, but it was also a unit of exchange.

Example ‘D’ is a typical candlestick shape that traders see regularly on their charts. We have marked the points where the candlestick opened and closed. If the candlestick closes above the exchange rate at the point of which it opened, it is considered to be a bullish candlestick. If it closes below the exchange rate at the point of opening, it is considered to be bearish. Candlesticks can also open and close at the same exchange rate.

However, in this example of a bullish candlestick, we can see a wick at the top of the candlestick and also one at the bottom. Therefore, a trader can determine that after opening, price action initially falls before reversing and rising to the top of the time frame, before falling again back to the close. In this case, we have two wicks, one at the top and one at the bottom. A trader can tell the total exchange rate covered by the candlestick by measuring between the low and the high points and also see pullbacks and reversals. The same principle applies to a bearish candlestick where price action is measured over the whole length of the candlestick, but where traders easily identify the opening and closing of price action for each time frame.

Each candlestick will have a different sized body and wicks dependent on the amount of volume going through at any given time. The basic principle is that the longer the body and the shorter the wicks, the stronger the volume. Traders are able to read the many different types of candlesticks, which are all given names, in order to depict the strength of a trend and volume in the market at any given time, and these will help them to predict trend formations, reversals, and consolidation of the exchange rate of any particular pair.

Diagram ‘E’ provides us with a snap-shot of a 1-hour chart of the GBPUSD pair, where candlesticks are used to show price action. In section ‘A’ of the diagram, we can see that the price action is fairly flat and trading in a sideways motion. However, candlestick number 1 pushes below the trend line and forms the basis of a downward move. The candlestick is also bigger than those preceding it, and the wick at the bottom is small, denoting strong volume to the downside.

After a period of uncertainty, price action becomes stronger to the downside, as denoted by the large candlesticks numbered 2 and 3. Price action continues the downward trend, however buyers push up price action at number 4, which is called a reversal hammer, and where indeed price action reverses to section ‘B.’ We now have a series of smaller candlesticks which denotes a thinning in volume, and where we can see some candlesticks open and close at the same exchange rate, telling traders that neither the buyers or sellers are in control at this particular moment in time.

Candlestick number 5 tries to push the trend to the downside, but reverses and forms a reversal hammer shape, and where we subsequently see price action move to the upside as per candlestick number 6 and 7. But we then see a trend reversal in candlestick number 8, which becomes an engulfing candlestick because it is larger than both 6 and 7. The strength of this candlestick denotes a potential increase in price action to the downside by taking out the previous two candlesticks, and we see further movement to the downside before price rises again. Incidentally, we have another price reversal hammer in section A where we have placed an X.

Here at Forex.Academy, we strongly recommend that you learn as many candlestick formations as possible because they are very commonly used within the trading community, and therefore this will give you an edge in your trading.

Categories
Forex Basic Strategies

Heard Of The Amazing ’20 Pips Per Day’ Strategy?

Introduction
Forex is the most liquid and volatile market in the world. The average pip movement in the major currency pairs is around 100 pips. However, as a retail trader

Introduction
Forex is the most liquid and volatile market in the world. The average pip movement in the major currency pairs is around 100 pips. However, as a retail trader

Introduction

Forex is the most liquid and volatile market in the world. The average pip movement in the major currency pairs is around 100 pips. However, as a retail trader, it is not impractical to grab 100 pips every single day. Though there are some strategies out there, it is very challenging to make 100 pips per day every day. But, there is 20 pips strategy, 30 pips strategy as well as 50 pips strategy, which is much reliable than the 100 pips strategy. So, in this lesson, we shall be discussing the 20 pips strategy.

The 20 Pips Strategy

The strategy is very simple and straightforward. According to this strategy, when the price breaks above a range in a logical area, you must go long, and when it breaks below a range in a logical area, you must go short. So, this strategy is basically a breakout strategy. However, it’s not as straightforward as it sounds. There are some criteria one must consider before trading this strategy.

❁ Considerations

✓ Currency Pair

You can trade this strategy on any currency pair. However, it is recommended to focus mainly on major and minor currency pairs.

✓ Session

Though the market is open 24 hours, it does not mean you can apply this strategy any time during the day. To keep it safe, it is advised to trade only during the times when there is high liquidity. That is, the London – New York overlap would be the best time to apply this strategy. Else, the London session or the New York session will work perfectly fine as well. And it is great if you do not trade it during the Asian session, as markets don’t usually break out during this period.

✓ Timeframe

Timeframe plays an important role when it comes to trading a strategy of this type. To make 20 pips a day, it is ideal to stay between the 1hour timeframe and the 15-minute timeframe.

✓ Indicators

This strategy does not require any technical indicators.

❁ How to trade the 20 pips strategy

Below is a step by step process to trade this strategy.

  1. Open the candlestick chart of any currency pair, preferably, a major or minor currency pair.
  2. Firstly, go to the 1-hour timeframe in the chart and see if the market is in a logical area to buy or sell (Ex: Support and resistance).
  3. If yes, then wait for the price to break above or below the consolidation area.
  4. Check the strength of the breakout on the lower timeframe (15 minutes). Based on the strength, prepare to hit the buy or sell.

❁ Trading the 20 pips strategy on the live charts

• Buy example

Below is the chart of AUDUSD on the 1-hour timeframe. We can see that the market has been bouncing off from the purple line. So, this becomes a logical area to buy. At present, the market is holding at the purple support line. And it was in a tiny range for like ten candles. Now, to apply the strategy, we need the market to break above this range.

In the below image, we can see that the market breaks above the range with a big green candle. But, before hitting the buy, we must switch to the lower timeframe and see if the momentum of the candle that broke the range was strong or not.

In the below 15 min chart, we can clearly see that the broke above the range in just two green candles. This is an indication that the buyers have come up strong. Hence, now we can prepare to go long.

Coming to the take profit and stop loss, the take profit would, of course, be 20 pips, and the stop loss can be kept a few pips below the support area. Alternatively, you can even go for a 1:1 RR by keeping a stop loss of pips.

 

• Sell example

Note that this strategy can be applied when the market is in a trending state as well. Below is the chart of EUR/USD on the 1-hour timeframe, and we can see that the market is in a downtrend. The market keeps making lower lows and lower highs. At present, it can be seen that the market is pulling back, and a green candle has appeared. Now, all we need is the price to break below the pullback to give us a heads up that the downtrend is still active.

In the below chart, we can see that, in the very next candle, the market broke below the pullback area. Hence, we can prepare to go short after getting confirmation of the strength from the lower timeframe.

In the below 15-minute timeframe chart, we can see that the momentum of the candle was sufficiently robust during the breakout. Hence, we can consider shorting in now.

As far as the take profit and stop loss are concerned, it remains the same as the previous example. That is, 20 pips take profit with 20 pips stop loss.

Bottom line

A great feature to consider about this strategy is that it can be used in any state of the market. However, all the criteria mentioned above must be met for the strategy to work. If you’re a beginner in trading, then this could be an ideal strategy to get started with. And if you have experience in trading, you can try enhancing the strategy by applying some indicators and patterns.

Note that this strategy, just like other strategies, does not provide 100% accuracy. There are times when this strategy fails, as well. Hence, it is recommended to use this strategy in conjunction with other strategies to have a better winning probability. Happy Trading!

Categories
Forex Price Action

Support and Resistance

Support and Resistance
One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced

Support and Resistance
One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced

Support and Resistance

One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced methods of identifying support and resistance are not only relatively unknown, but they are some of the original Technical Analysis theories. Some of those methods include identifying support and resistance according to naturally squared numbers, numbers related to an angular nature in Gann’s tools, harmonic ratios, pivots, Fibonacci levels, and other more esoteric methods. For this article, though, the focus is on identifying support and resistance based on prior traded price levels and ranges**.

 

What are Support and Resistance?

When you hear the word’s support and resistance, the definitions of those words may be the first thing that comes to your mind. Support indicates that something will assist or strengthen while resistance indicates rejection. In Technical Analysis, support means a level that is below the price, and resistance is above price.

The image above shows resistance as a red band and support as a green band. It’s important to understand that support and resistance on a candlestick chart should never be viewed as a static and exact price level. With a chart style that has such dynamic time and price levels, like Japanese candlesticks, support and resistance are an area or range of value. Determining the support and resistance levels requires a ‘zoomed’ out view of the chart. When you get a broader view of the past price action, you can see price levels where price has moved lower and then reversed higher (support) as well as price levels where price move higher and then reversed lower (resistance). The most important levels are those that show past resistance becoming support and vice-a-versa.

Prior Support turned into Future Resistance

 

Use another chart style to find support and resistance

Renko Chart

While it may seem simple to find support and resistance on a candlestick chart, there are some alternatives. The length of the wicks and body of candlesticks can vary and can add to the confusion. Using a Renko (above) chart simplifies the process of finding support and resistance by reducing the noise on the chart and providing less ambiguity when looking for highs and lows. Take note of how these resistance and support levels are drawn on a price-action-only chart. With a price action only chart, I don’t draw a value area like I would on a candlestick chart. But if you are not comfortable using a price-action-only chart and want to stick to a candlestick chart, then another trick that might help is to remove the wicks from the candlesticks. Look at the side by side comparison below.

Wicks VS No Wicks

Both charts display a weekly chart of the CADCHF pair. On the left, we have a regular candlestick chart with wicks – wicks that are all over the place. The chart on the right is the same as on the left, but with no wicks displayed. You can see how much more clear the tops and bottoms are on the right. This can make it a little easier to spot support and resistance levels.

 

** It is the view of this author that past support and resistance levels are inefficient for today’s markets. However, the method discussed in this article is part of a foundation of learning that can be applied to future price level analysis.

Categories
Forex Candlesticks

Ideas that can be Blended with Candlestick to Trigger Entries-Part4

In this article, we are going to demonstrate how a Morning Star offered us an entry. We know Morning Star is a strong bullish reversal candle, which is a combination

In this article, we are going to demonstrate how a Morning Star offered us an entry. We know Morning Star is a strong bullish reversal candle, which is a combination

In this article, we are going to demonstrate how a Morning Star offered us an entry. We know Morning Star is a strong bullish reversal candle, which is a combination of three candlesticks. There are two types of Morning Star.

  1. Morning Star
  2. Morning Doji Star

Here is how Morning Star looks like

And this is how Morning Doji Star looks like

The example we are going to demonstrate is a Morning Doji Star. Let us get started.

The price was down-trending and produced a Doji Candle on a support level where the last bearish candle closed within. Look at the very last candle. It came out as a Bullish Marubozu Candle closing above the 2nd last candle’s open. This is a typical example of Moring Star upon which buyers shall start integrating other equations to go long.

Let us have a look at those equations.

At first, we have to draw a level of resistance here. Let us draw it.

We draw the resistance line right where the candle closes. Since we do not have any down-trending Trend Line or a Double Bottom’s neckline here, thus we must wait for a trigger candle to close above the bullish candle on the trading chart.  We now have to flip over to the trigger chart. This is an H4 chart, so let’s flip over to the H1 chart to get correction/consolidation and breakout.

This is how the H1 chart looks. The first H1 candle came out as a bearish corrective candle, and the very next one closed above the bullish H4 candle’s close. A perfect trigger candle, we shall wait for. We sometimes may not get the corrective candle here. The very next H1 candle may breach the resistance line and offer us the entry.

In our previous article, we demonstrated an example of how a Bearish Engulfing Candle offered us an entry. Have you spotted out the difference between a single candlestick pattern and a combination of candlesticks pattern’s entry?

On a single candlestick entry, we had to wait for a neckline breakout (it may be trend line breakout), consolidation (on the trading chart), bearish reversal candle (on the trading chart), then the breakout (trigger chart). With Morning Star, we did not have to wait for consolidation on the trading chart. Once the combination pattern (Morning Star) was evident, we flipped over to the trigger chart; waited for a candle to make a new higher high to take an entry.

It may sound so many things to be remembered and integrated with candlesticks trading. However, once we practice and try to understand the market psychology that goes with those patterns, things will get as easy as you may like.

 

Categories
Forex Chart Basics

Ideas that can be Blended with Candlestick to Trigger Entries-Part 3

In Part 2, we learned how important a breakout is for taking an entry. Even the strongest reversal candle itself is not enough to create a new trend. In this

In Part 2, we learned how important a breakout is for taking an entry. Even the strongest reversal candle itself is not enough to create a new trend. In this

In Part 2, we learned how important a breakout is for taking an entry. Even the strongest reversal candle itself is not enough to create a new trend. In this article, we are going to learn other steps that we need to maintain for taking an entry in case of engulfing candlestick.

Let us have a look at the chart below.

After producing the engulfing candle,

  1. The price breached through a support level.
  2. The breakout candle looks very strong.

First two equations have been met. Shall we take the entry right now? The answer is “NO”. We must wait for an upward correction/consolidation. A correction/consolidation gives us another level of support/resistance (in this case resistance). It offers a better risk and reward ratio as well as a better winning percentage. Thus, correction/consolidation is considered one of the most vital components of trading.

Let us have a look at how consolidation took place here.

Pay attention to those candles after the breakout. The pair produced one more bearish candle. Many traders may think an opportunity missed here. Look at the very next candle. That came as a Doji Candle followed by a bullish one. Be very careful. The market often keeps having a correction and changes the trend even by making new higher highs. Thus, a bearish reversal candle we must wait for.

We got one and luckily, it was a bearish engulfing candle. Candle Stick Pattern is being used here again to show us selling sign. What do we have to do now?

We have to wait for another breakout. This time we have to flip over to our Trigger Chart. This is an H4 chart. Thus, our trigger chart is H1 Chart. Let us flip over to the H1 Chart.

The price came out with the last candle from the consolidation zone. A Marubozu Bearish Candle made the breakout. A less low spike indicates that the sellers are very confident. Look, Candle Stick Pattern is being used here again. Here we go. This is the point where we trigger out short (sell) entry.

Let us have a look at the chart below how our trade would play.

Wow, it played well. Though it had consolidation on the minor time frames later, however, this should not be our concern. We followed our trading chart’s trend, breakout, consolidation (H4) and the H1 breakout. By setting our Stop Loss and Take Profit, we shall forget the entry. This is another thing of trading called “Set and Forget” that need to be integrated.

In this article, we learned these are the things to be integrated as well.

  1. Consolidation/ Correction on the trading chart.
  2. Reversal candle to be formed on the trading chart.
  3. Flipping over to the trigger chart and waiting for a breakout.

In the next article, we are going to demonstrate an example of how a Morning Star offered us entry with the integration of consolidation, breakout, and breakout candle with a Morning Star. Stay tuned.

Categories
Forex Candlesticks

Ideas that can be Blended with Candlestick to Trigger Entries – Part 2

Candlestick Patterns are widely used by traders to take entries and making money out of trading. We have come to know from Part 1 that relying on a candlestick formation

Candlestick Patterns are widely used by traders to take entries and making money out of trading. We have come to know from Part 1 that relying on a candlestick formation

Candlestick Patterns are widely used by traders to take entries and making money out of trading. We have come to know from Part 1 that relying on a candlestick formation only is not enough for a reliable entry signal. Other things need to be integrated with candlestick formation so that traders can trade accordingly. In this article, we are going to demonstrate an example of how an entry should be taken depending mainly on an engulfing candle as well as other equations that need to be maintained by traders.

Let us have a look at the chart below.

The chart above shows that the market is up-trending. At first glance, we shall look for buying opportunities here. However, look at the last candle. This is an engulfing candle which indicates that the sellers may take over. An engulfing candle is a strong sign of a trend reversal. However, we must not get carried away, but wait for other indications. In this case, we may wait for a breakout at the last swing low. Have a look at the chart.

Pay attention to the red line. This is the last swing low where the price had a bounce and moved towards the North. Then, after finding a resistance, it produced a bearish engulfing candle; kept going down on the next candle and made a breakout with a huge bearish candle. This is now an ideal chart for the sellers to look for selling opportunities. The trend starts with an engulfing bearish candle. Candlestick pattern suggests that the sellers may take over. It has. It is pretty simple, right? Not really. Just go three candles back. Look at the same chart below.

Pay attention to the arrowed candle. This is a bearish engulfing candle as well. That could have changed the trend and the price could have headed towards the South. However, that did not happen. The price kept going towards the North for three more candles then came down. Do you spot out the difference? The price did not make any downside breakout. In this case, if it had made a breakout at the nearest swing low, it might have come down from right there. Look at the chart below to get a better idea of which level I am talking about.

The drawn red level was the last swing low. If the price continued to go down and made a breakout at that level, it would have been a different ball game.

In this lesson, we have learned that Candlestick Pattern is a sign. In fact, is the first sign of a trend reversal. However, we need at least two more things to integrate with Candle Stick Pattern for taking an entry. These are:

  1. A Breakout at a significant level of support or resistance.
  2. The breakout is to have good momentum meaning the breakout candle is to be a good-looking bullish or bearish candle.

 

Stay tuned to get to know more about candlestick and integration in Part-3.

Categories
Forex Candlesticks

Ideas that can be Blended with Candlestick to Trigger Entries-Part 1

Candlesticks are considered one of the strongest components to take an entry. However, this is not the only thing that a trader shall consider before taking an entry. An Engulfing

Candlesticks are considered one of the strongest components to take an entry. However, this is not the only thing that a trader shall consider before taking an entry. An Engulfing

Candlesticks are considered one of the strongest components to take an entry. However, this is not the only thing that a trader shall consider before taking an entry. An Engulfing Candle or a Pin Bar is a strong reversal candle. If the price is down-trending and we get a bullish engulfing candle, we may want to go long on the pair. No doubt, a bullish engulfing candle is a strong reversal candle, but there are other factors we must consider before taking an entry.

Let us find more about it from the charts below.

I have chosen a chart which was down-trending and produced a Bullish Pin Bar. The price then changed its direction and headed toward the North. Let us have a look at the chart.

The arrowed candle is one good-looking bullish Pin Bar. A Pin Bar like this attracts the buyers to go long. We see the consequence; the price headed towards the North with good buying pressure. Does this mean whenever we see a Bullish Pin Bar, we go long or vice versa? The answer is no. We must consider other factors such as Support/Resistance zone, Double Top/Bottom, Neckline Breakout, Trend Line breakout, Breakout Candle.

Let us have a look at the chart again.

See where the Pin Bar was formed. It was formed right at a zone where the price had several bounces. Ideally, this is a level where the sellers want to come out with their profit. Thus, a strong bullish reversal candle such as a Bullish Pin Bar shall attract the buyers to concentrate on the chart to go long. Now that we have found a strong support level what else to look for?

The price was down-trending by following a Trend Line. Can you spot that?

Have a look at this.

A down-trending Trend Line can be drawn. Buyers must wait for a breakout there. See the breakout candle. That was a strong bullish candle which was followed by another one. Moreover, the price came back and touched the Trend line after the breakout. Many buyers may have taken their entry there. This is not a bad idea. You may want to go long right after the second candle closes.

However, some buyers may want to go long at the neckline breakout. Have a look at the chart below.

To be very safe, some traders love to set a pending buy order and go long above the neckline level. It is a safer option for sure, but it has some disadvantages as well. We will talk about this later. Meanwhile, concentrate on what we have learned from this article.

  1. Candlestick or Candlestick pattern is to be formed at a value area.
  2. The existent trend is to be collapsed.
  3. Double Bottom or Double Top is to be evident.
  4. Breakout Candle is to be a strong commanding candle.

 

 

Categories
Forex Candlesticks

Morning Star: A Strong Bullish Reversal Candlestick Pattern

The Morning Star is a bullish reversal pattern that occurs at the bottom of a downtrend. A Morning Star is a combination of three candlesticks: The first candle shows the

The Morning Star is a bullish reversal pattern that occurs at the bottom of a downtrend. A Morning Star is a combination of three candlesticks: The first candle shows the

The Morning Star is a bullish reversal pattern that occurs at the bottom of a downtrend. A Morning Star is a combination of three candlesticks: The first candle shows the continuation of the downtrend. The second candle shows the weakness, and the third candle shows the strength of the bull.

There are two types of Morning Star:

  1. Morning Star
  2. Morning Doji Star

 

Morning Star

The Morning Star starts with a strong bearish candle followed by a gap down. The star candle may have a little bullish or bearish body. However, the third candle is to be a strong bullish candle closes at the above of the first candle’s open.

Have a look at this.

See the first candle, which is a strong bearish candle. The next candle starts with a gap closing as a little bearish candle. This one may have a small bullish body in some cases. The third candle starts with another upside gap. It is to be a strong bullish candle closing at the above of the first candles’ open. This states that the bull has taken control of the bear.

 

Morning Doji Star

 

Let us have a look at the Morning Doji Star

In this case, the star candle comes out as a Doji candlestick. The first candle comes as usual as a strong bearish candle. The third candle opens right at the support level and finishes above the first candle’s open. It states that buyers have started dominating the market.

 

In both cases, the first and third candles’ attributes are the same. The second candle varies. However, both types explain the psychology of the market, showing that the existent downtrend has come to an end, and an uptrend has been formed.

The Morning star is a visual pattern that is spotted out by the traders easily. It is the preferred pattern among all kinds of traders from price action traders to traders based on indicators.

How Traders Based on Indicators/Price Action Use the Morning Star

Traders based on indicators may use the Morning Star when it is produced at the Supply/Support zone. Moving Average, RSI, Bollinger Band, Parabolic SAR indicate Supply/ Support zone. If a Morning Star is produced at the zone that is a supply/support zone of those indicators, an entry may be triggered at the close of the third candle.

The price action traders may use horizontal, Trend Line, Fibonacci Support/Supply zone to take en entry on the Morning Star. If a Morning Star is produced at the supply/support zone of a horizontal/Trend Line/ Fibonacci levels, an entry may be triggered right after the close of the third candle.

 

 

 

 

Categories
Forex Candlesticks

Types of Bullish Candlesticks

In this article, we are going to get acquainted with some of the Bullish Candlesticks that the financial markets produce. Let’s get started.

 
Bullish Trackrail
Bullish Trackrail candlestick indicates

In this article, we are going to get acquainted with some of the Bullish Candlesticks that the financial markets produce. Let’s get started.

 
Bullish Trackrail
Bullish Trackrail candlestick indicates

In this article, we are going to get acquainted with some of the Bullish Candlesticks that the financial markets produce. Let’s get started.

 

Bullish Trackrail

Bullish Trackrail candlestick indicates that the market has been dominated strongly by the buyers. It is a combination of two candlesticks. The second candle is to be bullish and the length is very similar to the first candle. Both candles are with a long and solid body having tiny spikes or no spike at all.

Image: Bullish Trackrail

Bullish Engulfing

Bullish Engulfing Candle is formed with a combination of two candles. The second candle is to engulf and close above the first candle to be considered as a Bullish Engulfing candle. Some analysts/traders do not want to take first candle’s wick into account. However, if the second candle closes above the first candle’s wick, that is one good Bullish Engulfing Candle. A Bullish Engulfing Candle is considered as the strongest bullish reversal candle.

 

Image: Bullish Engulfing

Bullish Hammer

Bullish Hammer Candle is created when a candle closes with a small body with a long lower shadow. The body has to be tiny and it can be bullish or bearish. However, a little bullish body instead of a bearish body is more preferable among the buyers.

Image: Bullish Hammer

Spinning Top      

Spinning Top has a short body found in the middle with upper and lower wicks. The body can be bullish or bearish.

Image: Spinning Top

Bullish Pin Bar

Bullish Pin Bar is similar to Bullish Hammer. The only difference is a Bullish Pin Bar does not have any real body whereas a Bullish Hammer has a tiny body. Since a Pin Bar does not have a body, it has more rejection from the downside. Thus, Bullish Pin Bar is considered one of the most powerful bullish reversal candlesticks in the financial market.

Image: Bullish Pin Bar

Bullish Inside Bar

Bullish Inside Bar is produced with a combination of two candles. The second candle is to be bullish but shorter than the first candle. It is just the opposite of Bullish Engulfing Candlestick. A Bullish Inside Bar is considered the weakest bullish reversal candlestick.

Image: Bullish Inside Bar

Doji

A Doji Candle is formed where the price finishes very close to the same level. Thus, the candle has no body or a very tiny body. A Doji Candle itself is not a strong bullish reversal candle. However, if it is produced at a strong level of support, the market often reverses and goes towards the North.

 

 

Image: Doji

Bullish Spinning Top and Doji look very similar to the Bearish Spinning Top and Doji. The only difference between a Bullish Doji and Bearish Doji is a Bullish Doji is produced at a Support Level whereas a Bearish Doji is produced at a resistance level. The same goes for Spinning Top as well. All other bullish reversal candles’ are to be formed at a significant level of support as well. Their appearance is very different than the bearish reversal candles. Stay tuned with us to learn more about Candlestick.

 

 

Categories
Forex Candlesticks Forex Daily Topic

Three Facts about Candlesticks you Never Knew About

Candlesticks are great because it makes trends visual at first glance. But most candlestick users stay just with that trait and don’t go more in-depth.

Of course, everybody knows some

Candlesticks are great because it makes trends visual at first glance. But most candlestick users stay just with that trait and don’t go more in-depth.

Of course, everybody knows some

Candlesticks are great because it makes trends visual at first glance. But most candlestick users stay just with that trait and don’t go more in-depth.

Of course, everybody knows some candlestick patterns such as Morning and Evening Stars, Haramis, Dojis and Shooting stars, but what’ is hiding inside the candlestick?. How to extract market sentiment from its shape or pattern?

So, let’s begin!

1 – Unwrapping a Candlestick

A candlestick is condensed information of the price action within its timeframe. The corollary is that if we go to a shorter timeframe, the candlestick now is a pattern of several candlesticks.

In the chart here we see the unwrapping of a 4H candle into 30-min parts

Three Facts about Candlesticks you Never Knew About

Chart 1 – 4H Hammer Candlestick unwrapped into 30-min candles.

 

We notice that the candle has one segment dominated by sellers and the other part controlled by buyers.

Which sentiment dominates in sellers at the bottom?

  • To the first class belong those traders who could no longer hold the pain of being long and close their position.
  • The second class is made of those who came late to the trend and sold believing the trend will last forever, or quite so.

Which sentiment dominates in the way back up?

  • Late sellers realized that they were in the losing side, so they needed to close their shorts. That meant, they have to buy, adding to the bullish fuel
  • Longs that were taken out of their position see frustrated how the price moves up without them. Hence, some of them retake their longs, while others don’t dare, afraid this is going to be another bull squeeze.

2.- Impulse or correction?

There are only two stages in the market: Impulses and corrections of previous impulses. So how to spot the price is in an impulsive or corrective phase?

Three Facts about Candlesticks you Never Knew About II

Chart 2 – Candlesticks: impulses and corrections.

Impulses break resistances and move with a clear direction. Impulses are what make trends. Corrections move in ranges, lack direction, and usually retraces some or all the advances of the previous impulse.  People usually think in trends as composed by many candlesticks or bars, but we now know that a single candlestick is composed by many shorter-timeframe candlesticks. Therefore, we cannot be surprised if we state that a trend can be made of a single candlestick. That applies also to corrective movements. A corrective movement can be summarised in a single candlestick.

How to know if a candle is impulsive or corrective?

To spot an impulse look for a candlestick with a large body and almost no wicks or shadows. To spot a corrective movement look for small-bodied candles with or without wicks ( usually with wicks).  Sometimes we find both characteristics in a candlestick. That may mean it is a combination of impulse and correction. That is ok since there is no law that forbids the start of a correction or impulse in the middle of the timeframe of a candle. Sorry, the universe is not perfect!

3.- Who is in control?

Once we know facts 1 and 2, we are in the position to spot who controls the price action: buyers or sellers.

One clue is, of course how the candlestick closes, but the other clue is where are and how long are wicks. If we spot several candlesticks with large lower wicks we could reason that the buyers are pushing the price above the bottom of the candlesticks. If wicks happen on top we could deduct the opposite: Sellers selling the rally.

Three Facts about Candlesticks you Never Knew About III

Chart 3 – Candlesticks: Wicks show who controls the price action

A downward trend with a lot of lower wicks is weak. That applies to an upward trend with lots of upper wicks.  Therefore, we can detect the market sentiment by just observing the wick appearance on the candlesticks.

 

Final words

So now we know that there is much more than just fancy colors and trend visualization. We have to inspect and pay attention to body and wicks, also called shadows by Steve Nison. The information provided by a single or a group or candlesticks is worth the time spent.