Chart Patterns Forex Daily Topic

Chart Patterns: Ascending Triangles

Of all the bullish continuation patterns that exist, few are as sought after as the ascending triangle. Like all triangle patterns, their development and construction are dependent on two trendlines that intersect and form an apex. The two primary identifying conditions of an ascending triangle I a flat, horizontal top and an upward sloping trendline.

Ascending Triangle
Ascending Triangle

In addition to the two trendlines, there is a specific kind of behavior that the candlesticks must perform. The upper trendline and the lower trendline must be touched at least twice. Ideally, and according to Bulkowski, there should not be much open space inside the triangle. The same volume behavior that occurs in other triangles occurs here in the ascending triangle: price often breaks out in the final 2/3rds of the triangle, and volume decreases before the breakout. The psychology behind the formation of the ascending triangle is essential to understand. The pattern represents an apparent battle between longs and shorts. Short traders are under the impression that because the resistance level has been tested and has held, it will remain stronger. Long traders are under the impression that prices will move higher because of the formation of higher lows and an upward sloping trendline. Ultimately, shorts cover very quickly, just before or immediately after the breakout of the upper resistance.

Bulkowski recorded that, in equity markets, the breakout direction of an ascending triangle is upwards 64% of the time. Dahlquist and Kirkpatrick recorded that upwards breakouts occur 77% of the time. Interestingly, the performance of this pattern is roughly average across all patterns – this is contrary to the belief of many traders who self-report a high positive expectancy of upwards breakouts. Dahlquist and Kirkpatrick did warn that there are many false breakouts and that failure rates are between 11% and 13%.

As with any pattern, it is essential to pay attention to price action first and then find tools to help you filter whether an entry at the breakout is appropriate. Additionally, be wary of throwbacks as they are frequent over 50% of the time – many conservative traders wait for a retest of the breakout to confirm a valid break from the ascending triangle.


Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Forex Price Action

Make Full Use of a Strong Reversal Candle

An engulfing candle makes a strong statement about the price reversal. The longer the body, the stronger the statement is. In today’s article, we are going to demonstrate an example of the daily-H4 chart combination trading, where the daily chart produces a bearish engulfing candle with a long bearish body. We find out what it has to offer to the sellers in the end.

The chart shows that the price produces a bearish engulfing candle having a tiny lower spike. The body of the candle is a long one closing well below the last bullish candle. This is one good-looking bearish engulfing candle. Since it is the daily chart, the daily-H4 chart combination traders may flip over to the H4 chart to look for short entries.

The above figure shows the H4 chart. We can see that the last candle comes out as a bullish inside bar. It means the price in the H4 chart may consolidate. The sellers are going to wait to get a bearish reversal candle to go short in the pair.

The last candle comes out as a bearish engulfing candle closing well below consolidation support. The sellers may trigger a short entry right after the last candle closes by setting stop-loss above consolidation resistance and by setting take profit with 1R. Let us now find out how the entry goes.

The next two candles come out as bearish candles. However, the price does not head towards the South as expected. Moreover, the last candle comes out as a doji candle having a long upper shadow. The sellers are to wait for the price to hit the target. The last candle does not convey a good message to the sellers.

Here it comes. The last candle hits the target of 1R. The reversal candle in the daily chart is a very strong one. Do the sellers get anything extra out of it? Let us proceed to the next chart to see what the price does in the chart.

The price makes a long bearish move. It heads towards the South upon having consolidation. The sellers can make a handful of pips by eying in the chart. One of the reasons may be the bearish reversal candle in the daily chart. As far as a candlestick pattern is concerned, an engulfing candle is the most reliable reversal pattern. When you get an engulfing candle like the one we have seen here, it does have a lot to offer. Okay, here is a question. What do you see in the H4 chart here? Yes, the last candle comes out as a strong bullish engulfing candle. This has a lot to offer to the H4-H1 chart combination traders. Therefore, if you are an H4-H1 combination trader, flip over to the H1 chart and make full use of it.

Forex Price-Action Strategies

When Price Finds New Support/Resistance

Price action traders are to be calculative and watchful. Breakout and breakout confirmation are two things that price action traders keep eyes on. Trend initiating candle is another important factor. We often see that the price upon finding its support/resistance does not make a breakout straightway. It sometimes makes a little correction and then starts trending to make a breakout. This new level of support/resistance plays a significant role in price action breakout trading. In today’s lesson, we are going to demonstrate an example of this.

The chart shows that the price after being bearish makes a bullish correction. It produces a bearish engulfing candle and drives the price towards the downside. However, look at the last candle. It comes out as a bullish engulfing candle. This means the price is to find its resistance again.

It does not take long to find its resistance. The next candle comes out as a bearish engulfing candle. The sellers are to keep their eyes on the pair to get a breakout. It seems that the price may head towards the South and make a breakout this time upon finding its new resistance.

The chart makes the breakout by the next candle. The sellers are to wait for the next candle to close below the breakout candle to trigger a short entry. Do not forget that it makes the breakout upon finding a new resistance.

The next candle comes out as a bearish candle having a long lower shadow. Thus, they should flip over to the 15 M chart to see how the last 15 M candle comes out. Despite having a long lower shadow, the last 15M candle comes out as a bearish candle too. The sellers may trigger a short entry right after the last candle closes. Stop Loss is to be set above the last resistance and Take Profit is to be set with 1R. This is why the new level of support/resistance plays a significant role.

The price heads towards the South but not with strong bearish momentum. It hits 1R though. The distance between new resistance to entry point= Entry point to Take Profit= 1R.

Whenever the price finds its new resistance/breakout, breakout traders must count those to set their stop loss and take profit level. Breakout trading needs the price to make a breakout with good momentum. If it takes any pauses before making a breakout, ignore the last support/resistance. It gives us better risk-reward as well as more chance of winning a trade.

Chart Patterns Forex Trading Guides

Chart Patterns: Start Here

Chart Patterns: Start Here

Something that I stress repeatedly throughout our series on chart patterns is the difference between traditional markets like the stock market and the forex market. I’m sure a good number of readers have spent time reading books on technical analysis and have recorded and have seen various statistics regarding the performance of the various chart patterns that exist. There’s a big problem that exists in the realm of technical analysis and its use in forex markets, and that is related to nearly 100% of all technical analysis trading material focused on the stock market. Why is this a problem? Several reasons.

  1. Statistical performance values for chart patterns based on the pattern’s performance in the stock market is overwhelmingly long-biased: the stock market has been in a bull market for over a decade.
  2. Forex markets do not ‘trend’ in the traditional sense of financial analysis, they range.

In a nutshell, just because a particular pattern in the stock market may not perform that well in the forex market, it does not mean that its performance isn’t positive in forex. I’ve learned that most underperforming chart patterns in the stock market perform very well in forex markets. As always, make sure you do your own due diligence and research – investigate each pattern for yourself and see how they play out in your own trading.

To begin learning about Chart Patterns, follow this series of education articles.

Chart Patterns: Pullbacks and Throwbacks

Chart Patterns: Symmetrical Triangles

Chart Patterns: Ascending Triangles

Chart Patterns: Descending Triangles

Chart Patterns: Head-And-Shoulder Patterns

Chart Patterns: Broadening Patterns



Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.


Chart Patterns

Chart Patterns: Broadening Patterns

Chart Patterns – Broadening Pattern & The Diamond Pattern

Broadening Top
Broadening Top

This pattern is also called a funnel or a megaphone pattern. It’s an inverse symmetrical triangle. This pattern is definitely not that common, and it’s a tricky pattern to trade. The behavior of price in a broadening pattern is to increase swing ranges where new higher highs and new lower lows are made. In my opinion, it is best to ignore this pattern. The breakout and retest of the upper or lower trendlines are the prevailing trade strategies utilized for this pattern. Of all the patterns, to trade, this is one of the least profitable. However, I’ve learned that the breakouts are often false, due to the nature of the final swing in the pattern being mostly overbought or oversold. It is not uncommon to see megaphone patterns turn into a triangle pattern – which results in a rare but profitable pattern known as a Diamond.


Chart Patterns – Diamond Pattern

Diamond Top
Diamond Top

The diamond pattern is rare. It is also difficult to even notice if it exists. In fact, Thomas Bulkowsi writes on his site, ‘Let me clear about this. I don’t like diamonds. They are as tough to spot as nightcrawlers in the grass on a summer night.’ I believe that is a pretty accurate description. But, while diamond patterns are challenging to spot, they are a very powerful pattern that often results in fast and violent moves in the opposite direction – higher for diamond bottoms and lower for diamond tops. It is ok for the patterns to have one side that seems more slanted than the other and, in fact, they often do not appear as symmetrical as the example above. We trade a diamond pattern the same way we would any other triangle pattern.



Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Chart Patterns

Chart Patterns: The Head And Shoulders Pattern

The Head And Shoulders Pattern

Of all the patterns that exist in any market, the most well known is the Head And Shoulder Pattern. Kirkpatrick and Dahlquist’s book, Technical Analysis, detailed many studies on the performance of this pattern. The result of all the data is that the Head And Shoulder Pattern is the most profitable of all standard patterns. Interestingly, Dalquist and Kirkpatrick made no distinction between the performance of the head and shoulder pattern and the inverse head and shoulder pattern (sometimes called the bottom forming head and shoulder pattern). While this pattern is successful across many markets, it is also the pattern that causes the most losses to new traders. We’ll get into the specifics of why this pattern destroys a good number of traders. First, we need to understand what the pattern is.

Regular and Inverse Head & Shoulder Pattern
Regular and Inverse Head & Shoulder Pattern

The image above shows two head and shoulder patterns, the regular pattern and the inverse pattern. It just so happened that the daily chart of the AUDUSD conveniently had both of the patterns right next to each other – not a common occurrence. Now, you can and will read a lot of rules and theories behind the head and shoulder pattern. I could go into the behavior of this pattern, the psychology behind the three triangles that make up the broader pattern, the symmetrical nature of the left and right shoulders, etc., etc., etc., but we don’t need to complicate a pattern that can be very easily understood.

There’s a great book by Larry Pesavento titled Trade What You See. While the book Trade What You See is focused primarily on Harmonic Patterns, the title always stuck with me. If you were to stand in front of a mirror, you would more than likely notice the symmetrical nature of your left and right shoulders (unless you’ve had some significant injury or disease. There’s a good number of people who believe that both the right and left shoulders need to be as exact as possible – but this isn’t necessary.

Here’s a simple rule to follow:

If it doesn’t look like a human head and shoulder, then it probably isn’t a head and shoulder pattern.

 Are you familiar with the poker game Texas Hold’em or any other form of poker? There are several maxims that poker players follow, one of them is ‘Don’t chase the straight or the flush.’ Why? Because when you get dealt a hand that is missing just one card for your straight or one more suite to complete your flush, the odds are overwhelmingly against you getting that final card to complete the straight/flush. Head and shoulder patterns are the same way. The head and shoulder pattern is only complete when the neckline has been broken. Let me repeat that three times for you:

A head and shoulders pattern is not complete until the neckline is broken.

A head and shoulders pattern is not complete until the neckline is broken.

A head and shoulders pattern is not complete until the neckline is broken.

Failed Head & Shoulder Pattern
Failed Head & Shoulder Pattern


Many a trading account has been the victim of trying to anticipate the completion of a head and shoulder pattern, only to have it be broken. In addition to being the most profitable basic pattern, the head and shoulder pattern is also one of the most rejected patterns. We don’t chase straights or flushes in poker, and we don’t chase patterns in trading. In addition to the information above, here are some other factors that can help you interpret the head and shoulder pattern:

  1. If the volume in the left shoulder is greater than the right shoulder, there is an increased likelihood of the head and shoulder pattern completing.
  2. If the volume in the right shoulder is greater than the left shoulder, failure rates are higher.
  3. Horizontal necklines increase the probability of a head and shoulder pattern completing.
  4. The more dramatic the slop of the neckline, the more likely the pattern will fail to develop.
  5. Aggressive entries can be taken immediately when the price breaks the neckline.
  6. Conservative entries can be taken after the neckline has been re-tested post-breakout.
  7. If price breaks the neckline, retracements occur almost 70% of the time.



Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Chart Patterns

Chart Patterns: Descending Triangle

Descending Triangle
Descending Triangle

The descending triangle is another version of the many triangle patterns in technical analysis. It is the opposite of the ascending triangle. This pattern is overwhelmingly bearish and is one of the more common bearish continuation patterns. If you’ve read Dahlquist and Kirkpatrick’s Technical Analysis, you will find that this pattern is treated with some considerable positivity. It was one of the best-performing patterns. But there is a caveat to why this is.

Descending Triangle
Descending Triangle

The two trendlines required for the formation of a descending triangle are a flat, horizontal trendline that acts as support with a downward sloping trendline that acts as resistance. Ideally, price should touch both the upper and lower trendlines twice. Volume typically decreases as price gets closer to the apex. Breakouts occur within the final 1/3rd of the pattern. Dahlquist and Kirkpatrick report that increasing volume is actually more favorable for this pattern. The most common breakout is lower at 64% of the time.

I’ve written in prior articles about the dangers of putting to much stock into technical analysis books where the initial testing of patterns and results have been in traditional equity markets (stock markets). I believe that one of the reasons that Dahlquist and Kirkpatrick have reported such powerful and swift moves with a downward breakout is due to the nature of bear moves in equity markets. Because markets like the stock market are exceedingly long-biased, any dramatic drop below crucial support will have an exceedingly more dramatic move when compared to the forex markets – which are primarily range bound. Another factor that may attribute to the overperformance of this pattern in stock markets vs. forex markets is the ease of shorting in forex vs. the stock market.


Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Forex Fibonacci

You’re still using Fibonacci Retracements Incorrectly

You’re still using Fibonacci retracements incorrectly

Like any discipline or field of study, Technical Analysis goes through changes. Old theories and approaches are rigorously utilized and tested, new ideas are studied, and advancements in the field occur. And, like any discipline or study, it takes a while for people to adapt to the new way of doing things. There is a shocking amount of updated theory and application in Technical Analysis that has yet to make its way down to the retail trader and investor – some of it is almost 25+ years old! One of the updates to old application and practice is how we use a tool known as a Fibonacci retracement. For many years, the method has been to draw a retracement from one extreme swing to the next (from swing high to swing low or swing low to swing high). In practice, there are a few incidents where this may work out just fine, but the new and better way shows how much more accurate and useful the update has been.


Old vs. New

I want to start off right away by showing you the difference between the old and new methods – I reference the new approach as the Brown Method. The AUDUSD Weekly chart below shows the old way of drawing Fibonacci retracements. With the old process, the Fibonacci retracement is drawn from the extreme swing high on the week of August 5th, 2011, to the extreme swing low on the week of October 31st, 2008. The vertical line delineates the starting point of the retracement, and no data to the left of that vertical line should be used to determine the efficacy of the retracement. It is only the data after the vertical line that is important and relevant.

Fibonacci Retracement: Incorrect
Fibonacci Retracement: Incorrect

Now, contrast the image above with the new Brown method below.

Fibonacci Retracement: Correct
Fibonacci Retracement: Correct

You will observe how much more accurate the Fibonacci retracement levels are on the Brown Method vs. the old method. What changed? Observe the swing low retracement on both charts – they are different. They both start at the same level, but the retracement end for the Brown method is drawn to the swing low on the week of February 6th, 2009. But why? Why do you draw to a seemingly random or ‘off’ swing and not the extreme? The reason for this is based on the writings of W.D. Gann.


The Brown Method

I call this new Fibonacci retracement method, the Brown Method, after Connie Brown. It is Connie Brown who discovered this new theory and wrote about it in her 2008 book, Fibonacci Analysis. It is not a very large book, under 200 pages, but it is one of the single most important works in Technical Analysis of the past 15-years. Her discoveries of how confluence zones of Fibonacci retracements dictate the normal rhythm and pulse of the market are truly groundbreaking. But to the first question of why I did not draw the retracement to the extreme low? Connie Brown points out that W.D. Gann made the point that the end of a trend is not established by the extreme high or low – it is the secondary high/low that confirms the change in trend (sometimes known as the confirmation swing). This makes sense because the extreme is very rarely the level where the participants in a market agree that a trend is finished.

So how do we identify what swing to use? How did I identify what candlestick was the confirmation swing low on the weekly AUDUSD chart? Again, this goes back to Brown – but this information is from her penultimate work (her magnum opus in my opinion), The 32nd Jewel. The first chapter of her massive book (it weighs about eight lbs., is three inches thick and nearly 1100 pages long) addresses some of the problems students of hers have had with the application of her updated Fibonacci retracement method. To identify the correct swing to use, we look for the strongest bar. Let’s take a ‘zoomed’ in look at the swing low used on the AUDUSD weekly chart above.

Brown Method: Confirmation higher swing low
Brown Method: Confirmation higher swing low

It will take you some practice to find the swing bar (also, gaps are used, but that is for another article) that would be considered the ‘strong bar.’ What constitutes a strong bar? That can be somewhat subjective, but look at the candlestick that I’ve identified as the strong bar compared to the candlesticks before it and around it. Why did I pick this candlestick? First, it is a bullish engulfing candlestick on the weekly chart. Second, that candlestick rejected any further downside pressure after a consecutive four week period of weekly candlestick closes below the open. Third, the open and low of the candlestick created the support zone for the next five weeks. In a nutshell, the candlestick is massive, its sentiment overwhelmingly one-directional, and the lows of that candlestick were respected. That candlestick was the confirmation swing low because it confirmed the end to lower prices and was the most substantial candlestick before the new uptrend occurred.


Side note: Connie Brown also said to look for gaps in the price action as areas to draw the confirmation swing. Finding gaps is a much easier process when looking at traditional markets like the stock market. Forex data can vary from broker to broker as some data providers show gaps, and others do not.


The following articles will go into further detail on how to implement more of the Brown Method. I believe that what you will read and learn will be one of the ‘wow’ moments you experience in the study of Technical Analysis. To say that what Connie Brown has discovered is truly amazing is an understatement when we learn about the confluence of Fibonacci zones and how they create the natural price zones that an instrument swings to, it is a truly eye-opening experience.



Brown, C. (2010). Fibonacci Analysis: Fibonacci Analysis. Hoboken: Wiley.

Brown, C. (2019). The Thirty-Second Jewell: Thirty Years Behind Market Charts From Price To W.D. Gann Time Cycles. Tyton, NC: Aerodynamic Investments Inc.

Forex Chart Basics

All you need to be introduced to Trading Charts – Part 1: Line, Bar, and Candlestick Charts

Why Technical Analysis?

The expression “technical analysis” originated from the belief that price action is all that is required to make sound trading decisions. Fundamental analysts believe that fundamental or structural influences are already incorporated in the history of the price. The concept of price action analysis is credited to Charles Dow, the author of the Dow theory, around 1900.

Starting from there, TA began to rise in importance to traders. The idea that price movement discounts all new information seemed rational. Concepts such as price trending, price confirmation, support, resistance, divergence, and volume confirming price started to emerge.

TA practitioners believe that the current price represents the instantaneous consensus of value. It’s the cost at which someone is ready to buy and a different person to sell. That agreement depends on the different beliefs persons hold about the prevailing market situation. A potential seller believes that odds the price continuing moving up are minimal or that it will surely go down shortly. Opposing this view, a buyer, maybe trading in a different timeframe, might think it is the right place for the asset to start an uptrend. There’s a third category of people: Traders that are expecting to detect another price level to make a decision.


Traders using technical analysis record prices in charts. Since thousands of transactions happen every minute, chartists accumulate the market action in packets called timeframes. The x-axis registers the passing of time, while the Y-axis register the prices. Usually, volume bars are added at the bottom of the graph.

When traders and investors had to draw the charts on graphical paper, the usual was to use a daily timeframe and follow the daily closings. With the advent of personal computers and dedicated charting packages, we can find charts from sub-minute timeframes to hours, days, weeks, and months. Precisely, the MetaTrader 4 platform allows timeframes of 1 min, 5 min, 15 min, 30, min, 1 hour, 2, hours, 4 hours, one day, one week and one month.

Line charts

The most basic chart is the line chart. Line charts connect the ending price of every frame with a line.

Fig 1 – Line chart of the Bitcoin in a daily timeframe.

Bar charts

Line charts are useful to see trends but lack the information about how volatile was the session. To record this kind of information, chartists decided to draw vertical bars in every time segment, showing four critical elements: The open (O), the high (H), the Low (L), and the Close(C) prices of every segment of trading activity. That’s why sometimes they are called OHLC charts.

Fig 2 –  The same Bitcoin segment of history in a daily bar chart.

As we already stated, every bar is composed of four prices. The Open price is shown as a horizontal mark on the left side of the bar. A close price is depicted as a horizontal mark on the right side of the bar. The high is the highest point of the bar, and the Low price is the lowest part of a bar. The Close is the most crucial level, followed in importance by the Open, and then the high and the low.

Fig 3 – Bar anatomy.

The most probable price path for the bar shown above is the price moving from Open to High, then descending to the Low and finally having the strength to close higher. But we don’t know for sure. It might have moved from open to low, from there to a high to descend to the closing level, finally.  What we know for sure is that the sellers had the strength to drive down the price.

Candlestick charts

Candlesticks are a relatively new way to draw charts. They were introduced to the western world by the work of Steve Nison on the Japanse charting and trading methods.

They use the same four points, OHLC, but a body of the candle is formed between the Open and the Close. The rest of the price action, beyond that range, is left as a line called wick or shadow.

Fig 4 –  The same Bitcoin segment of history in a daily candlestick chart

 Traditionally a bullish candle was drawn hollow or white, while the bearish candle is drawn in black. Now we can assign any color to it. On figure 4, the upward candlesticks are depicted in turquoise, and the red candles denote descending prices.

Candlestick charts are much more graphical, and traders can see immediately if the trend is up or down. During the uptrend seen in fig 4, the turquoise color is prevalent, while the color shifted to red in the downtrend that followed.

Fig 5 –  The candlestick Anatomy

On candlestick charts, the Open and close prices are deducted by the context. The ascending candlestick moves from a lower open to a higher close, while the descending one moves from a higher open to a lower close.

The next article will be dedicated to introducing other forms of charting, such as Renko, three-line break, and point and figure.



Ichimoku Strategy #2 – K-Cross, The Day Trading Strategy

The Kijun-Sen Crossover (Crossunder) Strategy is the second in my series over Ichimoku Kinko Hyo. There are two trades setups provided for the long and short side of a market. This strategy also comes from Manesh Patel’s book, Trading with Ichimoku Clouds: The essential guide to Ichimoku Kinko Hyo technical analysis.

Patel called this the day-trading strategy. He warned that this trading strategy has the lowest risk factor out of all of his strategies. The positive expectancy rate is lower, and so being stopped out of trades is a normal consequence of this strategy. He also indicated that the win/loss ratio could be extremely high.

Kijun-Sen Cross Bullish Rules

  1. Price crosses above the Kijun-Sen.
  2. Tenkan-Sen greater than the Kijun-Sen.
    1. If the Tenkan-Sen is less than the Kijun-Sen, then the Tenkan-Sen should be pointing up while the Kijun-Sen is flat.
  3. Chikou Span in open space.
  4. Future Senkout Span B is flat or pointing up.
    1. If Future Senkou Span A is less than Future Senkou Span B, then Future Senkou Span A must be pointing up.
  5. Price, Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in the Cloud. If they are, it should be a thick cloud.
  6. Price not far from the Tenkan-Sen or Kijun-Sen
  7. Optional: Future Cloud is not thick.
K-Cross Strategy Bullish Entry
K-Cross Strategy Bullish Entry


Kijun-Sen Cross Bearish Rules

  1. Prices cross below the Kijun-Sen.
  2. Tenkan-Sen less than the Kijun-Sen.
    1. If the Tenkan-Sen is less than the Kijun-Sen, then the Tenkan-Sen should be pointing up while the Kijun-Sen is flat.
  3. Chikou Span in open space.
  4. Future Senkou Span B is flat for pointing down.
    1. If Future Senkou Span A is greater than Future Senkou Span B, then Future Senkou Span A must be pointing down.
  5. Price, Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in the Cloud. If they are, it should be a thick Cloud.
  6. Price not far from the Tenkan-Sen or Kijun-Sen
  7. Optional: Future Cloud is not thick.
K-Cross Strategy Bearish Entry
K-Cross Strategy Bearish Entry


Sources: Péloille Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.

Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.

Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.

Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.

Forex Price-Action Strategies

Using Multiple Time Frames to Get Multiple Entries

We know using multiple time frames is an essential aspect of trading. Traders use the bigger time frame to find out the trend, breakout, vital support/resistance levels, and relatively smaller time frames to trigger an entry. In this lesson, we are going to learn how the trigger chart can be used as the analyzing chart to find out more entries.

This is a Daily chart, which is being used as the trigger chart. The weekly chart is used as the analyzing chart. It is a combination of Weekly-Daily. The price heads towards the North. Traders are to wait for the price to produce a bullish reversal candle.

A Spinning Top daily candle at a flipped support, the buyers have a lot to be optimistic here. One of the daily candles is to breach the daily resistance to go long on the pair. Let us draw the support and resistance on the chart to get a clearer picture.

This is how the chart looks like with support and resistance levels. If one of the daily candles breaches the resistance with good buying momentum, the daily traders are to trigger a long entry.

The next daily candle breaches the resistance. The buyer may take a long entry right after the breakout candle closes. An entry on the daily chart means that the trader shall leave the trade/chart for three to four trading days by setting Stop Loss and Take Profit.

However, if a trader uses the same daily chart as the trend-detecting chart and flips over to the H4 chart to find another entry, it surely would be more rewarding.

Let us flip over to the H4 chart.

Previously, the daily chart shows an upside breakout. Thus, the trend is bullish. The H4 chart shows that the price starts having consolidation. If the breakout level holds the H4 candles and makes an upside breakout, the H4 buyers are going to go long on the pair as well.

This is the H4 chart with the support and resistance of consolidation. The buyers must wait for an upside H4 breakout to go long on the pair. Let us proceed to the next chart.

Here it comes. An H4 bullish engulfing candle breaches the resistance. The H4 traders may want to trigger a long entry right after the candle closes.

The H4 chart shows the price may have consolidation again. The H4 buyers may want to cash in their profit. However, the entry, which is taken on the daily chart, traders are still to hold their positions until they get a bearish daily reversal candle.

At the end of the day, price action trading works very similarly on the Weekly, Daily, H4, and H1 chart. Today’s examples show that a Weekly-Daily combination offers an entry. After the daily breakout, the Daily-H4 combination offers an entry, as well. With a lot of practice, dedication, and hard work, a trader can trade both of them. This will surely beget more profit.

Forex Harmonic

The Crab Pattern

The Crab Pattern


The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the extremely tight and resistance endpoint of 161.8% of the XA leg.

Like almost all harmonic patterns, the potential reversal in price action after this pattern has been complete is generally fast, violent and powerful. However, Carney gives special attention to this pattern and reports that it is usually the most extreme of all harmonic patterns.

The pattern is not as frequent as others due to its five-point extension structure. It is desirable to utilize an oscillator to filter entries of this pattern according to any divergence between price and your selected oscillator.

Crab Pattern Elements

  1. B must be a 61.8% retracements or less of XA.
  2. The BC projection can be quite extensive, generally 261.8%, 314%, or 3618%.
  3. An AB=CD 161.8% or an Alternate AB=CD 127% is required for the formation of this pattern.
  4. The extension of 161.8% of XA is the end limit of the pattern.
  5. C has an expansive range between 38.2% and 88.6%.

Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall.  Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press.  Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.

Forex Price-Action Strategies

Trade What You See on the Chart

Price Action traders are to look at a chart and make a trading decision according to that. They have to understand the language of it, which reflects the psychology of the market. In today’s lesson, we are going to demonstrate the importance of trading according to the chart’s price movement.

On 17.10.2019, the AUD did well against its counterparts in almost all the pairs. However, in AUDNZD, the AUD did not do well. It rather had a bad day against the NZD. On the day, the AUD was strong against other currencies, but why did it underperform against the NZD?

To start with, let us have a look at the H1-AUDUSD chart.

After finding the support at the red-marked line, the price heads towards the upside. It consolidates and continues the move towards the trend. The daily candle closes with a strong bullish tone, barely having an upper shadow. Let us have a closer look at the consolidation.

The first reversal candle is bearish. However, it closes within the wick of the last candle, which is a Spinning Top. The price finds support, and after producing an engulfing bullish candle breaching the resistance, it continues its bullish journey.

As mentioned earlier, the AUD was weak against the NZD. Let us now have a look at the H1-AUDNZD chart.

Look at the chart, the price heads towards the North (up arrowed) and comes down. You can assume how the daily candle would look like for that day. In the end, it makes a breakout at the support level and makes a new lower low. Things are completely different here with the AUD. Do you spot out the difference? Let us investigate on the chart.

The price heads towards the North as it does in other pairs. However, look at the first reversal candle (arrowed). This is a bearish engulfing candle. When the consolidation starts with such a candle, the minor time frames’ sellers shall keep their eyes to go short. This often makes a chart look choppy. Even after producing a good bullish reversal candle, the price does not make a breakout at the resistance. It rather comes down and gets choppy. After some hours, this is what happens.

A Double Top and breakout at the neckline drive the price towards the South. The consolidation followed by the breakout at the support makes the price bearish on the following day. We now understand the reason, despite having a good day, the AUD did not do well against the NZD.

To sum up, traders must understand the chart, price action, candlestick formation, and trade according to those to be consistent in making a profit.

Forex Indicators

The Truth About Moving Averages

Moving Averages

Of all the technical indicators that exist, moving averages are probably the most well known. Moving averages are also one of the only technical indicators ever used by market news broadcasters. Moving averages are generally one of the first types of indicators that new analysts and traders will learn about because they simple to calculate and simple to interpret. But are moving averages useful for trading? Are they appropriate for trading?

Dangers of Moving Averages

I want to preface any further commentary on moving averages by saying I am strictly opposed to their use. Outside of any singular purpose for their use, I will never advocate for their use of an analytical tool or a trading tool. The reasons for this opinion are my own trading experience, and the experience of teaching students – who have all (myself included) fell into the old trap of moving average crossover systems and the lies that are sold about their usefulness and profitability. That is not to say they are not helpful, useful, or profitable – but the temptation to believe in their positive expectancy and profitability is often too hard to avoid.


Moving Averages: A simple visual representation of data

20-period Simple Moving Average

The orange line on the chart above is a moving average — specifically, a Simple Moving Average (SMA). A Simple Moving Average is a line that is plotted, showing the average close of a defined number of periods. On the chart above, it is a 10-period moving average. Meaning it is taking the last ten candlestick closes, adding them up, dividing that number by ten, and then displaying it as a line. But a Simple Moving Average is just one type of average. There is an enormous amount of various moving averages, each with their specific calculations. The chart below shows only some of those different moving averages, all with a 10-period average.

Various moving averages

From the image above, you can probably say that, depending on the moving average used, some averages are more responsive to price changes than others. Some move a lot; some move just a little. There is a myriad of different reasons why one moving average would be used over another, and there are specific moving averages that to be used only with particular trading systems and methods. Now, after I’ve bashed moving averages, I think it’s essential that I do show some examples of moving averages positively. The first would be using a long period moving average on a higher time frame. For example, a standard method of determining whether a stock is bullish or bearish is to use a 200-period on a daily chart. If a stock is trading above the 200-day average, it is considered bullish; if it is trading below, it is bearish.

200-day Moving Average of S&P500

Another example of a trading system using moving averages effectively would be Goichi Hosada’s Ichimoku Kinko Hyo system. This system will be discussed in much greater detail in another article, but the Ichimoku system is based almost entirely on moving averages. There is a significant difference between Western moving averages and Japanese moving averages. The Tenkan-Sen and Kijun-Sen in the Ichimoku system are calculated using the mid-point of the default periods. The utilization of the mid-point is particular not to just the Ichimoku system but is indicative of a large amount of Japanese analysis, which focuses on ‘balance’ and ‘equilibrium.’ So while I do rail against the use of Western moving averages, the use of the Ichimoku system’s moving averages is undoubtedly a significant exception due to it being a full trading system and one of the few trading systems that are a proven and profitable system.

Ichimoku Kinko Hyo
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 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.

Forex Chart Basics

Candlestick Charts and Its Advantages in Financial Trading

With the advancement of technology, retail trading in the financial markets has become popular among investors. Since unnumbered traders from all over the world invest in the financial markets, they use so many of strategies, indicators, and EAs to make money out of trading. Also, many things with the financial markets have been changing as well. However, certain basic things have no, and they may never change. One of the things is the usage of Candlestick charts.

Before getting into this, lets us summarize the different types of charts available for traders. Typically, there are three types of charts that are mostly used in trading.

  • Line Chart
  • Bar Chart
  • Candle Stick Chart

Line Chart

Let us have a look at a line chart.

The line chart is generated by using the closing price of the bars. It does not represent the highest high, lowest low or the opening price. Thus, it gets tough for traders to find out the sentiment of other traders. The price may go towards the upside and has a strong rejection from a level of resistance. But the line chart does not show that rejection. Thus, a trader may think the market is bullish whereas the price has had a strong rejection and it may be time for the sellers to take over.

Let us flip over the same chart to a Bar Chart.

The Bar Chart is more informative than the Line Chart. It shows the opening price, closing price, highest high and lowest low of the period it has tracked. It certainly gives us a clearer picture than the Line chart. An experienced trader may not have any problem to find out the trend, rejections, market psychology by using the Bar Chart. However, we may have a better option. Do you know what that is? It is the Candle Stick Chart.

Here it comes.

A picture is worth a thousand words. Does not give us the clearest picture of market psychology? It does because it represents the market with color including closing price, opening price, the highest high and lowest low. Moreover, it shows us rejection or bounce (upper shadow/lower shadow) as well. Candlestick charting is one of the most important tools in modern days trading.

There are other things to be integrated with Candlestick Chart such as Support, Resistance, Fibonacci Levels, Pivot Points, Trend Line, and Channels, etc to be able to trade effectively. To be a long racehorse in trading, a trader must have a good understanding with all those. We will get more acquainted with Candlesticks, Candlestick Patterns and their usage, integration with other trading factors in our fore coming articles. Be with us. See you in our next article.

Forex Chart Basics

Dissection of a Candlestick

A candlestick is a type of price that financial markets’ charts use to display the high, low, opening, and closing prices for a particular period. It is the most commonly used price chart among financial traders nowadays. It does not only show the high, low, opening, and closing prices but also represents the true psychology of the traders. This is the main reason for the candlestick/candlestick chart being the most popular chart in the financial markets.

Let us demonstrate two typical types of candlesticks to find out how they look and how they are formed.

Let us start with a Bullish Candlestick.

In a Bullish Candlestick, the price opens at the downside; goes down and goes up again. This is what creates the lower shadow. The price continues to go upwards and goes all the way up to where the upper shadow ends. It comes down and closes at the Closing Price. This is what creates the Upper Shadow. Eventually, Opening Price and Closing Price creates Bullish Body. A Bullish Candlestick is usually represented by Green or White color.

Let’s have a look at a typical bullish market in Candlestick Chart.

The chart shows that the market is bullish. Most of the candles are bullish candlesticks. Thus the price heads towards the North. However, not all of them have Upper Shadow, Lower Shadow, or a thick Body that we have demonstrated in this lesson earlier. The market produces several types of Candlesticks, and they convey different messages to the traders.

A Bearish Candlestick is just the opposite. Let us have a look at that.

As we see here, that the price opens at the upside. Goes up and comes down to create the Upper Shadow. Comes all the way down and closes the price a bit further up. This is what creates the Lower Shadow. Difference between the Opening and Closing Price creates the Bearish Body.

Let us have a look at a bearish market in Candlestick Chart.

Same goes here. Not all the candlesticks are as typical as we have demonstrated in our lesson. However, the message is clear here. The price is bearish because of the dominance of Bearish Candles.

Not all the candles with a bearish body (or bullish body) declare the supremacy of the bearish market (or bullish market). By being able to read them well, traders can predict the market’s trend, trend continuation, and trend reversal.

In our fore coming articles, we will learn different types of candlesticks that the market produces; how they look like; what message they convey to the traders; how to read and make a profit out of them.




Forex Educational Library

Trading Is An Adult Game (II): Mysterious & Engaging


“If you wish to know the road, inquire of those who have traveled it” – old Japanese saying

(Quote from Steve Nison’s first book on Candlesticks)

On the first part of this series, we introduced technical analysis and the basics of charting. In this section, we’ll study candlestick patterns and look at ways to profit from them.

Reversal patterns

One of the most determinant skills a professional trader should have has to do with the ability to identify trend reversals as quickly and accurately as possible. In fact, reversal patterns do provide for the profitable trading setups by most candlestick masters.

Although reversal patterns do not always result in deep trend corrections, or in clear changes in market sentiment, they usually become a warning that a given trend is running out of steam (due to several reasons). Thus we as traders should start considering to either close our existing positions, to deleverage them or to tighten up risk (i.e. stop loss). Perhaps the most appreciated feature of reversal patterns is that they spot price areas for efficient entries, i.e., with an optimised risk-reward ration. However, we should not lose insight by forgetting the most inherent probabilistic nature of trading; put in differently, reversal patterns do increase our chances of determining successful entries, but we must add other factors to the equation such as risk-reward ratio, market sentiment, seasonality adjustments, etc.  Due to their relevance in nowadays trading literature, we shall carefully analyze trend reversal patterns.

We must be cautious to take positions against a prevailing trend if there is one. A rapid train isn’t going to reverse its direction easily. So, before strong trending markets, we should take only those signals matching the trend. Of course, on markets moving within a channel a pattern near the top or bottom of the channel is an ideal place for exit and reverse our position, provided the channel is broad enough to have a proper reward for our risk.

Before engaging in the study of the candlestick reversal patterns, let’s carry out a short discussion about a couple of indicators which may be used as confirmation of the main pattern.

Handy confirming indicators for its use together with candlestick patterns

I’ll be back… and back…and back…

Candlestick patterns are visually simple but sometimes variations of them appear in a lot of places, and not all of them should be taken into account as entry place. The accuracy of the candlestick patterns is highly enhanced when a confirmation signal is used with it. So in this section, we’ll present a couple of Indicators that may be useful as a companion because of its ability to show overbought or oversold places.

Handy confirming indicators

Stochastic Oscillator:

Two math for dummies, at $16.99 each: That’ll be $50.

The Stochastics Oscillator, developed by George Lane in 1950, came from the observation that closing prices tend to appear near the high of the range during uptrends and near the low of the range in downtrends.

This oscillator measures where the close is relative to the range of prices over a period of time. The %K line comes from a simple formula, which makes sure the signal is always between zero and 100:

There is a %D line, which is called slow stochastic and is computed by applying a three-day moving average to the %K line.

The usual way to be used when combined with a candlestick pattern is by taking action at %D and %K crossovers when this happens at an extreme.

Stochastic Oscillator:

Williams %R

Too much gear for this to be normal! Fuck that; we’re multitasking! (a Robin Williams liberal translation)

Williams Percent R is a momentum indicator developed by Larry Williams, which is very similar to the Stochastic indicator, but in this case, it shows the level of the Close in relation to the highest high of the period, instead of the lowest low, and it doesn’t depict a smoothed %D line.Williams %R

Therefore, this oscillator moves from -100 to 0. Values below -80 are oversold levels while from -20 to 0 are overbought.

Some charting packages shift these values to positive 0 to 100 by adding 100 to the formula. In this case, oversold levels are between 0 and 20, and overbought condition happens from 80 to 100.

%R is noisier than Stochastic %D, but with less lag, so together with the confirming candle pattern,  it allows for a better reward to risk ratio and tends to show more trade opportunities than Stochastic does.


We observe the excellent accuracy in sync of candlestick top and bottom patterns with the overbought and oversold levels pictured by the %R; and, also, the high reward to risk ratios that might have been achieved. Just one of the patterns (the piercing pattern, fourth from left to right) doesn’t present a good opportunity (therefore we won’t take the trade).

This type of good synch happens in horizontal channels mostly. When the trend is strong,  reliable signals only appear on pullbacks of the main trend.

Finally, the right chart is the continuation of the last signal from the left one. On the left, we had a good hammer, followed by a white candle, with %R in an oversold condition and rising. The left image shows the fate of this imaginary trade, which closes, rightly at the previous high, for a reward/risk of about Two. Then, another entry might have been taken reversing 100% of the last move with yet another 2:1 Reward to risk ratio.

That concludes our small digression about oscillators. The rest of the article will deal with Candlestick signals together with %R as my choice for companion oscillator.

Major candlestick signals

Japanese candlestick charts increase the level of information for the visually gifted trader. Each candle, in combination with its neighboring ones, reflects the psychological shifts in the investor’s sentiment.

  • Umbrella lines; hammer and Hanging man
  • The Doji Star
  • Engulfing patterns
  • Piercing patterns
  • Dark Cloud
  • Harami
  • Stars: Morning and Evening Stars
  • Kicker signal
  • Shooting star

Umbrella Lines

Give it to me, she yelled, I’m so fucking wet! …!

Umbrella lines are candles that show very long lower shadows and small bodies near the top of the trading range. This kind of candles is very interesting as it may be bullish or bearish, depending on price location. If it appears during a downtrend, it’s indicative of the end of it. In such places, the umbrella is tagged as a hammer. If it shows after a rally is called a hanging man.

Umbrella Lines

There are three differences between a hammer and a hanging man.

  • Trend: Hammers come after a downfall. A hanging man after a run-up.
  • Magnitude of the move: Hammers are valid even after a small drop. For a hanging man, the move should last longer.
  • Confirmation: A hanging man should be validated, while a hammer not.

A note to pairs and Forex Traders: Trading pairs makes umbrella candles kind of symmetrical. The stock asymmetry is tamed. A bull EUR/USD is a bear USD/EUR, so this confirmation stuff does not apply. We just need to realize that this kind signals work better when it goes with the prevailing trend, and need confirmation on the opposite direction.

Besides these patterns, we should always pay attention to the shadows of the candles. Shadows show the result of the fight between bulls and bears: If we see several consecutive candles with long upper shadows, although the trend is still up, those shadows are a sign that bears are starting to win.

Besides these patterns, we should always pay attention to the shadows of the candles. Shadows show the result of the fight between bulls and bears: If we see several consecutive candles with long upper shadows, although the trend is still up, those shadows are a sign that bears are starting to win.

On the other side, if there’s a downtrend, but long lower shadows with relatively small bodies start appearing, the continuation of the downtrend is under suspicion.

who is in command - forex academyUsually, by just paying attention to where the most longer shadows are drawn, we get the information of who’s in command, although not always this translates into a trend change, it just adds volatility. If we follow, as if it were our polar star, the proper reward to risk ratio and use the oversold/overbought indications set by %R, or Stochastics. we may survive those siren chants…


Honey, I’d really like to nail you…

An umbrella-like formation that’s present at support levels, signaling the end of a downward leg.

Pattern sentiment:

After a long time in a downtrend, the last bulls give up and sell. The latest bears take the byte and price go down on a climax of selling pressure; but then, there’s almost no one who hasn’t sold. Therefore bulls are the majority and prices start to climb back to the opening level. It may happen that short positions are being closed by traders realizing they were wrong, adding steam to the bull side. The longer the shadow, the weaker the position for the short side.

Sometimes, two or three consecutive hammers are drawing a double or triple bottom. Those are excellent signals of a trend change.

hammer - pattern sentiment

Criteria for trading hammers:

  1. The reward to risk must be higher than 2
  2. %R shows an oversold condition
  3. The lower shadow must be at least twice as long as its body
  4. The real body should be at the top of the range of the candle,  The color isn’t important, although a white body is more bullish.
  5. Almost no upper shadow.
  6. Large volume on the hammer bar.
  7. The entry on the next candle should be above the high of the hammer.
  8. A gap up is an enhancement, but not so much that spoils the reward to risk ratio below two.

Hanging Man:

Darling, suddenly, I feel quite vulnerable…

A hanging man has the same look as a hammer, but placed at the (hopefully) top of an ascending trend.

Criteria for trading Hanging Man:

  1. The reward be higher than 2x the risk
  2. % R is showing an overbought condition
  3. The lower shadow must be at least twice as long as its body
  4. The real body should be at the top of the range of the candle. The color isn’t important, although a black body is more bearish
  5. Almost no upper shadow.
  6. Large volume on the hammer bar.
  7. The entry point must be below the hanging man’s low.
  8. A gap up on that day and then a gap down is a strong signal
  9. Alternatively, a confirmation with a strong down day, or gap down, that goes below the hanging man’s low.
  10. Alternatively, wait for a failed test of the highs, forming a double top

Hanging Man

Hanging Man Pattern sentiment:

After a long uptrend, that day the price opens higher, but the bulls are hesitating and some traders take profits pushing on the bear side, so the price declines below the opening level. At the end of the session, the buyers start to move the price up again, to the opening level, or even higher.

This seems to demonstrate that the bulls are still in control, but it also shows that traders start taking profits, and even, short sellers are entering with more than reasonable reward to risk scenarios.

When the next candle moves below the previous low, bulls start to unload their positions at sell stops, adding fire to the downward pressure.

The Doji Star     

Stars can’t shine without darkness…
This pattern shows when the open and the close prices are the same, forming a horizontal line. That implies that bulls and bears are at an impasse. It’s an important alert when a trend has travelled
long.The Doji Star     

Perfect dojis hardly happen, and on intraday time frames, much less. Most of the cases are tiny hammers or small bodied candles, but when it happens, we should pay attention, and close a position at the violation of the low (or the high when shorts) of the doji candle.

Two special kinds of dojis justify being mentioned:

Gravestone Doji (Tohba)

The Gravestone is formed when open and close prices are the at low of the day. According to Stephen Bigalow, the Japanese analogy “it represents those who have died in the battle. The victories of the day are lost by the end of the day.”

It works better, according to sources, showing bottom reversals than tops. But it’s a significant indecision, with plenty psychological weight.

Gravestone Doji (Tohba)

Fig 8: Gravestone Doji

Dragonfly Doji (Tonbo)

Dragonfly dojis occur when the opening and closing prices happen, both, at the high of the day, and are hammers and hanging man variants.

Dragonfly Doji (Tonbo)

Fig 9: Dragonfly Doji

Engulfing patterns (Tsutsumi)

The issue isn’t penetration, but engulfing…(Amy Schumer)

The engulfing pattern is a major reversal pattern. Seen in a 2x timeframe
it may be pictured as an inverted hammer or doji.

The bullish engulfing candle opens lower than previous day’s close and closes higher than the previous open, engulfing the whole body of the previous one.bullish engulfing

The bearish engulfing is a mirror image of the first one.bearish engulfing

Fig 10a and 10.b: Engulfing patterns

Note: On intraday charts, the engulfing candle hardly opens lower/higher than the previous candle, but it must close higher/lower, engulfing the entire body of the previous candle.

Criteria to trade an engulfing formation:

  1. A reward two times the risk has been established
  2. The body of the bullish candle closes higher/lower than the open of the previous bear/bull candle.
  3. Prices have been in a trend and %R shows they are in oversold/overbought territory signal.
  4. The body of the engulfing candle is of opposite color, except when engulfing small bodied candles.
  5. A large body engulfing small bodies is a positive sign
  6. Large volume on the engulfing candle
  7. The body engulfs more than one body.
  8. An opening gap after the pattern (but not much of that 2:1 Reward is taken)

Pattern sentiment

After a decline of some proportion the price opens at or lower than the previous candle, but after testing or crossing the lows of the previous candle and taking all stops, the bulls take command and move the price up, and above last day’s open. That forces the bears to close positions, adding more fuel to the bull move. Now, the change in sentiment shifts and traders seek to test the highs of the previous bearish move.

Pattern sentiment

Piercing Patterns

Piercing is everything about holes… so you’re telling me you find them attractive!
Piercing pattern (bullish) and Dark cloud cover(bearish) are specular patterns between them, so for pairs trading, they are the same pattern, just on a reversed pair chart.

The piercing pattern is a two candle pattern. The first one is a bearish candle after a downtrend has traveled for some time. The second candle starts below the low of its neighbor, and it closes above the middle of it near or at the high of the range.Piercing Patterns

The condition that the open should be below the low of the previous bear candle hardly happens on intraday charts, therefore, with those, it’s enough that it starts at the previous open, closing above the middle of it, with a strong close.

Piercing Pattern sentiment:

Criteria to trade a Piercing Pattern

  1. A reward 2 times the risk has been evaluated
  2. %R shows oversold levels and moves up at the close of the white candle
  3. There had been a downward movement with a final long black candle
  4. the actual candle is white, crossed the middle of the black candle and closes at its highs
  5. A gap down on the white candle adds power to the signal
  6. The higher the close, the better
  7. A large volume is an enhancement.

Piercing Pattern sentiment:

After a continuous decline, the bearish sentiment is extreme. The last long candle shows a lot of selling activity. The next candle gaps down, continuing down for a while. Finally, everyone willing to sell has already sold and what’s left is traders thinking that this level might be a good price to buy. Short sellers start to close their positions, as well, so the price starts to go up. The end of the bar is strong, retracing half or more of the previous candle and closing at its highs. When the next candle continues the up-trend, late short positions losing money, start being closed and the move accelerates, therefore the downward move is questioned.

Criteria to trade a Dark Cloud Cover

Since Dark Cloud Cover is the specular image of a Piecing Pattern, just translate the piecing pattern criteria to its specular condition.


I’m never having babies. I hear they take nine months to download…(Liza Sabater 🇵🇷👸🏾 On Twitter: Retrieved from

Steve Nison describes a Harami as a small real body that is contained within what the Japanese call “an unusual long black or white body”.

Harami is a Japanese word for “pregnant woman”. The large body, being the mother of the small one, the baby. It’s a sign of market lacking steam. As we see on the fig 14, haramis happen quite often during trends. Candles of profit taking, and testing. Short term trading has made this pattern almost unworthy.

Therefore a Harami, by itself, isn’t reason enough to take an opposite position to the main trend. More confirming evidence is required, such as a third candle taking the lows of the mother candle, depicting a kind of morning or evening star pattern.Harami

Morning/evening Stars.

I’m not bad, I just have a lousy publicist (Lucifer)

The Morning star is a bottom reversal signal. Looking at it in a longer time frame may be seen as a hammer, or, even, a Dragonfly Doji.  It’s composed of three elements. After a down leg, the last candle is a long, black, candle. Next candle is a gap down, and a small body is formed. The last day, there’s a gap up and a long white candle that closes near the open of the first long and black candle.Morning/evening Stars.

Note:  Intraday charts do not show gaps. Therefore, the second body may be the baby of a Harami or a small black body below the first black candle. It also may appear two or three small bodies and then the white candle. That is an indication that a bottom may have been reached. This rounded bottom is a nice place to enter after the long white candle crosses above their highs.

Criteria to trade a Morning Star.

  1. Morning Star patternThere had been a downtrend easily visible on the chart
  2. The %R is in oversold condition
  3. After a bottoming black candle, and one or more small bodies with lower tails, the last white candle closes near the opening of the black candle and in its top range
  4. A reward 2X the risk is spotted from the entry point to the last major top or resistance
  5. If we see higher volume than usual in the black and white candles, the better.
  6. If there is a long down tail in the small body the signal is stronger.

Market sentiment in a Morning Star pattern:

A strong correction has happened and long positions acquired during the down move started to think that they went wrong and close their positions. A selloff begins forming a long black body. Next day (or candle) there is a gap, but at those levels, due to supports being hit and that most of the selling ended, the price doesn’t move much. The third candle starts moving up, pushed by the bulls, that realize there is a huge reward to risk guaranteed by the previous small body. This up move forces bear traders to close their short positions, adding strength to the upward momentum.Morning Star trade

The Evening Star is an inverted Morning Star, so for forex, pairs traders, it’s exactly the same pattern on an inverted pair. For example, an evening star on the EUR/USD is a Morning Star on the fictitious USD/EUR.

Criteria to trade an Evening Star.

  1. There had been an uptrend easily visible on the chart
  2. The %R is in overbought condition
  3. After a long white candle and one or more small bodies with higher tails, the last black candle closes near the opening of the white candle and in its bottom range
  4. A reward 2X the risk is spotted from the entry point to the last major bottom or support
  5. If we see higher volume than usual in the black and white candles, the better.
  6. If there is a long upper tail in the small body the signal is stronger.

Market sentiment in an Evening Star pattern

The Evening Star is a signal that warns the top of an upward move has been reached. There is a first long white candle, showing buying exuberance, then a happy gap up that fails to go further; and, finally, a painful gap down and a long dark candle.  You may imagine the feelings of the trader who bought at that island body on the top watching a gap down and a large down-candle. That’s exactly the feeling the trader had when he traded short at the small body of the Morning Star and watched the gap up and a long white candle.  Thus, after that gap down, bulls give up their hope for the continuation of the trend and close their positions at a loss and increasing the selling pressure.

two profitable evening star trades

Kicker Signal (Keri Ashi)

I don’t need a kicker to win my super bowls… O God, please don’t kick me in the nuts!

Keri Ashi is a powerful signal, although it almost never appears on intraday charts, and when it does, its cause is a surprise news creating huge instantaneous volatility, whose Reward to risk ratio is too poor to trade at once. Likewise, due to the 24/7 nature of the currency trading, almost never shows on daily charts, as well; although it may appear in the futures market of that pair.Kicker Signal (Keri Ashi)

A bullish Kicker signal is made of a long black candle and a long white candle whose open is above the body of the previous black one.  The bearish kicker is its reverse: A long white candle followed by a long black candle that opens below the open of the white one. It’s a radical shift in beliefs of traders about the value if one of the members of the pair that triggers an instantaneous thrust in price.

Besides its rarity in currencies trading, the reward to risk is quite poor, and almost always is a consequence from a news event, so its value is linked to the event’s value as trend changer. Therefore, Kickers are worth only to recognize a major trend shift.

Shooting stars (Nagare Boshi)

Hey, Arthur, check it out: A shooting star. That’s a sure sign of good luck, my friend! (Anonymous Dinosaur)

We already talked about the value of the shadows, wicks or tails to assess who’s controlling the candle: the bulls or the bears. Shooting stars are small bodied-candles with long Shooting stars (Nagare Boshi)upper tails.  The Japanese named that way by its similitude to a shooting star. It shows that the bears have controlled the candle. It may be produced by profit taking or fresh short position, but the bullish sentiment weakened. It’s body color isn’t important. As a reversal signal, it must come after a rally. At tops, it’s usually part of the Evening Star formation, so a shooting star is a very good warning signal to close our position if the next candle travels below the low of the star’s low.

When a shooting star happens at a bottom is called Inverted Hammer, and shows evidence that the bulls started to get in, although, finally bears won. Thus, the downtrend is in question. Under this circumstance, our stops should be tightened or profit must be taken.

A positive candle, after it will picture a kind of morning star signal and may be traded similarly. On fig 20 there’s one example of an inverted hammer at the bottom of the downward leg.


Candlestick charts show information that’s hidden in bar charts. Candlestick patterns are visually more evident than in bar style, but, mainly, the information shown is very similar.

The main characteristic of a good reversal signal is that in one, two, three -or more- candles price undoes the road taken by a long initial candle of opposite color at the end of a trend of a certain length. Thus, a candlestick pattern looks similar to a small bodied-candle with long shadow or tail, if observed on a longer time frame.

A long tail, then, is always worth paying attention to. It shows who won the battle in that particular candle and is an early warning of a reversal, especially near supports or resistance levels.

The use of Stochastics or Williams %R as companion indicator enhances the value of the pattern information and its probability as a winning trade.

As a trading philosophy, we should always weight the potential reward for the risk we take. Therefore, we should qualify the pattern by the reward it shows in comparison to its risk.



  • Profitable Candlestick Trading, Stephen Bigalow
  • Japanese Candlestick Charting Techniques, Steve Nison

All Images were taken using Multicharts 11 trading platform, and MetaTrader 4

Forex Educational Library

Profitable Trading Chapter III: Chart patterns


In the early days of technical analysis, charts were drawn by hand. Personal computers came much later. Traders and investors patiently drew their charts one day, hour or minute at a time. Indicators such as moving averages were calculated by hand. Sophisticated indicators- MACD, Bollinger bands- were mostly absent.

Under those conditions, traders focused on chart patterns for clues about market turns or continuations. Thus, patterns such as head and shoulders, triple bottoms, triangles, flags and so forth started being part of traders’ arsenal.

Actually, computer-oriented traders pay more attention to sophisticated indicators than to patterns, but there are many successful traders that sing praises to the good old method of pattern trading, because, they say, it’s faster than those lag-ish indicators.

One bar patterns

The easiest to recognize, of all chart patterns, is one bar patterns: Gaps, one bar reversal, spikes, inside and outside days.

Gaps and spikes

Gaps don’t occur in the 24/7 currency markets. Or do they? That depends on how we define a gap.

Gaps and spikes

And what is a gap: Technically it is a hole in the prices due to a price change that happened between the previous close and the open.

In order to make it extensive for its use in the currency markets lets define gap as a price shock. An extensive bar or a spike such as one that is caused by a news event.

Fig 1.a shows a gap on a daily chart of a stock. Fig 1.b shows the same gap on a weekly chart as an elongated candle. It would be an elongated candle on its daily chart, too, if its open were drawn near the previous close.

The important factor is the traders’ sentiment about the price shock, not the way we draw it on a chart.

Using our brand new definition, a gap in the currency markets is a spike, a huge candle, produced by a news event that might have been a hole if the market had been closed during that event.spike in the usd/gbp hourly chart

This pattern is the product of a large volatility jump, and it’s usually a local top or bottom. Thus, it’s often followed by a pullback, sometimes very large, as we may see in fig 1.d.

The majority of spikes show the direction of a future leg. It may be the same as the current leg or opposite to it. In any case, the gap is an indication of trend direction, at least mid-term. Although, the intelligent trader knew he must wait for a low-risk entry on a breakout or breakdown of the pullback leg.

Unexperienced traders must avoid trading events such as these. Money is made with method and discipline, not by greedy entries.spike with pullback fill

Reversal bars


Reversal barsA bullish reversal bar is a bar with its low making a new low but closing higher.  A bearish reversal is a bar where there’s a new high but with the closing lower. Those reversals aren’t significant unless in context with highly oversold or overbought situations.


A bullish key reversal is a bar with new lows and then making a high higher high, closing, also, higher than the previous bar’s
close. The bearish key reversal is its specular pattern.

bearish key reversal

Important reversal patterns

From lower to higher or vice versa.

The most important pattern for determining a trend reversal has already been dealt with. Since a trend reversal -for instance from bear to bull trend- is going from lower highs and lows to higher highs and lows, this is a pattern, and it’s one of most important for the detection of a trend change.

From lower to higher or vice versa

It’s possible that we may detect a failure to new lows, but we don’t start getting higher highs and lows. Thus, we have shifted from a downtrend to a sideways market, that may resume a downtrend or break up. We still don’t know. But the bear trend has stopped.


It’s a top formation. The inverted Head-and-Shoulders is its specular counterpart as a bottom formation.


Stages of a Head-and-Shoulders pattern

  1. A strong rally followed by a minor pullback forms the left shoulder.
  2. Another high-volume rally reaches a higher high and, then, pulls back to or near to the previous low
  3. A third rally that doesn’t make new highs with a downward leg that push prices below those two previous lows, to D
  4. Prices are below the neckline that acts as resistance. Prices go up a bit, touching the neckline but failing to hold and descending to fresh lows.

Breakout: The confirmatory stage is D, with prices below the neckline failing to go back up.

The importance of the volume:

The majority of the volume appears during A and B legs, the highest occurring during B rally, and greatly diminished volume during the formation of the right shoulder.

Fig.4.b shows an inverted head-and-shoulders bottom, where the neckline isn’t horizontal, and a typical volume pattern of stronger trading before B and lightening after it.

The importance of the volume

Broadening bottoms

Appearance:  Drawing trend lines at tops and bottoms of the formation it gives the impression of the silhouette of an ancient turntable’s horn.

Broadening bottoms


Price Trend: declining.

Shape: Price seems an oscillating pattern with increasing amplitude.

Trend lines: The two trend lines across minor tops and bottoms diverge from each other. The upper trend line must be ascending or horizontal. The bottom one should be pointing down.

Touches: According to Thomas N. Bukowski’s book on patterns, a broadening bottom needs at least two minor highs and two minor lows to validate the pattern.

Volume: Volume follows price. When the price falls so does volume, and when price moves up volume increases, as well.

How to trade it: When the channel is wide enough, buy near the lower trend line and sell on weakness or when it touches the higher trend line. Also buy a pullback after the breakout or breakdown, if it fails.

Broadening tops

Appearance:  Similar to a widening bottom.

Broadening tops


Price Trend: Ascending.

Shape: Price seems an oscillating pattern with increasing amplitude.

Trend lines: The two trend lines across minor tops and bottoms diverge from each other. The upper trend line must be ascending. The bottom line should be pointing down or horizontal.

Touches: According to Thomas N. Bukowski’s book on patterns, a broadening top needs at least two minor highs and two minor lows to validate the pattern.

Volume: Volume follows price. When the price falls so does the volume, and when price moves up volume increases, as well.

How to trade it: This formation may show a trend change, but sometimes is just a trend continuation. When the channel is wide enough, sell near the higher trend line and buy when it touches the lower trend line. Also, buy the breakdown from the lower trend line.

Broadening ascending wedges

Appearance: similar to a broadening top, but the lower trend line is, also, ascending.

Broadening ascending wedges


Price Trend: ascending.

Trend lines: The top line is steeper but the lower one is also trending up.

Touches: It needs at least three distinct touches (or close to it) on each of the lines.

Breakdown: In the majority of times there is a breakdown.

How to trade it: As in the case of the other broadening tops, sell near the higher trend line. Also, sell if it fails to make a new high. Sell the breakdown, as well.

Broadening descending wedges:

Appearance: similar to a broadening bottom, but the higher trend line is, also, descending.

Broadening descending wedges


Price Trend: It usually acts as consolidation of an upward trend.

Trend lines: Both head down, but the bottom line is steeper.

Touches: It needs at least two distinct touches on each line.

Breakout: In the majority of times there is a breakout.

How to trade it: As in the case of the other broadening bottoms, buy near the lower trend line. Also, buy if it fails to make a new low. Buy the breakout, as well.

Double bottoms

A double bottom is the first confirmation that the trend has stopped making new lower lows and lower highs. After a new low is made, the following bars draw a small rally to the recent highs.

Then, the price experiences a pull-down from that resistance level, to test the recent lows: The test resolves to the upside, breaking the recent resistance up to fresh highs, starting an upward trend.

Double bottoms


Price Trend: downward.

Bottom shape: Both bottoms are at the same level or close to it. The shadow of the second low may be below the first low, but it closes above it or the next candle does it.

Confirmation: The double bottom is confirmed by a breakout of the resistance level of the formation.

How to trade it: Buy the breakout.

Double tops

Double topsA double top is the specular image of a double bottom. Price was on an uptrend and made a new local top. Then it pulled back to a local support level, and, after, it rallied again but failed to break the recent top and fell down, breaking down that local support to make fresh lows.

Price trend: upward.

Top Shape: both highs are at the same level or close to it.

Confirmation: The double top is confirmed when the support level is broken down.

How to trade it: Sell the breakdown.

Triple Bottoms

Triple bottoms are a form of oscillation. Not only present themselves after a long downward trend, but it’s usually three or more bottoms in sideways channels, or in reactive legs during an uptrend.

They are more reliable as a continuation pattern, on a bull trend than as counter-trend signal in bear markets.

Triple Bottoms

Price trend: Preferably upward

Bottoms: Three bottoms at similar levels. It helps that the second and third bottoms didn’t touch the first one.

Confirmation: Price breaks up the confirmation line.

How to trade: Wait for a pullback to support (confirmation line) and buy the second breakout.

Triple tops:

A Triple top is good trend continuation signal on a bear trend, after a pullback rally.

Triple tops

Appearance: Three distinct highs well separated. The peaks present sharp spikes.

Tops: The price variation between peaks is minor.

Confirmation: Prices must go below the lowest low in the formation.

How to trade: The breakdown risk is too high. Wait for a pullback to trade.

Rounding bottoms

Rounding bottoms and saucers are synonyms. This pattern, that’s supposedly trend reversal is so plagued by “surprise” failures that we hardly may call them “bottoms” at all. More usually, these formations appear during uptrends as a pullback, after which the trend resumes.

Rounding bottoms

Bottom Shape: The bodies on the downtrend candle get smaller, and then a bottom is formed (no fresh lows). Then a breakout happens with a tiny rally that holds the breaking level. Forming higher lows. A potential pattern of higher highs and higher lows emerges.

Confirmation: The second breakout to new highs, confirms the new leg.

How to trade it: Buy the first or the second breakout, after the small pullback. The second one is safer.

Rounding tops:

Yet another false pattern. Thomas Bulkowski writes about this pattern: “When is a top not a top? When it is a rounding top and prices break out upward 53% of the time. I like to refer to this pattern not as a rounding top, but as a rounding turn (RdT).

Rounding tops

Appearance: After a rally lost its steam, price moves on a pullback that erases most of it.  The last local bottom holds. A rally move proceeds up again.

Confirmation: Prices break the resistance of a confirmation line drawn at the high of the rounded formation.

How to trade it: To me, it’s a reactive leg in an uptrend, thus, if a new leg is confirmed by breaking a trend line drawn on the highs of the pullback segment, then a buy order may be entered at a breakout of recent highs. Taking the breakout of the confirmation line is too risky because we still don’t know if it will repeat the previous pullback by forming a sideways channel. Therefore, it’s better to wait for another pullback past the breakout of the confirmation line. See Fig. 13 for clarification.

Continuation patterns


A typical continuation pattern. After an impulsive leg a pause in the opposite direction. It’s usually a nice entry point after an impulsive leg.

Flags - Forex Academy

Appearance: Flags are fast oscillating symmetrical patterns with a downward slope in bull trends and upward one in downtrends. A typical corrective leg.

Volume: Volume fades, receding with the trend.

Confirmation: Breakout, during uptrends, or breakdown on downtrends.

How to trade it: Enter the breakout, following the previous trend. Do not enter if it’s in opposite direction to the trend, such as, in fig.14, the 4th ascending flag.


Pennants are a flag variation, but with its trend lines converging.


The fact that the volatility fades on a pennant, makes it an excellent spot for good reward to risk trades.

Appearance: Flags are fast oscillating converging patterns. The slope usually is contrary to the main trend, but it may be horizontal or in the same direction to the main trend.

Volume: Volume fades, receding with the trend.

Confirmation: Breakout, during uptrends, or breakdown on downtrends.

How to trade it: Enter the breakout, following the previous trend.

Triangles and Wedges:

Triangles and Wedges are like flags and pennants. The difference is the undulations are more noticeable and wide, so they take longer to develop. The difference between triangles and Wedges is a bit arbitrary: Triangles have lower highs and higher lows. Wedges may not because their tilt is higher, upward or downward.

They are reactive waves that, usually, end with the burst of another impulsive wave in the same direction as the previous one. Anyhow beware: All reactive waves, including wedges, are fights between bulls and bears, so its ending is uncertain.

There are upward and downward wedges. The fact that it usually breaks out in the opposite direction of its own is its reactive nature that opposes the main trend.

Wedge - Forex Academy

Appearance: Undulations with fading strength. Its upper and lower trend lines converge

Volume: Volume fades, receding with time.

Confirmation: Breakout, during uptrends, or breakdown on downtrends.

How to trade it: Enter the breakout, following the previous trend.

This covers all important chart patterns and formations available.

The main common feature is an ending with a breakout. To trade them we must evaluate carefully the reward-to-risk situation and, if not satisfactory, wait for the end of the first impulse and enter at the end of a continuation pattern – usually a flag or pennant.

There are plenty of variations of these patterns, and, sometimes, they’re very hard to spot. But if we keep our trendlines touching the local tops or highs on downward legs, and at the local lows during uptrends, we’ll be able to spot trend breakouts, judge where we are, and if it’s a good risk to reward, take appropriate actions. See fig 19.

Profitable Trading Chapter III: Chart patterns

Next chapter, well be dealing with computerized indicators, such as MACD, RSI, Stochastics, Williams %R, On balance Volume, Parabolic SAR a so on.



Encyclopedia of Chart Patterns 2nd edition, Thomas N. Bulkowski

Trading systems and Methods 5th edition, Perry Kaufman