Have you ever wanted to learn how to trade the bullish piercing candlestick pattern? If so, then you’re in luck. In this addition to my price action course, I’m going to show you how to identify and trade the bullish piercing pattern. This pattern is considered to be a moderately strong reversal signal – not in the same strength category as, for instance, a pinbar (shooting star or hammer) or an engulfing pattern. Since this signal is only moderately strong, price often will retest the low formed by the bullish piercing pattern. Consequently, many traders become discouraged, trading this pattern, before they get a feel for it, or understand how this pattern can really benefit their trading. What is a Bullish Piercing Candlestick Pattern? The bullish piercing candlestick pattern is, obviously, a bullish signal. It is also a moderately strong reversal signal, as I mentioned earlier. Like most of these candlestick patterns, the context in which this pattern occurs is very important. A true bullish piercing pattern only occurs after a downward trend in price. This pattern consists of a relatively large bearish candlestick, followed by a bullish candlestick that closes somewhere above the 50% mark of the preceding candlestick’s real body (see image below). In Forex, the bullish candle should open near the close of the preceding bearish candle; there are rarely gaps in Forex, because of the extreme liquidity of the market. In other markets, the bullish candle should open below the preceding bearish candle (as seen above under Non-Forex Piercing Pattern). Trading the Bullish Piercing Candlestick Pattern In the image below, you will see a bullish piercing candlestick pattern followed by a nice rally in price. This bullish piercing pattern was preceded by a bearish (downward) price movement, which is a requirement to qualify taking this trade; the context is very important whenever you’re doing any kind of price action trading. The doji could be a signal that the bears are running out of steam, but price continued to drop. The next candle was another bearish candlestick, which had a real body that was bigger than the previous 10 or so candlesticks. The idea is that this larger candlestick is more significant, and so are any patterns that develop from it. In order to make a bullish piercing pattern, the next candle must close somewhere above the halfway mark of the preceding bearish candle’s real body, which our example below does (barely). If you would have taken this trade, you could have made some significant gains. Since the bullish piercing candlestick pattern is only a moderately strong reversal signal, it would have been nice to see some western technical analysis supporting this trade. A good trend and reversal trading system can be very useful for trades like this one, and for further qualifying price action trades in general. Example: The Top Dog Trading system measures multiple market energies and combines that with certain triggers for taking trades. These candlestick patterns can take the place of those triggers, or at the very least, the Top Dog Trading system would have likely shown several market energies that supported taking the trade in our example above. I personally do not take any bullish piercing candlestick patterns as entry triggers without some kind of confirmation from my main trading system. As opposed to the stronger signals, e.g., engulfing patterns, morning/evening stars, pinbars, etc., which I sometimes make exceptions for. Maybe you prefer to trade pure price action, or perhaps all of the signals are lining up in your trading system; either way, the piercing pattern above could have been profitable for any trader that spotted it. There are several ways that you could have taken this trade: 1. You could enter the trade when and if the new candle (the candle after the bullish piercing pattern) breaks the high of the previous candle. 2. You could take this trade on the open of the new candle. 3. You could wait for the new candle to possibly pull back in price to 50% of the piercing pattern’s bearish candle (real body) before entering. 4. You could wait and possibly enter when and if price retests the support level revealed by the bullish piercing pattern’s formation. Getting out of the trade: Simply place your stop loss under the lowest low in the sequence of the piercing pattern. In the example above our stop loss would have been placed under the low of the bearish candlestick in the sequence. Trading Japanese candlestick patterns doesn’t always work out as nicely as the one in the example above did. Sometimes you lose on multiple signals in a row, which is why managing your money correctly is so important in any trading that you do. Having the patience to take only qualified trades while risking consistent, responsible amounts of money on each trade will go a long way toward your continued success in trading candlestick signals. Final Thoughts It’s more profitable to trade Japanese candlestick patterns with western technical indicators. If you’re already using a profitable trading system that takes advantage of these indicators, you will be much more likely to benefit from trading Japanese candlesticks as entry signals. Pure price action trading can still be profitable, but I would personally not recommend the bullish piercing pattern for that style of trading. If you really prefer naked price action trading, I would recommend sticking to the stronger reversal signals. As always, the context in which these trades are taken is very important. A true bullish piercing pattern only comes after a bearish trend in price. This movement in price, however, can contain as few as three significant, consecutive, bearish candlesticks in order to qualify as a bearish trend. Never carelessly risk your hard earned money. Be sure to demo trade each new candlestick pattern that you learn until you are confident in your candlestick trading techniques. As with any type of trading, proper money management and patience will go a long way toward your success with these candlestick strategies. Add some quality, practice screen time, and you could be trading the bullish piercing candlestick pattern like a pro in no time.
Another great price action pattern, that often leads to very favorable risk to reward scenarios, is the bullish harami candlestick pattern. In this addition to my price action course, I’m going to show you how to correctly identify and trade the bullish harami pattern. This pattern is only a moderately strong signal – not in the same strength category as something like a hammer or engulfing pattern. I prefer to trade candlestick signals in addition to my main trading system, using my trading system to qualify the candlestick signals that I may be considering. Since the bullish harami is only a moderately strong reversal signal, I don’t recommend pure price action trading with this signal. What is a Bullish Harami Candlestick Pattern? The bullish harami candlestick pattern is, as mentioned earlier, a moderately strong bullish reversal signal. This pattern starts with a relatively large bearish candle followed by a relatively small bullish or bearish candle. The real body of the 2nd candle must be inside of the real body of the 1st, bearish candle, and must not be more than 25% of the 1st, bearish candle. In most markets, the 2nd candlestick in the pattern can be bearish or bullish, as long as its real body is inside of the real body of the 1st candle, and its size is not more than 25% of the 1st candle (see the image above). In the Forex market, however, the 2nd candle in the pattern will almost always open near the close of the 1st candle, and will always be a bullish candle (because another bearish candle would mean no inside bar). I’ve said it over and over again in these articles, but it’s worth repeating: the context in which you trade these candlestick patterns is of crucial importance. A true bullish harami pattern only comes after a downward trend in price. Never trade these signals from consolidating market prices. Trading the Bullish Harami Candlestick Pattern In the image below, you can see a bullish harami candlestick pattern followed by a short rally in price. The second candle in this particular bullish harami pattern forms a hammer signal. The new upward movement is short-lived, but you still could have earned some decent profits on this one, especially if you had used the 50% entry that I like to use on hammer and shooting star signals. If you would have used the 50% entry based on the hammer candlestick in the bullish harami pattern above, you could have made about 3x your risk at full leverage. I personally would have closed half of my position once it reached the 1:1 ratio mark (or 1% for me, since I only risk 1% per trade). This way, even if the trade goes against me and triggers my stop loss after this point, I will still only break even. Example: You enter the trade (pictured above) with 4 lots at the traditional entry (when the new candle breaks the high of the smaller, second candle of the harami pattern). You’re risking 1% of your total trading account. Price starts to move in your favor, and soon you’re up 1%. At this point, you close 2 lots, and leave the other 2 lots in the market. You are now in a bulletproof trade, because even if you never take profits on the remaining 2 lots, and your stop loss is triggered, you still would not lose more than you’ve already made on the trade. In other words, you would break even. This next trade is similar to the last in a couple of ways. The retracement after the bullish harami candlestick pattern was short-lived, and the second candlestick in this pattern is a hammer signal as well. We’ll use this example to go over some possible entries for this useful candlestick pattern. Entry number 1 is the traditional entry for this pattern. Using this entry, you enter the market when the next candlestick after the harami pattern breaks the high of the smaller, second candlestick in the pattern. In the trade above, that would have been when the new candlestick breaks the high of our hammer signal. Entry number 2 is simply an entry at the open of the next candlestick. It is more aggressive because the bullish harami signal’s relevance is not confirmed by price before you enter the market. It is entirely possible that price could immediately head for your stop loss. On trades where this entry works out, you will get a better risk to reward ratio than with entry number 1. Entry number 3 is an entry when the new candlestick comes back to the 50% mark of the hammer candlestick that appears in our harami signal above. It is considered to be aggressive by some traders. I don’t consider it to be aggressive because it gives you a much better risk to reward ratio when it works out. This particular 50% entry (which is 50% of the entire range [high to low] of the candlestick) is only used on pinbars – like the hammer, in this case, or shooting star signals. Note: The only downside to entry number 3 is that the 50% entry will sometimes keep you out of good reversal trades that simply never return to the 50% mark of your hammer or shooting star. The bullish harami candlestick pattern pictured above is an example of this candlestick pattern that worked out very well. This particular harami pattern signaled the end of a retracement to the overall upward trend. I chose to include this example because many price action traders would not have taken this trade, and they would have missed out on some serious profits. The two candles that formed the bullish harami signal look fine, however, this pattern did not come after a very good downward trend in price. I probably would have taken this trade, however, because of the obvious resistance level that started the small downward retracement in price. One of the benefits of trading harami candlestick patterns is that the potential risk to reward ratio is usually pretty good on these trades. In the example above, even using the traditional entry, this trade would have gone for at least 1:1 risk to reward if price returned anywhere near the previous resistance level. Note: Your stop loss should be placed under the lowest low in the series of candles that formed your signal. In the example above, you would have put your stop loss under the low of the second, bullish candlestick in the pattern. Final Thoughts Candlestick patterns are great short term signals, but there is never a guarantee that price will continue in any direction for very long. Bullish harami candlestick patterns typically make for good risk to reward ratios, making them profitable even on short-lived reversals. The context in which these candlestick signals are taken is very important. A true bullish harami candlestick pattern only comes after a downward trend in price. Never trade any candlestick signals during periods of price consolidation. As always, taking advantage of the best entries for each particular trade and using wise money management skills will go a long way toward your continued success with these candlestick signals. The bullish harami candlestick pattern is often overlooked by price action traders because it is only a moderately strong signal. However, the favorable risk to reward scenarios that harami signals present make them worth learning. Be sure to demo trade this pattern until your are consistently profitable, and have fun trading!
In this addition to my price action course, we’re going back to the three-candle patterns. Correctly identifying and trading the evening star candlestick pattern can be very rewarding. In this article, I’m going to show you the right way to trade this profitable candlestick signal. The evening star is considered to be a strong reversal signal. Like all strong bearish candlestick patterns, the evening star is not only profitable to trade, but is also very useful in identifying important resistance levels. This pattern is one of the first candlestick signals that I learned how to trade, and it, along with the morning star candlestick pattern, continues to be one of my favorites. However, these patterns do not occur as often as some of the other strong reversal signals, i.e., engulfing patterns, hammers, and shooting stars. What is an Evening Star Candlestick Pattern? An evening star candlestick pattern is a strong bearish reversal signal, meaning a true evening star pattern only occurs after an uptrend in price. What constitutes an uptrend in price may vary from trader to trader, but the move should be somewhat significant. Steve Nison has stated that a trend in price, as it relates to candlestick trading, may be as little as a few significant candles in one direction. The evening star candlestick pattern consists of a relatively large bullish candlestick, followed by a candlestick with a relatively small real body (like a doji or spinning top), followed by a bearish candlestick that closes somewhere lower than the 50% mark of the first, bullish candlestick’s real body. Note: In Forex, if the second candlestick in this three-candle pattern is a spinning top or something slightly larger, it must be bullish (see the image above). A non-Forex evening star is similar. One difference is that the second candlestick needs to be isolated above the first and third candle of this three-candle pattern. There should be, at least, a small gap up to the second candle, and also another gap back down to the third candle (see the image to the right). Like in the Forex pattern, the second candlestick should have a relatively small real body (like a doji or spinning top), but unlike the Forex pattern, the second candlestick could be either bearish or bullish, as long as it is isolated above the first and third candles. Lastly, a non-Forex evening star’s third candlestick does not necessarily have to open at or above the first candle in the pattern. It could simply gap back down from the second candlestick into the real body of the first candle, and close somewhere below the 50% mark of the first, bullish candlestick. Note: Sometimes you will see a Forex evening star pattern that looks like its non-Forex counterpart (leaving the second candlestick isolated above the others). These occurrences of the pattern don’t happen often in the Forex market, but when they do, it is usually a very strong bearish signal. Trading the Evening Star Candlestick Pattern In the image below, you will see a textbook evening star candlestick pattern. This one would have worked out very well for any trader that took the signal – even at the traditional entry (when price breaks the low of the third candlestick). Given the context in which this pattern occurred, as well as the high wick of the second candlestick, and the low wick of the third candlestick in this pattern, I would have considered entering this trade on the open of the next candlestick. By doing so, you could slightly raise your potential risk to reward on this trade. In the next example (below), you will see an evening star signal who’s third candlestick engulfs the first and second candlestick in the pattern. This is a high probability signal, although it usually does not make for a very good risk to reward scenario. In my previous article, Trading the Morning Star Candlestick Pattern, I mentioned that I prefer to wait for a pullback on signals that have an engulfing third candle. That’s exactly how I would have played the signal below. By waiting for a pullback in price to the 50% mark of the large, third candlestick in this pattern, you either create a more favorable risk to reward scenario, or you avoid the trade altogether. In our example below, we would have stayed out of the trade using this technique. Note: This pullback to the 50% area of the third candle in the pattern does not happen every time, or even most of the time. This technique is simply a way to create a more favorable risk to reward scenario on a trade that you would otherwise avoid. In the next example (below), you will see another evening star signal. Although this pattern would have worked out, there are a few things to consider. A discerning trader may have stayed out of this one. First, the tall wicks or shadows on top of the three candles in this pattern necessarily lower your risk to reward potential, because your stop loss needs to be placed above the highest high in the sequence. However, the tall upper wicks are a bearish indication. The second thing that I would mention is that the real bodies of the candlesticks in this pattern aren’t relatively large. In the previous two examples, the real bodies of the first candlestick in each pattern are the largest in their respective uptrends. This is not a requirement, but it is something that you might want to consider. Larger candlesticks are more significant in any price action pattern. All that being said, I still would have take the trade above. I would have taken the traditional entry (show in the image above), and I would have closed half of my position as soon as the trade reached 1:1 risk to reward – leaving the other half in the market. After seeing that harami pattern at the bottom of the move, I would have closed the rest of the trade for a decent profit. Final Thoughts As with any bearish reversal signal, a true evening star will only occur after a uptrend in price. Trying to trade similar candlestick formations during periods of price consolidation is not wise. In the Forex market, remember that the second candlestick in this pattern must be a doji or a small bullish candlestick. In other markets, the second candlestick can be bullish or bearish, as long as it is isolated above the other two candles in this pattern. The third candlestick in this pattern needs to pull into and close, at least, somewhere lower than the 50% mark of the first, bullish candlestick. Often, the third candlestick in this pattern will engulf the previous two candlesticks or more. When that happens, it is a strong bearish signal, although it necessarily creates a less favorable risk to reward scenario. Trading the evening star candlestick pattern can be very rewarding, if it is done right. No trader is an expert at this pattern after simply learning to identify it. It takes practice to get a feel for what techniques need to be used and when. Be sure to demo trade this profitable candlestick signal before risking your hard earned money, and it just might become one of your favorite candlestick signals too.
Trading the dark cloud cover candlestick pattern can be very profitable, if done the right way. In this addition to my price action course, I’m going to show you how to correctly identify and trade this lucrative candlestick signal. I like to trade this pattern, because, like the harami patterns and the bullish piercing pattern, this pattern often leads to good risk to reward scenarios when it works out. Also, the bullish piercing and dark cloud cover patterns are fairly common, providing candlestick traders with plenty of opportunities to test their skills and earn a profit. What is a Dark Cloud Cover Candlestick Pattern? The dark cloud cover pattern is a moderately strong, bearish reversal signal. Like all bearish reversal signals, a true dark cloud cover pattern only occurs after an uptrend in price. Steve Nison (the authority on candlesticks) says that a trend in price, as it relates to candlestick trading, may consist of just a few significant candles in one direction. This pattern consists of a relatively large bullish candlestick, followed by a bearish candlestick that closes deep into the real body of the first, bearish candlestick. The second candle in this pattern should close somewhere lower than the 50% mark of the first, bearish candle’s real body (see the image below). A non-Forex dark cloud cover signal is similar. The only difference being that the second, bearish candlestick needs to open above the close of the first, bullish candlestick; so there should be, at least, a small gap up before the second candlestick closes deep into the real body of the first one (see the image above). In Forex, a gap up to the second candle’s open is not necessary. The extreme liquidity of the Forex market (especially in the major pairs) ensures that there are rarely gaps in price from one candle to another. Note: You may come across a dark cloud cover candlestick pattern that resembles its non-Forex counterpart (second candle opens above the close of the first candle). Although this is a rare occurrence, it is usually a very strong bearish signal. Trading the Dark Cloud Cover Candlestick Pattern In the image below, you can see a nice dark cloud cover pattern that signaled a major reversal. This one would have worked out nicely, and you could have made more than five times your risk. You might also notice that this reversal was so strong that it blew right past the bullish engulfing pattern that formed eight candlesticks later. Of course, upon seeing the engulfing pattern, that would have been a great place to lighten up on your position, even though it was mostly ignored. In the next example (below), you can see multiple dark cloud cover patterns. The first signal could have earned you about twice your risk. You can see from this example, however, that candlestick signals are often very short term indications of where price is headed. The second signal, although it worked out, wasn’t looking quite as promising upon setup. The upward price movement that preceded that signal is not significant enough for my comfort; there were really only two bullish candlesticks making up that trend, including the first candlestick in the dark cloud cover formation. Also, the risk to reward ratio on that second signal wasn’t looking too great because of the large candlesticks that made up the second pattern, along with the tall upper shadow of the first, bullish candlestick in the pattern. Even though the reversal that followed was much more significant than the first one, you still would have only made about twice your risk. In the next example (below), you will see another dark cloud cover candlestick pattern. The uptrend that preceded it wasn’t much of a move, but considering that all the candlesticks in that trend were bullish, and they each made slow but steady progress upward, I would have considered this move significant enough to count as our qualifying uptrend. One thing that a discerning price action trader may have considered is that the candles making up this dark cloud cover aren’t particularly large. They are, however, relatively large when compared to the candles that make up the preceding uptrend. The example above is a perfect demonstration of why you should always seek, at least, twice your risk to the first support level (on bearish trades). As soon as price reached the previous cycle low (our first support level), it reversed again without much notice from the candlesticks – other than a couple of long lower shadows. The traditional confirmation entry happens when price breaks the low of the second candlestick in our dark cloud cover signal. The only other option is to enter at the open of the new candle. Your stop loss should be placed above the highest high in the pattern (remember to add the spread in Forex). Final Thoughts As with any bearish reversal signal, a true dark cloud cover candlestick pattern only occurs after an uptrend in price. Trying to trade these candlestick signals from periods of price consolidation in the market is never a good idea. In non-Forex markets, remember that the second candlestick in this pattern needs to gap up slightly before closing deep into the first candlestick (lower than the 50% mark of the first candlestick’s real body). Due to the extreme liquidity in the Forex market, a gap up is not likely, although if it occurs, it is a very strong bearish signal. One of the beauties of candlestick trading is that it can be added to just about any trading system that you are currently using for more trading opportunities. Using a reliable, profitable trading system can help you qualify the best candlestick signals to take. Trading the dark cloud cover candlestick pattern can be very lucrative, if you know what you’re doing. Never risk your hard earned money trading these signals live until you’ve become an expert at trading them with your demo account (or paper trading). With a little practice, you’ll get a feel for this pattern, and you’ll be trading it like a pro in no time.
Would you like to learn how to trade a candlestick pattern that often yields very favorable risk to reward scenarios? Then trading the bearish harami candlestick pattern might just fit the bill. In this addition to my price action course, I’m going to teach you how to correctly identify and trade the bearish harami pattern. The bearish harami is a similarly traded pattern, signaling market psychology that is likely to move price in the opposite direction. In this article, I’ll try to cover some new ground on trading these two great candlestick patterns. The bearish harami is a moderately strong bearish signal. This pattern, like the bullish harami, is not in the same strength category with such patterns as the hammer, morning star, engulfing pattern, etc. My preferred method is to trade candlestick signals in addition to my favorite trading system. Keeping in mind that the harami signals are only moderately strong, I think it is especially important to consider other technical indicators that may or may not support trading any particular harami pattern. Note: I do not recommend pure price action trading with these signals, although some traders are very successful with this approach. What is a Bearish Harami Candlestick Pattern? The traditional bearish harami candlestick pattern starts with a relatively large bullish candle, followed by a relatively small candlestick that can be bearish or bullish, with a real body that can open and close anywhere within the range of the previous bullish candle’s real body (see the image below). The only stipulation to a traditional harami pattern is that the second candlestick must not be more than 25% of the preceding candlestick (see the image above). Again, whether or not the second candlestick is bearish or bullish, or where the second candlestick opens and closes (in relation to the preceding candlestick), is of little significance in most markets. This pattern may look slightly different in the Forex market. In the Forex market, the second candlestick will, almost always, open near the close of the first candlestick. The second candlestick must also always be a bearish candlestick (see the image on the right). Obviously, another bullish candlestick would prevent the crucial inside bar of this pattern from developing. Finally, I must mention that a true bearish harami candlestick pattern can only develop after an uptrend in price. The context in which you trade these, or any, price action signals is crucially important. Note: Never trade the harami patterns, or any price action signal, from an area of price consolidation (flat or sideways markets). Trading the Bearish Harami Candlestick Pattern In the image below, you can see a bearish harami candlestick pattern followed by a short dip in price. I chose this particular instance of the pattern for 2 reasons: 1. This pattern shows that, although price action signals (when used correctly) have a high probability of indicating the immediate direction of the next price movement, there is never any guarantee on how long this movement with last. You must be prepared to take profits early in some cases. This is true for all price action patterns. 2. Although the bearish price movement was short-lived, in this case, you could have still made a nice profit on this trade due to the high risk to reward ratios that the harami patterns typically offer. This is because your entry point would have been 1 pip below the bottom wick of the smaller, second candle of the pattern. Even though the dip in price in the example above was short-lived, you still could have made, at least, twice what you would have risked on that trade. Imagine the kind of risk to reward scenarios you could achieve when the bearish harami pattern is followed by a full reversal with some conviction. It’s not uncommon to achieve 5 times your risk when these trades work out nicely. The downside to this candlestick pattern is that it is only a moderately strong reversal signal. As I mentioned earlier, it is not to be treated in the same respect as a strong reversal signal, such as a hammer, morning star, engulfing pattern, etc. In fact, some traders, including Steve Nison, trade this pattern as they would trade a doji. Don’t give up on the harami patterns just yet, though. The favorable risk to reward scenarios can make up for many losses. Even small corrections in price (like in the example above) can make up for 2 or more losses. Of course combining these harami signals, or any price action pattern, with a good trading system will help to qualify the best trades to take. At the very least, you can use these signals as an indicator of when to take profits on trades that you are already in. Example: You are in a bullish trade, riding the price action steeply upward (as in the example above). Next, you see the bearish harami develop. As this is a bearish indicator, you would use this signal as a place to either close or partially close your trade. I included the example above because the context in which you take any price action signal is the first and most important thing to consider. Earlier, I mentioned that a true bearish harami candlestick pattern only occurs after an uptrend in price. The example above shows an uptrend with a small retracement in price that occurs before our candlestick signal. This small retracement may have led a less experienced trader to disqualify the harami pattern that occurred afterward. However, this is still an example of an uptrend until after our pattern. I wouldn’t consider any downward movement during an uptrend to be more than a retracement unless it consists of 3 or 4 strong bearish candlesticks (or perhaps 2 very large candlesticks) or a series of lower highs and lower lows (which occurred after our pattern). The bearish harami candlestick pattern pictured above is an example of this particular candlestick signal that would have worked out very well. You could have made twice what you were risking on this trade before the first candlestick closed. Obviously, the trend continued downward from there. The trigger to jump into a properly qualified bearish harami is when price breaks (1 pip) below the low of the smaller, second candlestick in the pattern (see the image above). You would place your stop loss (1 pip) above the highest high in the series of candlesticks that formed your harami pattern (see the image above). Note: If another candlestick pattern or other relevant resistance level is slightly above your candlestick pattern, always place your stop loss (1 pip) above the higher resistance level. In the example above, the first candlestick in the pattern made the highest high, and there were no other relevant resistance levels nearby, so this rule did not come into play. Another thing to note is the size of the first candlestick of the pattern in relation to the other nearby candlesticks. In the example above, the first candlestick is much larger than the previous 12 candlesticks pictured. Psychologically, this gives more relevance to the pattern. It signifies that, even after a confident rally by the bulls, the overall market is not quit sure that upward price movement is the right direction at this time. Final Thoughts All candlestick patterns are great short term signals, but there is never a guarantee that the new direction of price will follow through with any conviction. Sometimes candlestick patterns signal small retracements in price. The harami patterns excel in these situations, because of the favorable risk to reward scenarios that they typically present. Remember that a true bearish harami only occurs after an uptrend in price. The stronger the uptrend, the more relevant the signal in most cases. Never trade any candlestick patterns during periods of price consolidations (sideways markets). Choosing only the best entries and using wise money management skills will go a long way to preserve your capital and ensure your continued success while trading these candlestick signals. As always, be sure to demo trade these signals until you are consistently profitable before risking your hard earned money. The bearish harami candlestick pattern is often overlooked by price action traders, because it’s only a moderately strong signal. However, the favorable risk to reward scenarios that harami signals present should encourage you to pursue and master them. Have fun learning and happy trading!
The hanging man is a very popular, but often misused, candlestick trading signal. In this addition to my price action course, my goal is to show you how to correctly identify and start trading the hanging man candlestick pattern (in the right situations). This popular candlestick formation is a weak reversal signal, and as a result, most experienced candlestick traders do not use the hanging man alone as an entry signal. Although the hanging man candle, when properly traded, is not typically used as an entry signal, it can be a great heads-up indicator. Especially when combined with a good system for entry triggers, this candlestick signal can be a powerful tool to have in your trading arsenal. Note: I do not recommend pure candlestick trading with the hanging man, at least not as an entry signal, unless it’s combined with a reliable trading system that has proven to be profitable on its own. What is a Hanging Man Candlestick Pattern? The hanging man is a weak bearish reversal signal. This candlestick looks like the hammer candlestick signal, only it appears at the top of a trend, or strong bullish price movement. Like the hammer candlestick, the hanging man should have a long lower wick/shadow (at least 2x the size of the real body), as well as little to no upper wick/shadow. The real body of the hanging man signal can be bullish or bearish (see the image above). For obvious reasons, this bearish reversal signal is considered to be slightly more bearish if the real body is also bearish. As I mentioned before, this candlestick formation is only considered to be a true hanging man candlestick signal when it appears after an uptrend. The context in which you take any candlestick signal is of utmost importance. Never trade candlestick signals from within price consolidation (flat or sideways markets). The psychology of this signal is that, even thought the bulls are still in control of the market, the market has shown an ability to move lower (long lower wick/shadow). This can make the bulls a little nervous, and some may start taking profits while they’re ahead. Trading the Hanging Man Candlestick Pattern In the image below, you will see a series of hanging man candlestick patterns. In both cases, these formations happened during an uptrend, and in both cases they signaled an upcoming bearish price movement. As you can see, the second set of hanging man candlesticks signaled a full reversal in the trend. In either case, these candlestick signals would have been a great place to take profits on a bullish trade that you might have been in, which is how most successful candlestick traders use this particular price action signal. Example: You enter a bullish trade, riding the trend up as far as you can. When you see the first hanging man (in the example above), you close half of your position. Upon seeing the following bearish confirmation candle, you realize that you were right to be suspicious of the trend continuing. However, price doesn’t break the low of the confirmation candle, so you keep the other half of your position in play for now. Upon seeing the second set of hanging man signals, you close your remaining position. As demonstrated in the example above, you would have been wise to utilize this candlestick formation as an exit signal. Of course, if you had closed your entire position after the appearance of the first hanging man, your trade would have been almost as successful as the one described in the example, without the extra risk. In the image above, you can see another hanging man candlestick signal, with dashed lines showing the proper entry and stop loss placement. Notice that the entry trigger is (1 pip) below the bearish confirmation candle – not the hanging man itself. The stop loss is placed (1 pip) above the highest high in the bullish cycle (current uptrend swing). As I mentioned earlier, I do not recommend pure price action trading with the hanging man as an entry signal. That being said, the technique above is the correct way to trade this signal as a entry trigger if you choose to. Also keep in mind that the hanging man can be a very high probability entry trigger when combined with a good trading system. The Top Dog Trading system, for instance, teaches ways to measure other energies in the market (cycle, momentum, support/resistance, etc.). When you know what the other energies in the market are doing, it’s much easier to qualify high probability candlestick signals. In the image above, you can see another great example of how the hanging man candlestick pattern can be used as an exit signal. There are some other indications that the bulls are running out of steam in this example as well. Let’s look at them altogether to get a picture of how we could have anticipated the bearish fall in price that followed: 1. The second large candlestick in the strong bullish move that preceded our hanging man candlestick pattern made a huge move upward, but the market rejected price at those levels (see the image above). This candlestick occurred to early in the trend to be considered a shooting star, but the long upper wick/shadow is still relevant. 2. Price retested those levels that the market had previously rejected (as it often does), and made some headway. However, while retesting those price levels, a hanging man candlestick signal appeared. This is considered to be a bearish signal, especially considering that it appeared within an area of such obvious rejection of price by the market. 3. The following candlestick is bearish, which is (depending on its relative size) a confirmation of the bearish sentiment of the market at the time. This means that the bulls are probably getting nervous, and taking profits on their open positions. This causes supply to go up, and price to go down. If you would have taken this particular hanging man candlestick pattern as an entry signal, placing your stop loss above the hanging man itself, you would have gotten a nice risk to reward trade. However, the correct place to put your stop loss, in this scenario, would have been above the large upper wick/shadow that preceded the hanging man signal, because that is the highest high in that particular bullish movement. Note: Putting your stop loss in the correct place on this particular trade would have yielded an unfavorable risk to reward scenario. So what do you do? You would simply stay out of the market. Successful trading means staying out of the market until conditions are perfect. Even then you will lose trades, so don’t just trade for the sake of trading. Final Thoughts Keep in mind that candlestick trading is great for predicting short term market direction changes, but there is never a guarantee on how long any particular market direction will last. This is especially true with the hanging man, or any of the weak candlestick reversal signals. The context in which any candlestick signal is traded is very important. A true hanging man candlestick pattern can only appear after an uptrend in price. Never trade the hanging man, or any other candlestick signal, during periods of price consolidation (flat or sideways markets). As with any trading technique that you choose to try, wise money management skills will go a long way toward ensuring your continued success. Take only the best trade setups, use your stop losses, and make sure you are never overleveraged! The hanging man is a very popular, but often misused, price action signal. Trading the hanging man candlestick pattern can be very fun and rewarding, if you know how to trade it correctly. As always, be sure to and demo trade this technique, until you have a firm grasp on it, before risking any of your hard earned money.
Many candlestick traders don’t fully realize that every candlestick tells a story about the market. That is certainly the case with the often overlooked high wave signal. In this addition to my free price action trading course, I’m going to show you how you should be trading the high wave candlestick pattern. This candlestick formation, like the spinning top and doji formations, shows indecision in the market; therefore, you wouldn’t take the high wave candlestick as an entry signal, but it can be a good indicator that the market may be changing direction. You often find multiple high wave candlesticks at the top or bottom of trends that are changing direction. Note: I have not found pure naked candlestick trading to be profitable in my own personal experience, although I know of traders that do well with these techniques. I have, however, found that using candlestick signals with a reliable trading system, that has proven to be profitable on its own, can be a powerful combination. What is a High Wave Candlestick Pattern? As I mentioned earlier, the high wave candle is similar to a spinning top or doji – as it signals indecision. The idea is that, over the course of the given time period, the bulls and the bears both tried to move the market, but neither was able to hold onto their gains by the end of the period. Like a spinning top, a high wave candlestick pattern has a relatively small real body. The difference is that a spinning top has relatively small upper and lower wicks, whereas a high wave candlestick has relatively long upper and lower wicks, revealing more volatility. In the image above, you can see a doji, a spinning top, and a high wave candlestick. Spinning tops and high wave candlesticks can have either bullish or bearish real bodies. The real body of a high wave can be larger than the real body of a spinning top, but should be relatively small when compared to its total range (the distance between its high and low). You may see high wave Japanese candlesticks forming in various places on your charts – including consolidating (low-range, sideways) markets. In order to be of any use, like the doji and spinning top, the high wave signal must come after an uptrend or a downtrend. Used in this way, it could signal a possible change in direction. At the very least, it should alert you to the possibility of stronger, more reliable, reversal signals upcoming. Trading the High Wave Candlestick Pattern In the image below, you will see a series of high wave candlestick patterns. The first occurred after a small retrace in the overall trend, which is not typically where this signal would be useful. However, as you can see, its occurrence after a relatively large bearish candle signaled indecision in the market. It was followed by an inverted hammer (which is a weak bullish signal), and then the trend continued upward. The second occurrence, in the image above, is a more useful example of trading the high wave candlestick pattern. It appeared after an extended uptrend, signalling that the market was unsure about continuing the uptrend. That signal was followed by a bearish engulfing candlestick that engulfed the previous 2 candlesticks. The trend reversed from that point. The third high wave signal appeared shortly after the previous bearish engulfing pattern. This signaled more indecision, but ultimately the trend continued its reversal. Notice: At the top of the trend above, we have a high wave candle, followed by an engulfing candle, followed by a spinning top (or a formation very similar to one), followed by another high wave candle, followed by a doji, and then finally another engulfing pattern, before continuing the bearish reversal of the trend. All of these candlesticks are telling a story. The last high wave candlestick in the image above came after a downtrend, signalling indecision. It was followed by an engulfing candlestick, forming a bullish engulfing pattern (although not a very good one). The result was another reversal (at least in the short-term). Below are some examples of how you could use the high wave candlestick pattern in your own trading: Example #1: You’re watching an uptrend, waiting for a reversal signal. You see a high wave candle. This lets you know that there is indecision in the market, and you should be on the lookout for an upcoming strong reversal signal, e.g., shooting star, bearish engulfing pattern, evening star, etc…. The high wave candle also strengthens the idea that price will reverse in the area of your strong reversal signal. Example #2: You’re in a existing trade. You’re near your take profit. The market seems to have lost its momentum, and then you see a high wave candlestick form. You notice that this stall in price is also happening near a significant support/resistance zone. You decide to close your trade, keeping your profits, rather than risking a sharp reversal; or perhaps you just move your stop loss to break even. Exmaple #3: You decide to scale into a trade, starting with a small position. At first, price action is going your way, but then you notice a series of indecision signals, e.g., high wave candles, spinning tops, dojis, etc…. You decide to hold off adding to your position until the market shows you more evidence that it will continue in the direction of your trade. Final Thoughts: As I always say, candlestick trading is great for predicting short-term changes in market direction; however, nothing works 100% of the time in trading, and even strong reversal signals that work out can’t guarantee that the reversal will continue in your favor. That being said, you shouldn’t be trading the high wave candlestick pattern as an entry signal, but it can add to the case for taking a strong reversal signal. You often see multiple high wave signals at the absolute tops and bottoms of large trends, which can be powerful with the right trading system. Like all the other candlestick signals that we have discussed in my price action course, the context in which these signals occur is very important. If you see a high wave candlestick during a period of price consolidation, it’s obviously signalling market indecision, but so is the low-volatility, consolidating market. However, these signals can be valuable when they occur during trends, especially strong or extended trends. Steve Nison recommends using candlestick signals with western technical indicators to find and qualify the best trades. I like to combine candlestick signals with another profitable trading system that works well with candlesticks, like the Infinite Prosperity system. The high wave candlestick is a simple indecision signal – not powerful on its own, but it can help to make a strong case for taking other, stronger candlestick signals. Hopefully, this article will help you get started trading the high wave candlestick pattern.
Although not as common as its counterpart signal, the hanging man, the inverted hammer can still be a useful tool – in the right hands. In this addition to my free price action course, I’m going to show you how to start trading the inverted hammer candlestick pattern. This candlestick formation is a weak reversal signal; therefore, it is not wise to take this candlestick signal, alone, as an entry trigger. Although it’s typically not taken as an entry signal on its own, just like the hanging man, the inverted hammer can be great for building a strong case for a reversal trade or early exit. When combined with stronger reversal signals, or a setup that works well with candlestick signals, it can be especially useful. Note: If you’ve been reading this blog for any amount of time, then you probably already know that I don’t recommend pure candlestick trading – especially with the moderate or weak signals. I prefer to combine candlestick trading with a reliable trading system that is profitable on its own. At the very least, you should be taking these signals from significant support and resistance levels. What is an Inverted Hammer Candlestick Pattern? The inverted hammer candlestick pattern is a weak bullish reversal signal. It looks just like a shooting star, only it appears at the bottom of a trend. Like the shooting star, the inverted hammer should have a long upper wick/shadow (at least 2x the size of the real body), and it should have little or no lower wick/shadow. The real body can be either bullish or bearish (as seen in the image above). The inverted hammer candlestick, itself, is considered to be slightly more bullish if the real body is bullish. However, if you use this signal in conjunction with a confirming candle (like I’m going to show you below), it is actually slightly more bullish, in my opinion, when the real body is bearish. That’s because the confirming candle will typically engulf, at least, the real body of the inverted hammer, and it often engulfs more. An inverted hammer formation is only considered to be a true inverted hammer when it appears after a downtrend in price action. As with any of these reversal signals, it’s important to take them in the correct context. Never trade these candlestick signals from consolidating price action (flat or sideways markets). The psychology behind this signal is that the bulls were buying during this time period, but were unable to hold that buying pressure. That being said, the bulls have shown an ability to move price up from the current level. This could make the bears nervous enough to start taking profits at this level. Trading the Inverted Hammer Candlestick Pattern In the image below, you will see a couple of inverted hammer candlestick patterns. The length of the lower wick in the second example is on the limit of what I would consider acceptable. Any lower and this candlestick would be considered a high wave candlestick (indecisive). In both cases, these formations signaled a support zone. Even in the second example, price eventually went up from that zone significantly (although I had to cut the bullish price action off to center the image). You might also notice, in the second example, that there was a high wave candle before our inverted hammer, and a long-tailed doji afterward. These are also signals that a support zone has been hit. Either example (from the image above) could have been used as an early exit signal for a bearish trade that you were in, which is how this particular candlestick signal is usually used. Example: You enter a bearish trade, and price action has been on your side so far, surging lower. You see the first inverted hammer, and you decide to close half of your position, locking in some profits. You’re thankful that you kept some of your position in the market, because price has continued lower. Upon seeing the second inverted hammer, as well as some other bullish signals (or signals of indecision), you decide to close your remaining trade. In the image above, you can see another great example of how trading the inverted hammer candlestick signal can help you keep more of your profits. The high to the left of our inverted hammer was capped off by a dark cloud cover candlestick pattern. Let’s assume you entered a sell order at that point, and you’re waiting for an opposing, bullish signal to close your position. After the initial, strong, downward move, there was a bullish piercing pattern. However, in this case it was not very bullish, because of the relatively long upper wicks on both candles in the pattern. Let’s assume you didn’t close your position there. Next, you get a high wave candlestick, then our inverted hammer, followed by a couple of spinning tops – one of which is part of a bullish harami. If you would have closed your position when the inverted hammer formed, or shortly afterward, you would have locked in about as much profit as you could have possibly expected from that trade. I mentioned earlier that I do not recommend trading the inverted hammer candlestick pattern as an entry trigger. If you choose to trade it as an entry signal, the technique above is the correct way to do it. When trading this signal as an entry trigger, you need to wait for a bullish confirming candlestick. In the example above, the candlestick after the inverted hammer closed above it, but it has a long upper shadow (which is bearish). You would need to wait for a bullish candle that closes near the top of its range for a proper bullish confirmation. A good rule of thumb is to wait for a candle that closes within the upper 1/3rd of its range (for a bullish confirmation). In our example, we got a proper bullish confirmation on the very next candlestick. In the example above, I added dashed lines to show you the proper placement of your entry level and stop loss. The entry should be 1 pip above the high of the confirmation candle (as shown above), or at the open of the candle immediately after the confirmation candle closes, depending on your trading strategy. The stop loss would be placed 1 pip below the lowest low in the area of the inverted hammer signal – not necessarily the inverted hammer itself. Final Thoughts Japanese candlesticks are a great way to predict short term market directions, but there is never a guarantee on how long any particular reversal or continuation pattern will last – especially with the weak signals. Combining price action trading with a profitable trading method can help you qualify better trades and improve your strike rate. Context is so important when trading any candlestick signal. Remember: A true inverted hammer only occurs after a downtrend in price action. Never take this signal from a consolidating market (flat or sideways price action). Trading the inverted hammer candlestick pattern can be a powerful tool, if done the right way. You should always and demo trade any new trading setup that you plan to add to your repertoire, and use responsible money management when you decide to go live. Good luck and happy trading!
So you’ve heard of the doji, but what about the dragonfly and gravestone dojis? In this addition to my free price action course, my goal is to help you correctly identify and start trading the dragonfly doji and gravestone doji. These patterns are considered to be weak reversal signals (varying degrees of strength) or indecision signals. I don’t recommend pure candlestick trading with these signals, but they can be useful in addition to a profitable trading system that works well with candlestick signals. The dragonfly and gravestone dojis can also be used as entry triggers on their own, although this is not typically done. However, if that is what you would like to do, there is a higher-probability method for trading these signals on their own, which I will teach you in this article. What is a Dragonfly Doji or Gravestone Doji? In the image below, you will see a dragonfly doji and a gravestone doji. Starting with the dragonfly doji, it consists of a relatively long lower wick, no real body, and no upper wick. In the Forex market, a real body or upper wick that are only a few fractions of a pip is acceptable. The gravestone doji is the opposite of the dragonfly doji. It has a relatively long upper wick, no real body, and no lower wick. Similar to the dragonfly doji, a gravestone doji can have a very small real body or lower wick. Unlike many of the other candlestick signals that we have learned about, the dragonfly and gravestone dojis can have varying degrees of significance, depending on where they appear in the overall price action of the market. For instance, a dragonfly doji that appears after a downtrend (as shown above) is bullish. It would be similar to a hammer signal, but not nearly as strong. That same dragonfly doji, if it appears after an uptrend, becomes a slightly bearish or indecisive signal. In this case, it would be similar to a hanging man signal, but not as strong. Similarly, when a gravestone doji appears after an uptrend (as shown above), it is bearish. It would be like trading a shooting star signal, but not nearly as strong. However, if that same gravestone doji appears after a downtrend, it becomes slightly bullish or indecisive. In this case, it would be like trading an inverted hammer signal, only it’s not as strong. Both of these candlestick formations often appear in sideways or choppy markets as well. However, to be useful to our trading, we would only consider them after uptrends or downtrends. Never trade any candlestick signals during periods of consolidation/accumulation (sideways, choppy, low liquidity, etc…) in the market. Trading the Dragonfly Doji and Gravestone Doji In the image below, you can see a gravestone doji and a dragonfly doji that appeared in a choppy, (mostly) sideways period. These two candlestick signals only show indecision. They are not very useful to us because of the context in which they occur. Near the center of the image, you will see a long-tailed doji (or long-tailed spinning top). I do not consider this formation to be a dragonfly doji, because the upper wick is a bit too long. The long-tailed doji is, however, a bullish signal for a couple of reasons: 1, the long lower wick is bullish; and 2, the size of this candle is very large relative to any other candlestick in the image. Since it showed a rejection of lower price and was much larger than the other candlesticks in the area, I would consider this to be a pretty strong bullish indication – even though it occurred from sideways price action. Note: We’re not taking the long-tailed doji as an entry signal. Normally, we would never consider its significance at all, because it occurred in a sideways market. Its size is the trumping factor here. Also keep in mind that if a large candlestick occurs during periods of low liquidity in the market (such as the end of the New York session, or during the Asian session), the significance of the candlestick is nullified, because it’s much easier for fewer traders to move the market during such periods. Lastly, on the right side of the image above, you can see a dragonfly doji that appears after a small downtrend in price. This occurrence of the dragonfly doji is actually useful to us. In this case, the dragonfly doji is a bullish signal. Combine that with the long-tailed doji from earlier on the chart and you could make a pretty good case for the market trending upward in the near future. The image above is an example of how to take the gravestone doji as an entry trigger. As I mentioned earlier, I don’t recommend doing this, unless the trade is supported by a profitable trading method that works wells with candlestick trading; however, if you do want to trade these dojis as entry triggers, this is the way that I recommend doing it. Instead of jumping into the market right away, when the gravestone doji first appeared, you would wait for a bearish confirming candle. To be a bearish confirming candle, it needs to close below the previous candle. It should also close near the bottom of its total range. To put it another way, if the confirming candlestick in question has a long lower wick, that is not a bearish signal. I like the confirming candle to close in the bottom 1/3rd of its range for bearish confirmation (as in our example), or in the upper 1/3rd of its range for a bullish confirmation candle. In the example above, you can see a gravestone doji, followed by a bearish confirmation candle. In this case, the bearish confirmation candle occurred on the very next candlestick, which is good for reward to risk ratios. Your stop loss would have been placed 1 pip (plus the spread) above the high, which was our gravestone doji. The entry could have been taken at the open of the next candlestick after the bearish confirmation candlestick closed, if you wanted to be more aggressive and improve your chances of a good risk to reward ratio; or you could have taken the trade once price broke 1 pip below the low of the confirmation, as I’ve shown in the example above. To trade the dragonfly doji as an entry trigger, you would go through the same steps, except you would wait for a dragonfly doji to appear after a downtrend, and you would wait for a bullish confirming candlestick. Also, the stop loss would be placed only 1 pip below the low of the downtrend (no need to account for spread). That’s because the spread is paid on entry during buy plays, and it’s paid on exit during sell trades. In the image above, you will see a failed gravestone doji setup, as well as a dragonfly doji showing indecision in the market (because it occurred after an uptrend). The dragonfly doji could be considered slightly bearish if it had been followed by a bearish confirming candle, but you would never use this as an entry trigger either way. Going back to the failed gravestone doji setup, you can see that it does meet the minimum requirements of a traditional gravestone doji. Although it does occur after an uptrend, it occurred after the uptrend had retraced slightly. In this context, it’s more of a sign of indecision than a bearish signal. Also, no bearish confirmation candle occurred to support the gravestone doji as an entry signal. There was a bearish candlestick (second candle after the gravestone doji). It did close below the low of the previous candlestick, and it even engulfed the real bodies of the previous two candlesticks; however, looking at its lower wick, you can see that it did not close within the lower 1/3rd of its range. This is a great example of an entry that you should skip. If you were already in a buy trade, this signal would not have been a good indication to exit your trade early either. The same goes for the dragonfly doji that appeared later in the trend, but just look at that beautiful bearish engulfing pattern at the very top of the uptrend. Final Thoughts Japanese candlesticks are a great way to predict short-term trends and trend reversals; however, without a confluence of supporting market factors, it can be hard to predict which trends or reversals will continue with enough follow through to hit your take profits. Combining price action trading with a trading system that works well with candlestick trading signals, like the Infinite Prosperity system, is a great way to qualify these candlesticks trades. I do not recommend pure price action trading. Never take any candlestick signals out of context. It is important that you understand where these candlestick signals are useful and where they are not. The dragonfly doji is only really useful to us when it appears after a downtrend, and the gravestone doji is only really useful to us when it appears after an uptrend. Other occurrences of these two candlestick just signal indecision. Trading the dragonfly doji and gravestone doji can be profitable, if you do it the right way. Most price action traders overlook these candlestick formations, because they are weak reversal signals. Under the right circumstances, though, they can be very useful as early exit signals or even entry triggers. As always, be sure to and demo trade these candlestick signals until you’re consistently profitable with them, and have fun trading!
Hidden divergence vs regular divergence – what’s the difference? Either type of divergence can provide a powerful edge with the right trading strategy. In this article, I’m going to show you the difference between hidden divergence and regular divergence. I’m also going to show you how these two types of divergence should be used, and I’ll give you some tips on trading hidden divergence. Keep reading to learn how to increase your odds of taking winning trend continuation trades. Hidden Divergence vs Regular Divergence Hidden divergence is a sign of trend continuation, while regular divergence is a sign of trend reversal. The idea is that regular divergence shows momentum leaving the trend, which could be an early sign of a reversal. Hidden divergence shows momentum coming into the current trend, which makes a continuation more likely. The charts below show examples of both hidden divergence and regular divergence. I’ve marked the bullish divergence in green and the bearish divergence in red. In the chart above, you can see some examples of regular MACD divergence. Regular divergence is measured off of the lows of price and the indicator during a downtrend, and off of the highs of price and the indicator during an uptrend. Starting from the left, price made lower lows while the MACD line made a double bottom. Next, price made a double top while the histogram made lower highs. Finally, price made three consecutive higher highs while the histogram made three consecutive lower highs. In the chart above, you can see some examples of hidden MACD divergence. Hidden divergence is measured off of the lows of price and the indicator during an uptrend, and off of the highs of price and the indicator during a downtrend (the opposite of regular divergence). Starting from the left, price made higher lows while the histogram made lower lows. Next, price made higher lows while the histogram made a double bottom. These are both examples of bullish hidden divergence. Tips for Trading Hidden Divergence One technique that can greatly increase your success rate with divergence trading is combining your various divergence patterns with other entry triggers. For the sake of this article, we’ll be using candlestick patterns in combination with hidden divergence. In the previous chart (above), you’ll notice that I’ve highlighted two candlestick patterns. The first was a bullish engulfing candlestick pattern, and the second was a morning star candlestick pattern. Both of those signals could have helped you time your entry off of those two hidden divergence patterns. In the chart above, you can see an example of bearish hidden stochastic divergence. Price made a lower high while the stochastic oscillator made a higher high. Remember that, for hidden divergence, we measure off of the highs of price and the indicator in a downtrend. Notice: I drew the hidden divergence off of the highs in price and where those highs corresponded on the stochastic oscillator. I only considered a new high to be forming after the stochastic had crossed below the 50 line (not visible on this chart) and then crossed back above it. After this hidden divergence pattern occurred, a bearish engulfing candlestick pattern also occurred. This strong bearish signal could have helped you get the best entry with this setup. Do you see how the candlestick pattern strengthens the case for the hidden divergence pattern and vice versa? In the chart above, you can see an example of bearish hidden RSI divergence. Price made a lower high while the RSI made a higher high. A bearish engulfing pattern formed at the second high, confirming our hidden divergence pattern. Note: This was not a very good bearish engulfing pattern to take, because the engulfing candle did not close in the lower 1/3rd of its rage, which is slightly bullish. To learn more about how to trade candlestick signals, check out my free price action trading course. The candlestick signal that I highlighted above was not the first candlestick signal to occur at the lower high. However, if you had correctly placed your stop loss above the highest point in the cycle, this trade would have worked out anyway. Hidden Divergence vs Regular Divergence – What You Should Know The difference between hidden divergence and regular divergence is that hidden divergence is drawn off of the highs of price and the indicator in a downtrend. Similarly, it’s drawn off of the lows of price and the indicator in an uptrend. This is the opposite of regular divergence. Hidden divergence also signals a possible trend continuation. Regular divergence signals a possible trend reversal. Both can be powerful entry signals when combined with other profitable trading strategies. Hidden divergence vs regular divergence – which do you prefer to use with your trading system? Let me know in the comments below. In my own experience, I’ve found regular divergence to be more useful, but I use both hidden and regular divergence on a regular basis.
Do you know how to trade the double bottom chart pattern? Many traders overlook this profitable price action trading pattern because they don’t know how to trade it properly. In this addition to my free price action course, I’m going to show you a few profitable ways to trade the double bottom chart pattern. There are many ways to trade this chart pattern, but in this article, I want to focus on three profitable techniques that I have used to trade the double bottom chart pattern. I’m also going to show you which technique I prefer to use, and why I don’t trade the traditional techniques for this pattern anymore. By the end of this article, you should be able to identify and trade good double bottom chart patterns. After you learn how to properly trade the double bottom, it may become one of your favorite price action chart patterns. What is a Double Bottom Chart Pattern? A double bottom chart pattern is a strong bullish price action signal that occurs at the end of a downtrend. It happens when an equal, or almost equal, low forms during a downtrend, instead of another lower low. The idea behind the pattern is that failure to make another lower low could be a signal of momentum leaving the trend. The first low in the pattern becomes support that provides a strong bounce for the second, equal low. As you can see from the image above, a second horizontal line is also drawn at the middle peak. This is the traditional breakout point of the double bottom chart pattern. I’m going to refer to this line as the breakout line. To get your profit target, you measure from the support line to the middle peak (or breakout line). Then you take that measurement and duplicate it upward, starting from the breakout level. Note: There is no ascending or descending version of this pattern, unlike the head and shoulders chart pattern. All of your important levels (other than the main trendline) will be drawn horizontally only. Trading the Double Bottom Chart Pattern Starting with the standard way to trade the double bottom, your entry is taken after price breaks the breakout line. Most traders opt to wait for a candlestick to close above the breakout line to enter. Your stop loss is placed under the most recent low. Note: As you can see in the example below, waiting for a close above the breakout line would have resulted in a missed opportunity. Often there is a pullback to the breakout line, but in this case, it did not happen. The reason I don’t trade the standard double bottom technique anymore is because the reward to risk ratio is not good enough. Some traders use the traditional take profit target to partially close their position, leaving the remaining position to ride the trend (which can improve the risk to reward). The next technique is more aggressive and provides a better risk to reward scenario. In this technique, you wait for a candlestick to open and close above the trendline. If that happens, you enter at the open of the next candlestick (see the image below). Your stop loss is placed under the most recent low. If you’re going to use this technique, I recommend moving your stop loss to break even before price makes it back up to the breakout line. The breakout line often acts as resistance, so it’s a good idea to move your stop to break even, as long as your trade still has a little room to breath. The reason I haven’t continued to trade this technique is because the reward to risk is still not good enough. The risk to reward scenario is better in this aggressive entry, but the strike rate is also lower because you’re not waiting for the double bottom to be confirmed (with a breakout). This last technique is the way I like to trade the double bottom chart pattern. It is much more aggressive, but the risk to reward scenario is often excellent. In the example below, you could have made over 9 times what you had risked. I start looking for a bullish entry trigger where a double bottom chart pattern may be forming. In the example above, we got a nice bullish engulfing candlestick pattern right on the support line. Your entry would be the standard entry for a bullish engulfing pattern, which is the open of the next candle. Your stop loss would be placed under the most recent low, and your take profit would be the standard take profit target for the double bottom. Final Thoughts As you can see, learning how to trade the double bottom chart pattern can be lucrative. However, as I’ve explained, the traditional techniques for trading this chart pattern will not usually give you a great risk to reward scenario. Using my aggressive entry, you can usually get a great risk to reward scenario. The downside is that, for many traders, especially new traders, it’s hard to let a winning trade fun for so long. Most traders would be tempted to close during any one of those pullbacks. This aggressive technique also allows you to move your stop loss to break even before price touches the breakout line, while it still usually provides your trade plenty of breathing room. Make sure you do leave your trade some breathing room, though. The last thing you want is to be right on the trade but only make a pip or two because you moved your stop to break even too early. If you’re using price action signals as your entry trigger, trading MACD divergence can help you qualify and time your entries. If the MACD is making higher lows while price is forming your double bottom, the pattern is usually stronger. If you’re a price action trader, you need to learn how to trade the double bottom chart pattern. Make sure you backtest and demo trade any of these techniques before adding them to your trading plan. Have you had success trading the double bottom pattern? Let me know in the comments below.
Trading the head and shoulders chart pattern can be very profitable if you know how to trade it properly. In this addition to my free price action trading course, I’m going to show you a few profitable ways to trade the head and shoulders chart pattern, including the technique that I prefer to use. The head and shoulders signal is the first long-term price action pattern that I have gone over in this free course. There are several ways to trade this, some more aggressive than others, and it’s good to know how different types of traders are likely to approach this chart pattern, regardless of the technique that you choose to use. Note: There are bound to be other ways to trade this chart pattern, but when it comes to understanding how the majority of the retail market will trade this pattern, there are really only two classic techniques that you need to know. What is a Head and Shoulders Chart Pattern? The head and shoulders chart pattern is a strong bearish price action pattern that occurs when the market makes the first lower high during an uptrend. The name comes from it’s resemblance to a head and shoulders, with the right shoulder being the first lower high of the uptrend. The neckline is typically drawn off of the candle bodies of the lows after the left shoulder and before the right shoulder. In the image above, the neckline is perfectly horizontal, which is not a requirement. When the neckline is angled upward, the head and shoulders chart pattern is considered, by some, to be less bearish. When it’s angled downward, this pattern is considered, by some, to be more bearish. Note: I haven’t personally found the angle of the neckline to be a good indicator of the strength of this pattern. Instead, whether or not the uptrend has been an extended one seems to be a better indicator of strength in my experience. Trading the Head and Shoulders Chart Pattern Beginning with the standard way of trading the head and shoulders chart pattern, the entry is taken when the neckline is broken. Some traders wait for a candlestick to fully close below the neckline before entering the trade. Others jump in as the neckline is broken, making sure to get into the trade before it takes off to the downside. Your stop loss should be placed above the right shoulder of the pattern. To get your take profit, you measure, centered between the lows that form the neckline, to the highest high in the head of the pattern. Then take that same measurement, from the same starting point, and duplicate it to the downside to determine your take profit (see the image above). The next traditional entry, which I’m calling the “pullback entry,” is similar to the standard entry. Often when price breaks the neckline of the head and shoulders chart pattern, it will pull back to test the neckline as resistance. When this happens, it can provide a good, slightly more conservative, entry point. The entry trigger in the “pullback entry” could be a number of things. Traders sometimes combine this particular chart pattern with the signals from another trading system. It could also be a candlestick signal, or simply a candlestick that bounces off of the neckline (like the entry below). Note: A more conservative approach would be to wait for the candlestick to close below the neckline after touching it. Like the standard head and shoulders chart pattern, your stop loss in the “pullback entry” would be placed above the right shoulder of the pattern. Your take profit would be determined the same way as the standard setup as well. Measure from the center of the neckline to the top of the head. Duplicate that measurement to the downside for your take profit. Finally, I like to trade the head and shoulders chart pattern using a more aggressive approach. If I haven’t already entered at the top of the trend by trading MACD divergence, I try to anticipate the top of a right shoulder forming using either a shooting star candlestick pattern or a bearish engulfing candlestick pattern. In the image above, the entry trigger was a dark cloud cover candlestick pattern. I wouldn’t normally use this moderate candlestick signal on its own, but I would take it in combination with other bearish indicators, such as bearish hidden divergence. After drawing the neckline, I would determine whether or not to take my aggressive entry. I prefer to be able to, at least, move my stop loss to break even before the neckline is tested again. If I can’t do that, I will not take the aggressive entry, because price could find support at the neckline. Note: The trade pictured above would have reached a full take profit before re-testing the neckline. This is ideal, although they don’t all setup this way. My stop loss, in the example above, is 5 pips above the high of the right shoulder. This gives me room to cover the spread plus a little cushion for 15 Minute time frame noise. My take profit is twice my risk. In the example above, you could have easily used the neckline as your take profit level instead. Final Thoughts The head and shoulders chart pattern can be tricky to spot at times, especially in the Forex market. However, it’s worth learning to trade properly, because many strong reversals are preceded by this chart pattern. Just like with candlestick signals, the context in which you trade this chart pattern is very important. A true head and shoulders chart pattern only comes after an uptrend. The more extended the uptrend, the more reliable this chart pattern is. There are many ways to trade the head and shoulders signal. I prefer to use a more aggressive approach. I like to enter early, and move my stop loss to break even before the neckline is even given a chance to act as support. That way, if the pattern doesn’t work out, I still have a chance to make money or break even. I hope you can see why I like trading the head and shoulders chart pattern. With the right technique and a little practice, the head and shoulders could become one of your favorite trading setups too. Good luck and happy trading!
Do you enjoy trading price action patterns? Would you like to learn some profitable double top strategies? In this addition to my free price action course, I’m going to show you a few profitable ways to trade the double top pattern including my favorite Forex double top strategy. There are many ways to trade the double top chart pattern. In this article, I’m going to show the two traditional double top strategies that I have used in the past. These are the most well known double top strategies. Although these traditional patterns are relatively profitable, I’m going to show you why I don’t trade them anymore. I’m also going to show you my favorite Forex double top strategy and why you should start trading this pattern like I do. What is a Double Top Chart Pattern? A double top is a strong bearish reversal pattern. It occurs when an uptrend fails to make a higher high and instead, makes an equal (or near equal) high. The psychology behind the pattern is that the failure to make a higher high could be an early sign that the momentum is leaving the uptrend. The equal high is an indication that the previous high is being tested and confirmed as resistance. All this means that a reversal is likely to happen. As you can see from the image above, two horizontal lines are drawn off the double top. The top line is the resistance line. The second line marks the middle valley. From here on, I’ll refer to this line as the breakout line. To get your profit target for this pattern, you measure from the resistance line to the breakout line. Then you take that measurement (in pips if you’re trading the Forex market) and duplicate it downward as in the image above. Note: There are varying opinions on where to set your horizontal lines, but I always set my lines off the real bodies of the candlesticks – not the highs or lows. I’m my experience this works better more often than not. Trading the Double Top Chart Pattern Now that we’ve got the basics of the double top chart pattern down, let’s go over the two most common ways to trade it. Both of these techniques are profitable, as long as you don’t try to force a double top entry where there isn’t one. The first Forex double top strategy that we will go over is the standard double top strategy. Entry for this strategy is taken when price breaks below the breakout line. Some traders opt to wait for a candlestick to close below the breakout line and a pullback to the entry point before entering a trade. Your stop loss is placed above the highest high in the double top pattern. As can see from the image above, the reward to risk ratio of the standard double top strategy is not great, which is why I don’t use this strategy anymore. In this example, the reward to risk ratio is less than 1:1. The next Forex double top strategy we will talk about is a little more aggressive. For this strategy, you need to draw a trendline from the most obvious lows of the uptrend to the middle valley of the double top (see the image below). Entry is typically taken after the first candlestick that opens and closes below the trendline. Note: This technique works better when there is an obvious trendline because it’s more meaningful when an obvious trendline is broken. This technique also works better with steep trends because the reward to risk ratio tends to be better. Place your stop loss above the highest high in the double top pattern. As you can see from the example above, you typically get a better reward to risk ratio using this aggressive strategy. It’s often possible to get 2:1 reward to risk ratios or better. In the example above, the reward to risk ratio was around 1.5:1. This is an improvement over the standard technique, but the next technique I’m going to show you is a huge improvement on both of the standard techniques. My Favorite Forex Double Top Strategy This next Forex double top strategy is my favorite technique because it typically provides excellent reward to risk ratios. In the example below, you could have earned nearly 5x your risk. This technique typically provides a 4:1 or better reward to risk ratio. To take the entry, you need to use another trading strategy that provides bearish entries near the tops of cycles. I prefer to use a few specific price action signals, mainly the bearish engulfing pattern and the shooting star (with confirmation and pullback). The Top Dog Trading system also works well for this. In the image above, you can see a nice bearish engulfing pattern that occurred right at the resistance line. Entry would be taken on the open of the next candlestick. The stop loss would be placed above the highest high in the double top (as shown in the image above). Note: When using this technique, it’s important that the first top in the double top pattern is followed by a nice bounce down. This helps to confirm that top as a resistance zone, which is important when you’re taking a very aggressive entry like I do with this strategy. The get your take profit, use the same technique as you would with the standard double top strategies. By getting a great entry and using the traditional take profit method, you can get some great reward to risk scenarios with this trading strategy, which means you only need to be right 1 out of every 4 trades or so to be profitable. Final Thoughts With the traditional aggressive strategy as well as my favorite Forex double top strategy, I prefer to move my stop loss to break even before price returns to the breakout line because the breakout line could be a potential support zone which causes price to reverse and take out your stop loss. In the traditional aggressive example above, the entry was too close to the breakout line to use this technique. It’s important to give the trade room to breathe. In the example of my favorite strategy, however, there was plenty of room to move the stop loss to break even before price reached the breakout line. I like to use strong price action signals as entry triggers for this strategy. For instance, I like to wait for an engulfing pattern in which the engulfing candle closes in the bottom 1/3rd of its range. Shooting stars should be followed by a bearish confirmation candle (which also closes in its bottom 1/3rd range) and then a pullback to the close of the shooting star. Regardless of which double top strategy you choose to use, trading MACD divergence can help qualify them. When your double top coincides with lower highs on the MACD histogram or signal line, the double top will typically be a stronger pattern. I hope you like this Forex double top strategy. All of these double top strategies are profitable, but it takes some screen time to get a feel for what a good pattern looks like as it’s setting up. As always, backtest and demo trade any new strategies until you get the hang of them.
Are you interested in trading the inverse head and shoulders chart pattern? The inverse head and shoulders chart pattern can be very profitable if you use the right trading strategy. Many price action traders use this profitable chart pattern and its opposite, the head and shoulders chart pattern. There are many different strategies for trading this chart pattern but I believe the strategy that I use is the most profitable way to trade the inverse head and shoulders. In this addition to me free price action course, I’m going to show you how to identify the inverse head and shoulders. I’m also going to show you two traditional, but profitable, ways to trade this pattern as well as my favorite strategy. What is an Inverse Head and Shoulders Chart Pattern? An inverse head and shoulders chart pattern is a strong bullish reversal signal. It occurs when a downtrend fails to produce another lower low and instead produces a higher low. The idea is that the failure of the downtrend to produce another lower low is a sign that momentum may be leaving the trend. The neckline is typically drawn off of the real bodies of the candlesticks of the high after the left shoulder and before the right shoulder (see the image above). In the image above, the neckline is perfectly horizontal. The neckline can be horizontal, ascending, or descending. Traditionally, if the neckline is ascending the inverse head and shoulders chart pattern is considered to be more bullish and if the neckline is descending the pattern is considered to be less bullish. Note: Although an ascending neckline is typically considered to be more bullish, I prefer to trade these patterns with horizontal or descending necklines. In my experience, patterns with horizontal or descending necklines provide better reward to risk ratios (more on this below). Traditional Inverse Head and Shoulders Strategies Starting with the standard inverse head and shoulders trading strategy, entry is taken when price breaks the neckline. Some traders prefer to wait for a candlestick to close above the neckline before entering the trade. Note: Waiting for a candlestick to close above the neckline will often lead to missed opportunities or poor reward to risk scenarios. The stop loss is placed below the right shoulder (see the picture above). To get your target, measure from the neckline to the lowest low of the pattern (I prefer to measure to the candle body low). Then take that measurement and duplicate it upward. Note: With a descending neckline (all examples in this article), you should duplicate your measurement up from your entry point. With an ascending neckline, you should duplicate upward from the same point that you took your measurement. In my experience, this is the way that has worked best, and it’s also why I say that patterns with horizontal or descending necklines provide better reward to risk ratios. Ascending necklines use up much of the reward before the entry is even taken. Another traditional inverse head and shoulders chart pattern trading strategy is to wait for price to break above the neckline and then take the entry if and when price pulls back to the neckline. The benefit of this technique is that it’s a more conservative approach (because price is already established above the neckline) that often leads to a good reward to risk ratio, especially with descending necklines (see the image above). However, you’re never guaranteed a pullback. Place the stop loss under the right shoulder. To get your target, simply duplicate the measurement from the neckline to the lowest low as in the previous example. My Favorite Inverse Head and Shoulders Strategy In order to trade my favorite inverse head and shoulders strategy, you need to combine this pattern with another trading signal. I prefer to use price action signals like the hammer (with confirmation and pullback) or bullish engulfing pattern as an entry trigger for this pattern. In this aggressive technique, you must take your entry before the right shoulder is fully formed. In the example below, I used a bullish engulfing pattern as my entry trigger. Place your stop loss under the right shoulder of the pattern as in the previous two techniques. To calculate your target, simply duplicate your measurement from the neckline to the lowest low as in the two previous examples. The reason I prefer this aggressive technique is because the reward to risk ratio is usually much better than any other technique that I have used for this pattern. Although the example above is not a great example the reward to risk ratio is still better than the other two examples on this page. Final Thoughts Your reward to risk ratio is a huge part of your trading success. Trading the inverse head and shoulders chart pattern will typically provide you with a good reward to risk ratio, especially if you use my aggressive strategy. I’m a big fan of divergence trading. Combining hidden divergence with this chart pattern or even regular divergence between the left shoulder and head of this pattern can help to qualify good trading setups. As a bullish reversal pattern, a true inverse head and shoulders will only occur at the bottom of a trend. Taking these patterns out of context is an easy way to ruin their effectiveness and lose money. Using my aggressive technique, I prefer to move my stop loss to break even before price returns to the neckline when possible. In the example above, this wouldn’t have worked because it’s important to leave the trade with enough “breathing” room. Moving my stop loss to break even in that example would’ve been too restrictive. If you’re a price action trader or like to incorporate price action signals and pattern into your other trading systems, I hope you’ll give the inverse head and shoulders chart pattern a try. Did you already use this pattern? Do you like my inverse head and shoulders strategy or know of another way to trade this pattern? Let me know in the comments below.
Pivot points are a vestige of the days before electronic trading that were calculated manually in the past by floor traders. Pivot points are still a key element of technical analysis to many traders today and many pivot point strategies exist to take advantage of these important horizontal support and resistance levels. In this article, I’m going to explain how pivot points are calculated and show you 3 profitable pivot point strategies that you can use to take advantage of them. How Are Pivot Points Calculated? The pivot point (P) itself is simply an average of the high, low, and closing price of the previous day, week, or month (typically the previous day). P = (High + Low + Close) / 3 The first resistance (R1) and support (S1) levels from the pivot point can be calculated by multiplying the pivot point by 2 and subtracting the Low or High respectively. R1 = (2 x P) – Low S1 = (2 x P) – High The second resistance (R2) and support (S2) levels are calculated subtracting the Low from the High and adding or subtracting the result to/from the pivot point. R2 = P + (High – Low) S2 = P – (High – Low) Finally, the third resistance (R3) and support (S3) levels are calculated by subtracting the Low from the pivot point, multiplying by 2, and then adding the High or subtracting the pivot point from the High, multiplying by 2, and subtracting then subtracting the Low. R3 = High + 2(P – Low) S3 = Low – 2(High – P) If all of this seems a little overwhelming to you, don’t worry – there are pivot point calculators available online. Better yet, there are indicators for your trading platform that do the calculations automatically, like this pivot point indicator for MT4. 3 Profitable Pivot Point Strategies for Forex Traders Below are 3 profitable pivot point strategies. The examples are geared toward Forex traders but these techniques work in other markets as well. In these examples, I’m using candlestick trading techniques as entry triggers. Other trading techniques that take advantage of trends and reversals, like those taught in Top Dog Trading or Infinite Prosperity, will also work well with these pivot point strategies. Note: A trading system like Day Trading Forex Live will not work for entry triggers with these pivot point strategies because it works off of very specific stop run setups. However, price is more likely to reverse when pivot points line up with other trading signals, regardless of the setup. Pivot Point Bounce Strategy The pivot point bounce is a classic trading strategy. The idea is that if price is above the pivot point, the market sentiment is bullish. If price is below the pivot point, the market sentiment is bearish. The pivot point bounce takes advantage of market sentiment, buying or selling if price retraces back to the pivot point (which is historically a good horizontal support or resistance level). Note: In the example above, I used a morning star, which is a strong bullish candlestick pattern, as my entry signal. Pivot Point Trend Trading Strategy You can also use pivot points and the various support and resistance levels calculated from them for trend trading. The idea is to take advantage of retracements at significant levels after price has chosen a direction based on the pivot point. If price breaks through the first support or resistance level convincingly, and then retraces, you can buy or sell the bounce off of that resistance level. Note: In the example above, I used a bearish engulfing pattern, which is a strong bearish candlestick pattern, as my entry signal. Pivot Point Reversal Strategy Pivot point support and resistance levels can also be good places to take reversal trades. If price is showing signs of slowing down near the second or third support or resistance levels, these can be good places to buy or sell respectively – especially if these levels line up with previous market structure. The idea is that, at support or resistance levels 1 and 2, price is likely to be extended. Since these levels are also typically good horizontal support and resistance levels they are great areas to look for reversal trades. Note: In the example above, I used a shooting star with a confirmation candle (which is how I prefer to trade them) as my entry signal. The confirmation candle was a strong bearish candlestick that closed in the lower 1/3rd of its range. The entry was taken when price pulled back to the standard entry point. Final Thoughts These 3 pivot point strategies are just a few of the many pivot point strategies that traders use to take advantage of these strong horizontal support and resistance levels. In fact, regardless of which trading strategies you use, pivot points can be a strong addition – especially for intraday trading. Each level of your pivot point calculations can be significant on their own. However, these levels are particularly powerful when they line up with previous structure (support and resistance levels) in the market. I don’t recommend trading pivot points alone, but adding these pivot point strategies to your other technical trading systems or combining them with fundamental analysis can work very well. I hope you enjoyed these 3 profitable pivot point strategies. Be sure to backtest and demo trade any new strategies before live trading them. If you have any questions about these strategies or would like to suggest others, please leave a comment below.
Every trader in the Forex market has their own Forex Trading Strategy, but still they keep on looking for something new every now and then. They might be having the best one already with them, yet their psychology would make them look for a new one which leaves them loosing the valuable one they already had with them. Today I am going to share with you some Forex trading strategy that may range from basic to expert level. They may sound really odd, but can make some real money. (Note: All the below mentioned Forex trading strategy are modified from the basics and tested with several long time trades, yet I advice you to test it completely before you use on your live trading accounts.) 1. 40 Pips Pull back Trading Systems for Scalpers This Forex trading strategy is technically real simple one. If any major counter pair on Forex moves up to 40 pips in any direction from the market opening of the day, then you can simply go on with the opposite direction which would give you a minimum of 15 to 20 pips at most of the time. The reason behind is simple, you know that the market cannot move in one single direction. It always has ups and downs where we just catch up with the other side of the movement. 2. Buy Above and Sell Below Moving Average Strategy The moving average is familiar among all Forex traders, most of the traders approach moving average in his own way. Yet this is one more way, but a real nice one. Attach the moving average indicator to the chart with the following preset (MA method: Simple) (Apply to: Close) (Period: 34) When, a candle closes completely above or below the moving average without touching it, also the high or low of the candle does not touch the moving average, then you can go for the trade If the candle is above the moving average = Buy If the candle is below the moving average = Sell (Note: 15 min chart and higher time frame are recommended.) Take Profit (TP) you can have approximately 10 pip for 15 min chart signal, 20 pip on the 30 min chart signal. Test some back trades to have a proper idea about it. The Stop Loss (SL) should be opposite to the trade. To Buy, sell would be the stop loss and for Sell, buy would be the stop loss. 3. Three Day Average Fibonacci Forex Trading Strategy This is a little more complex, yet a powerful strategy. It’s not that easy to describe it completely in this blog. Please download the below PDF and learn everything about the strategy in detail. Trader’s Tip: Now it’s your turn. After learning every single strategy take your own time and test everything to find which one is working for you better. Get a clear idea of it. We can’t promise you with a 100 % result for the above strategies, but you can surely make some real money, if you approach in a proper way.
How many times have you entered into a trend only to find out that it has already run its course and you were too late? Many of the Forex trading strategies that we use help us predict which way the market is trending and whether to expect a bearish or bullish trend, but give little or no indication as to the strength of the trend. Sometimes these forex trading strategies will lead us to enter a trade and that trade will turn out to yield very little income, even though it went in the direction that we anticipated. ADX, or Average Directional Index, is a tool that is designed to help us anticipate the strength of a trend to avoid these kinds of situations. In combination with other Forex trading strategies the ADX can allow us to fully understand the trend and thus only enter trades that will yield big profits. ADX trading strategy is not a standalone Forex trading strategy as it only gives an indication as to the strength of the trend. It does not give any indication as to the direction of the trend and for that reason, it must be used along with other Forex trading strategies. Understanding the Average Directional Index is very easy. It ranges on a scale from 0-100, 100 indicating a very strong trend and 0 indicating a non-existent trend. If the ADX is very close to 0, expect a sideways moving trend, meaning the market will not go up or down but rather stay around the same value with small corrections. When the ADX is low it is a good time to consider closing the trade as you don’t stand to make a profit from a sideways moving market. On the other hand, if the ADX is very high, expect a fast moving trend which means that it is probably a good time to enter a trade. Don’t forget, the ADX is only an indication of the strength of the trend and does not indicate whether the price will go up or down.Values of ADX that are considered high are above 50. Whenever there is a strong trend, the ADX will be above 50. Weak trends are indicated by values under 20 on the ADX scale. This example clearly shows how we can use the Average Directional Index to analyze the trend: As you can see, in the first part of the chart there is a very strong bearish trend and the ADX (shown on the bottom) is very high. Once the trend ends, and the market begins a sideways stage, the ADX drops below 20. In this case, using the ADX could have helped us exit the trade when it had reached the end of the trend and not waste our time and resources on currency pairs that are not going anywhere. Combining the ADX indicator with your other Forex trading strategies can give you just the edge you need to increase your profits.
Price Action SwingsAny chartist that has spent considerable time analyzing candlesticks would agree: Market movements rarely take place in a linear fashion.Down-trends are often accented with ‘up-swings,’ as the chart below points out: The exact opposite can be said for up-trends, being accentuated with ‘down-swings.’ And of course, if we have a range, we can notice both up-swings and down-swings. Swings-Lows, or Down Swings, can be classified as a low point of price that is accompanied by a ‘higher-low,’ value in price on each side of the candle. The multiple swings exhibited by price behavior throughout the day can be used for a multitude of functions.For instance, for traders wishing to grade trend, they can often do so by observing ‘higher-highs, and higher-lows,’ or ‘lower-lows, and lower-highs.’ Taken a step further, traders wishing to manage risk can potentially look to these swings for stop placement. For example, in the chart below, the trader looking to take on a long postion can adopt the stance:“If price breaks this swing low, then I no longer want to be in my trade as the trend may no longer be to the upside.” And of course, once a trader is in a position – this same mindset can be used in position management. The chart below illustrates: We’ve covered 3 of the more popular mechanisms of ‘Swings,’ in the market, but we are just scratching the surface. There are numerous additional mannerisms in which these swings can be used by the price action trader.In our next piece, we will look at using ‘Swings,’ to enter into positions that may be amenable for ‘big,’ moves exhibited by the market; a market condition that many traders flock to when conditions are right: The Breakout.
Swing trading is a trade method in the gray area between trend following and day trading. A swing trader holds a stock for a small period of time and then will trade the stock when it’s in it intra-week or intra-month oscillation. A experience swing trader will generally choose a large-cap stock because of its broadly defined high and low extremes. The trader will ride the stock wave in one direction for a couple of weeks, only to switch to the opposite side of the trade when their particular stock changes direction. A swing trader is best in position to do this when that market is more on the stable side versus it being a bear or bull market. This is because those markets’ momentum generally carry stocks in one direction only (and for a long period of time). The success in swing trading is to be able to identify what type of market is currently being experienced. One of the best ways of doing this is looking at historical data of what was indicative of different markets in the past, particular prime swing markets. If a market is identified as prime for swing trading, but later turns out to be a bear or bull market, a swing trader can find that there are the same up and down oscillations than those that occur in a more stable market. This would ensure that best strategy would be to trade on a long-term directional trend instead of the quicker trends that many of the most experienced swing traders are noted for. Unlike many stock traders, swing traders are not looking to make it big with one particular trade, but are more concerned with hitting its baseline and confirm its direction. At the profiting level, a swing trader will want to exit the trade as close to the upper or lower channel line without being too close, which can cause a loss in opportunity. In a market where a stock is showing a strong directional trend a swing trader will usually wait for the channel line to be reached before selling, thus when a stock is showing a weaker directional trend, the trader will usually sell before the before it hits the channel line in the event the direction changes and the line does not hit on that particular swing. Swing trading is a great method for beginning traders, while offering a profit potential to advanced traders. A great trader will be able to know when the stock is ripe and what momentum their particular stock has gained before making a decision. Trend following plays a very important role in swing trading as well knowledge of the physics of the stock market. Like the physics of ocean waves, swings can be unpredictable but when a large wave comes rushing at the shore, then its prime time for swing trading, but remember that swing trading is never as predictable as the swinging of a clock pendulum.
A forex trader must master many analysis techniques and strategies to trade successfully. Studying chart pattern is one of the most common practices in Forex trading. These charts give reliable entry and exit points for the potential trade. Out of many kinds of charts, one of the most common patterns followed by the majority of traders is triangle pattern. It is liked and preferred by many as it is not only indicates good trade with low risk and high rewards, but also gives clear indications about the price objectives. There are three types of triangle patterns commonly followed by the traders. Let’s discuss them one by one. 1. Symmetrical triangle pattern: The first pattern is commonly known as the symmetrical triangle pattern. This kind of triangle pattern is result of the intersection of two trend lines of slopes similar to each other. The point of intersection of the trend lines is called the Apex. Usually in a symmetrical triangle, the rising trend line intersects with the down trend line. In case of a symmetrical triangle pattern, sellers cannot push the price of the currency lower and the buyers are unable to take the prices higher. Now all that happens is the coiling of the price between support and resistance which is termed “consolidation” in trading language. Due to consolidation, breakout is most likely to occur within the first 2/3 part of the triangle. This breakout is either above the trend line resistance or below the trend line support. As a result of which, either the buyers or the sellers take control over the trading day. Symmetrical Triangle Pattern Once the traders recognize a symmetrical triangle pattern on the chart, all they must do is wait for the breakout to occur. After the breakout, a stop is placed approximately 10 pips below the last swing low in the chart. Traders usually place the limit equivalent to the height of the triangle. 2. Ascending triangle pattern: Another triangle pattern commonly seen on the charts of the forex market is the ascending triangle pattern. It is very easy to recognize and traders do not need to emancipate a lot before recognizing an ascending triangle pattern. An ascending triangle pattern is formed when the rising trend line intersects with a flat resistance line on the chart. Traders often regard it as a bullish pattern in the Forex market. This triangle pattern is often regarded as a breakout above resistance level on completion. However, it is not mandatory and breakout can take place below the resistance pattern too in case the trend before the triangle formation was a down trend. In short, the trader should not get excited seeing a rising trend as resistance may be too strong for the buyer to push the prices higher and breakout may occur below the resistance line. In most cases, when an ascending triangle pattern is formed, buyers win the battle defeating the resistance but in case the buyers loose the battle, it can easily be seen that drop in price is equivalent to the height of the triangle. Ascending Triangle Pattern 3. Descending triangle pattern: The last triangle formation in triangle trading patterns is the descending triangle pattern. It is contrary to the ascending triangle pattern as in the descending pattern a down trend line intersects with a flat yet solid support line. On recognition of such a pattern by the chartist, they wait and expect a further down trend line. This triangle pattern is usually confirmed by a breakout below the area of support or close below the area of support. This breakout is a signal for the traders to short their position and put a stop loss above the top of the triangle pattern. In such a triangle pattern, sellers have a stronger position compared to buyers. In the majority of cases, price of the currency breaks the support line to move further downwards, but in some cases, if the support line is too strong to be broken, the price of the currency can bounce back and reach new highs. It will then become a lost battle for the sellers. Usually, investors place the orders above the triangle top and set a target equivalent to height of the triangle pattern formation with aim of generating decent profits. Descending Triangle Pattern Triangle pattern trading can be a very good tool for the trader. Once you know how to read triangle patterns on the chart or you get an expert to read the patterns for you, it becomes quite simple and convenient to judge the movement of the currency. It not only helps you judge the movement of the currency, but also where to place the order, how much risk has to be taken, and how much profit can be expected from the trade.