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Mastering Engulfing Candle Trading 📚Engulfing candles are an essential feature of technical analysis in forex trading. An engulfing pattern happens when a larger candle engulfs the entire body of the previous candle, signaling a potential reversal of the current trend. Engulfing candles, which can be either bullish or bearish, are trusted by many traders for their reliability in predicting future price movements. However, to become an expert in engulfing candle trading, one needs to learn how to identify the best ones and leverage their body size effectively. In this article, we will look at the crucial steps to master this trading strategy. 🔎Identifying the Best Engulfing Candles One of the key aspects of trading using engulfing candles is knowing how to spot the strongest signals. The best engulfing candles should be resistant to the noise and inconsistent movements that can often occur in the forex market. The first step towards identifying the best engulfing candles is to focus on the size of the preceding candles. Candles with small bodies and long wicks produce too much noise and can lead to false signals. Instead, seek engulfing candles that develop after a significant price move, ideally with a larger body and shorter wick. Higher timeframe charts - like the 4-hour and daily - offer better accuracy in identifying reliable engulfing patterns. 💪Leveraging Body Size for More Efficient Trading The size of an engulfing candle’s body plays a crucial role in determining the strength of a trend. A larger body indicates more significant price movement and more active participation from traders. The size of the engulfing candle can also help ascertain the potential strength of the new trend. Bigger body sizes usually signal a stronger trend, whereas smaller bodies usually represent a more moderate price move. Traders can leverage body size to adjust their trading strategy – for instance, employing wider stop losses for more significant movements or using tighter take profit targets for moderate trends. I have collected couple of good engulfing candles that we were trading with our team. Take a closer look at their body sizes and the previous candles. Such candles alone can provide fantastics trading opportunities. 🔔Conclusion Engulfing candles are an essential tool in forex trading, and their size can significantly help traders identify the best entry signals. Traders who master engulfing candle trading can develop a more accurate technical analysis strategy that yields high returns. By continually analyzing candlestick patterns and using other technical analysis tools, traders can build robust investment strategies that enable them to become profitable forex traders. What do you want to learn in the next post?
TVC:GOLDEducation
by UnitedSignals
9
3 Key Entry Rules to Boost Your Trading PerformanceToday I want to share with you this topic: the 3 Entry Rules to Boost Your Trading Performance. Over the 20,000 traders that we have coached over the time via conferences and talks we’ve done all over the world, we have found one of the challenges that traders have is that they find themselves locked into a trade and then being stopped out when they enter into trade. So their entries are not really optimized or they are not getting the right timing for their entries. Sometimes they come during a coaching session; they say ‘Thiru, I need some help with my entry.’ So this topic, the 3 Entry Rules, can actually help you optimize your entry and overall improve your strategy performance. This is what we’re going to be looking at today in this video. The first one is what we call “ Time Frame Correlation ,” the short form abbreviation TFC. In TFC one thing you do have to remember when you’re correlating the different time frames is that you’ve got to remember three times. Some of you may be wondering ‘What do you mean by three times?’ What I mean is that for example if you are an intra-day trader trading on a shorter time frame, like a one hour time frame, then you need to be looking at three time frames at least altogether, so the one hour and each of the time frames has to be three times the one that you are trading on, three times or four times. Now let me explain by way of an example: If you are trading on a one hour time frame, then we are looking at maybe three to four hours (1 x 4 = 4 hours) and then after that, you want four times that, approximately that is a daily time frame, 16 hours is a daily time frame. What we’re looking at is to correlate the times frames before we take the trade. We are usually looking at three time frames and each time frame is three times each other. For example, if you are an end of day trader and you want to enter your position onto a four hour time frame then you can start to look at daily time frame and then three to four times that would be a weekly time frame as well that you’re looking at. Let me explain why this is important. For example, imagine this – you would have probably experienced this – in a one hour time frame it looks like it’s going down and you are thinking it is looking like a very good short sell as the direction is going further down. You put your entry over here and let’s say you put your stop loss over here and you’re good to go. Let’s say your target is somewhere around there. In the next hour the trade then triggers you in and starts to go towards your target, everything is well and rosy. You are happy, you’re in profit and you are thinking ‘it is only a matter of time before I reach my target.’ Then what happens? You know the usual thing, you would have experienced it if you have traded or if you are trading at the moment as well, it will start to reverse and where your stop loss is – let’s say other traders have their stop loss here as well – suddenly the market reverses and shoots up and takes up all the stops. I’m sure you have experienced this. Now why does that happen? It is because, if you imagine this is the one hour time frame, if you didn’t correlate between the other time frames – the four hour and the daily time frame – and let’s say the four hour and the daily time frame are in an up-trend, if that is the case, then what happens is that the orders that are inside the daily time frame are being filled by the brokers and therefore the market is reversing to fill them up on a higher time frame. This is what is happening and this is why sometimes you get these sharp reversal moves in the market. It is very critical that you correlate the time frames before you start to take your position on the one hour time frame. In fact, in the last live trading we did where we were teaching a strategy that we called “stops to cash,” what we usually do is we take contrarian move on a one hour time frame where it looks like a perfect short, where beginners and even intermediates are getting into short position, but we are looking at a contrarian position in terms of the one hour time frame but when you align it to the higher time frames, it’s just in line with the trend. That’s all we’re doing here. What we’re saying is when everybody’s stops are being taken out, we are actually converting it to cash according to this time frame correlation. I believe that concept is well clear and nice now. Definitely do consider putting that into your entry rules. The second entry rule we’re looking at is “ Indicators .” This is quite a critical one that you can put into your entry rules also to optimize your strategy performance. In terms of indicators, the usual common ones that we are looking at are Stochastic, RSI and for example CCI as well. These are familiar names, you have all heard of them. There are thousands of indicators, but the important thing is don’t just pick an indicator and just slam it onto the screen, but ask yourself what are you looking to achieve, what is the objective of your strategy? Then pick and choose your tools. For example, let’s say you’re driving your car and it starts to break down, you can’t just choose any old hammer or spanner. You have to analyze the problem first before choosing the tool that you want to use to repair the mistake or the fault on the car. It is the same thing here, as we are looking to optimize our strategy, we have to ask ourselves what is going to be the most efficient indicator to help me optimize my strategy performance and towards what objective? That is how you actually choose the indicator that you want to have on the screen in your strategy. The last one we are looking at is “ Price Action .” Price Action is very critical because most of our strategies use price action. It is the fastest of them all. Some things the price won’t be able to tell you and that’s when we use indicators because it involves a lot of calculations. With price actions you notice some really powerful bar patterns that give you an edge in the market and then using all these three factors together that can give you a very strong edge against all the other 99% traders. For example, price action patterns can start to look like the low test bar starts to come up over here and it’s starting to show a reversal pattern. Or even things on a daily time frame where we are looking at something like a down trend and it is starting to reverse – all those critical price action patterns that can give you and edge. So these three rules that’s I’ve just gone through with you right now can be so important to improving your whole strategy and your trading performance. On a final note, what I want you to remember is that just using them by themselves is not enough as Traders. But using them in a cumulative manner strengthens your edge so strongly in the market and also optimizes and maximizes your trading performance for consistent profits. I believe this has been very useful for you all and as we always say, til the next time stay disciplined, follow your trading plan and keep Trading like a Maste r.
Education
by masterthemarkets2010
TommyXAU Educational - What i mean by clean rangeGood afternoon gold gang, hope you're having a good weekend. I thought id hop on to share with you a piece of information of what i mean by clean range. Ok .. Say you have 2 key levels in price .. we have had a big news event causing a big red candle to the left hand side. This has left what is called an imbalance. An imbalance is where the wicks of the previous and after candle don't meet. Backtest that one yourself and see how many times these imbalances get filled. Price is coming back up and closes above the key level .. it is now a high probability that price will come up and fill that imbalance and the clean range. I call it clean as there is no traffic or hurdles that should stop price on its way up. Again, adding to the probability. Simple as that really guys .. Please leave a like if it was of any help to you and ill see you this evening for market open! TommyXAU
OANDA:XAUUSDEducation
by tommyXAU
3
Trend Channel Early Direction and Best Entry NIS- Nava Imbalance Strategy - Using Only Price Action, We can find the best entry to catch those HUGE returns! This is how to detect early direction and perfect entries and exit points using Wycoff method. (on diagonal trend channels not support/resistance) This Wycoff pattern will create imbalances on parallel trend channels. IMBALANCE (price moves outside of trend channel then returns.) First imbalance is showing who is in charge regardless of trend channel direction. Example -IF first imbalance is on top, & trend channel is going up, Look for entry at new imbalance #2 at the bottom of trend channel to catch biggest move. Best Entry = @Fakeout / Safe Entry= @ return to trend and retest trend line. -IF first imbalance is on top, & trend channel is going down, Price will move with trend until higher time frame trend channel line is hit. Price will then start to return to imbalance below slowly. This pattern repeats on all trend channels that have been correctly placed. - We find correct channel placements by making trend channels from daily down to entry time frame. - Hide higher timeframe trend channels to see better in the lower time frame channels but will need to see where they are as price approaches the trend lines. - Trend channels like to continue the push of a trend until bounce of higher time frame trend channel lines to follow higher trend channel or breakout. You can follow price with trend channels once you have entered until price starts making imbalances in the opposing direction.
Education
by JOKESTV
Using Multi-Time Frame Analysis To Find Key Levels That MatterDo you find yourself drawing too many levels on your charts? Do you struggle to know which levels that actually matter for trading decisions? Do you wonder why price moves straight through some key levels and not others? This video will show you how to analyse a stock using Multi-Timeframe Analysis techniques to find the key levels that actually matter for trading, and how to quickly find the most important levels where price is likely to react.
NYSE:CCIEducation
by JoelWarby
🌳very important terminologies in Trading🌳Hello every one 🟡(1) Price action The Movement of an asset or Security's price over Time , Plotted on The chart 🟡(2) All-Time High (ATH) The Highest asset has Ever been in Price 🟢(3) Support a Point in the market where the Price is less likely to drop below due to previous demand or price action 🟡(3) Resistance a Point in the market where the Price is less likely to break above due to previous demand or price action 🔵(4) Trend line a line indicating the General Price Direction of a chart 🟡(5) break out when the Price of the asset break through a pre-determined Trendline ⚪(6) Formation when a Financial Chart moves in such a way as to create a Recognizable pattern.patterns to signal trading opportunities either to enter or exit positions. 🟢(7) pump or bullish The price of an asset is going up 🟡(7) Dump or bearish The price of an asset is going Down 🔵(8) Long Position a Regular Buy in The Market. a Trade that is Predicting the asset will go up in value 🟡(8) short Position The opposite of a long Position. Entering a Trade position betting the asset to go down in value.
Education
by CobraVanguard
21
Price Action Is Key!!!Price Action Trading Is A Method Of Trading Where Trading Traders Are Able To Make Trading Decisions About Trades Based On Price Movements - Price / Market Data... Without Relying On Indicators etc... #1. Price Action Refers To The UP And DOWN Movement Of A Security's Price When It Is Plotted Over Time #2. Candlestick Patterns - Candlestick Formations - Chart Patterns Are Derived From Price Action. #3. Price Action Involves The Use Of A Naked Market Chart... With The Use Of RAW PRICE DATA #4. Price Action Is Definitely Leading The Way... To Trading Without Lagging Indicators #5. Price Action Does Not Involve Those Messy Charts And Clutter That Takes Up Half The Screen
Education
by UnknownUnicorn33425005
Chart MechanicsIt was only after studying the works of Ehler that I started looking at the charts as frequency. It was something so obvious that was staring me in the face but I couldn’t see it. Ehler is by far my biggest influence when it comes to chart analysis and indicator development, what makes him different is his background in electrical engineering. Many of my scripts are based on his work including Boom hunter pro, Tesla coil and the Center Of Gravity Oscillator. His contributions are so amazing yet are hidden away in the deepest corners of the Internet. Don’t believe me? Try google him. Since I first looked at a chart I wondered why the charts do what they do, why the same patterns keep appearing, how does Fibonacci fit into all this and what is really happening in a breakout… What you are about to read is my theory and based only on my own research and theoretical science. At first, I was searching for a formula or algorithm that would explain the rhythm and behaviour of price action with no luck. It was only after I converted the ticker into audio and started running it through some filters that I noticed it is not a digital signal at all. The waves and behaviours matched an analog signal. The only conclusion that I can come up with is at some point the chart ticker signal is getting passed through an analog circuit or a possibly but unlikely, a digital processor emulating an analog signal. This means the ticker data is travelling through a unit with electrical components, perhaps an audio amplifier or radio transmitter style circuit. My theory is this device is used to adjust the ticker price according to volume. When volume increases charts behave just like an increase in voltage, likewise when the volume decreases the price action operates at a lower voltage. I could go as far to say that a circuit like this is likely to be manually controlled by some potentiometers (knobs) that can adjust the voltage and bias of the signal passing through the circuit… but I won’t. Ive narrowed this down to 3 possible reasons. 1. This device was created to “randomise” ticker price to make the charts operate how they do, or secondly., it was an accident. My third conclusion is a combination of 1 and 2. I suspect when originally transmitting the chart ticker data by radio frequency the data on the other side came out messed up and random. Before the 1980’s this type of interference happened a lot when sending an audio signal wireless and usually came down to need to boost the signal with gain. There is a possibility that they liked what they saw and kept it to make the charts interesting. If you make your own exchange you will see that price action is boring and does not move like the charts that come from exchanges. If this was the case then there is a good chance as technology improved the need to transmit by radio was no longer required but they still wanted the “price action” so they built a box to emulate this response without the need to transmit wirelessly. It works like a filter over the the ticker price. A wise man once said “Understand magnets and you will understand everything.” Without magnetic energy electricity can not flow nor exist. Think of it as in layers. A magnetic field serves as train tracks (grid) for electricity to travel. The path of the magnetic energy dictates the path of electricity in a physical form. Magnetic energy has its own tracks, this field runs on a simpler set of rules than magnetic energy and does not have a materialised presence such as magnetic energy or electricity. You can’t see it, touch it or measure it directly. This makes it a theory impossible to prove in modern western science. Things like sound waves and light waves run on these rails , in fact everything in this universe is built on this field. To sum it up basically: magnetic energy is only required when materialising a wave. Before you jump in the comment section and call me crazy please consider I am not the first to talk of these principles. There have been many before me such as Hermes Trismegistus, Pythagoras of Samos, Leonardo Bonacci, Leonardo da Vinci, Nikola Tesla, Albert Einstein and Ed Leedskalnin. Even Isaac newton devoted 10 years of his life translating the emerald tablets of Thoth in an attempt to understand these principles. In my onion these are some of the greatest minds to bless our planet in modern history (last 12500 years). Why do I mention all this? These rails are important… The chart data coming from the ticker feed has analog processing, this means it is bound by these laws and price action is not random. The screenshot below shows 2 rules important to consider when trading. The waveforms of the chart MUST move within a channel. Channels can double or they can halve. There are an infinite amount of parallel lines within one parallel channel and infinite channels outside it. “As is above, so is below”. Every chart is just parallel lines within parallel lines. This doubling and halving process is the foundation of creation and life itself. 1 + 1 = 2... The first step of the Fibonnaci sequence. This is why Fibonacci lines and sacred geometry work on the charts. There is is not a Fibonacci line on the chart because that’s where all the volume is, There is a lot of volume because that’s where a fibonacci line is. I won’t go into detail on how and why but it has to do with the travel of polarity. The first doubling creates the first step in creating a vortex within this sub-magnetic rail system. Yes, there is a rail system that these rails run on too but lets not get into that. If you plot the Fibonnaci sequence on a 4 axis chart in every possible way (12 dimensions) you will be left with a very messy chart with lines going in all directions. Out of these lines there are darker areas where the lines cross over more often. If you look at these darkened areas it is a picture of a perfect 3 dimensional vortex. Inside this this vortex you will find all the golden ratio patterns as well as a Merkabah in the center and many other shapes you will recognise but thought nothing off before. I know this because Ive done it. What I'm trying to say is the fibonacci lines are hotspots of connectivity + flow and are essentially neutral zones for poles to connect and join this vortex to create a larger cell/vortex. So what is a support and resistance line? These lines are actually bands. And have the characteristics of a magnetic pull/push. The image below shows a parallel channel that price action flows in. The neutral line and support and resistance line are just smaller parallel bands and behave accordingly. In the image I use North and South as an example but at this level there is no such thing as north or south or positive and negative. They are just opposites. Neutral is the area where these opposite poles flow into each other and back out again creating a connection point for the next channel to attach itself. Consider this to be the eye of a vortex. This is similar to a parallel wiring configuration used in electronics, it is also how cells in our body divide and connect. Support and resistance lines are not only just straight lines they are also dynamic like a moving average (EMA) but these dynamic lines are built from this straight line grid. I use 4 labels to describe a SR line, active, inactive, static and dynamic. Active lines are involved in current activity. Inactive are not in use. Static - a straight line and dynamic - a moving line. If you don’t understand, don’t worry, Its about to get simple… In this screenshot below I mark out the strongest channel BTC is travelling in currently. In the chart on the left I have simply kept halving this channel. See how price action bounces between these lines. It's no coincidence. In this screenshot I have drawn in the other active channels of price action. At this point price action (wave/current) is trying to charge up a new set of lines but but with only 2 connection points the current cannot delivery the energy and is required to create more connection points. At this point price action can only go in 2 directions. In this screenshot we can see the waveform has now connected another line and can now pass more energy through. This a parallel connection effectively doubles the voltage and ohms of the link. Using my Tesla coil indicator we can see the charts as a frequency. When the price action charges a connection point it creates an explosion. Well… Its an implosion. First the waveform needs to pull in and switch polarity before exploding outwards. Below we can monitor the polarity activity using my Technicals pump wave: EVERY BREAKOUT FOLLOW THESE RULES. So what does this all mean? I don’t trade charts, I trade the signal that comes from the machine that makes the charts…
INDEX:BTCUSDEducation
by veryfid
38
Key Patterns Of Price ActionKey patterns of price action. Below I will describe several key patterns, but on the diagrams you can see the analysis from a technical point of view. And also please pay attention to the rules, which I do not advise to ignore. The Cup with a handle pattern is formed according to the following logic: - On an upward movement, the bulls cannot push through the next resistance level, a correction begins. It is undesirable that there were impulses during a rollback, a moderate downward movement should be observed; -By basic rules, the bottom of the cup should be formed in the area of correction levels. A deeper rollback is allowed in modified models. In case of a deep correction after entering the market, the position is transferred to breakeven as soon as possible, the probability of the trend continuation is lower, it is better to insure; Double bottom It all starts with the formation of a new low on a downtrend, after which a rollback against the trend occurs. Then, the price goes down again and rests against the previous low. And finally, after pushing off from this level, an upward movement begins, which breaks through the level of the previous local maximum. It is after the breakout of this level (confirmation line) that the final formation of the 'Double Bottom' occurs and you can start buying. The same is with a reversal in an upward market. After the first high, the price should fall by at least 10%. Otherwise, it will mean that the bears are not strong enough. Saucer Let's start with the shape of the figure. Contrary to its name, the correct shape of the 'Saucer' figure rather resembles a bowl. As you can see, the figure is formed by a smooth price movement along a parabolic trajectory. The first half of the figure (the left side of the saucer) is a smooth descent from the edge of the saucer to its bottom. The second half of the figure (the right side of the saucer) is the same smooth rise from the bottom to the edge. Ideally, the second half should be a mirror image of the first. And the bottom should in no case be sharp. The classic 'Saucer' is formed, as a rule, on large timeframes from D1. But you can also find him on H1. Flat base In trading, the term flat means an area on the chart, without a clearly defined direction of price movement, that is, a trend. In other words, flat is the opposite of a trend. Misc Rules -all BP = 10 pips -ideal prior uptrend >30% -for wks abv avg vol: #up>#down -up 20% for new base - undercut base resets base count - 66% or 3rd stage base fails - 80% of 4th stage base fails - in base bottom look for - shakeout - tight closes - volume dryout - accumulation
Editors' picks
Education
by DeGRAM
79
BTCUSD May See A Slow Down Based On Bitcoin Volatility IndexHello traders! Today we will talk about Bitcoin Volatility Index and we will show you how to understand and read it compared to the BTCUSD chart using Elliott Wave theory. Well, BTCUSD is in an impulsive rise from March lows and currently we are observing the final wave 5, mainly because of a rise out of wave 4 triangle, which in EW theory suggests the final move before we may see a deeper A-B-C corrective decline. If we take a look at the BTC Volatility Index chart, we can see it approaching the lows again. And always, when BTC Volatility comes to the lows, we can expect some big action and huge volatility, especially if this is a wave 5 of a bigger ending diagonal. So, considering that BTCUSD can be finishing wave 5 and BTC Volatility Index coming to the lows, we should be aware of a bigger corrective decline soon, ideally somewhere here at the end of August and beginning of September. If you like what we do, then please like and share our idea. Be humble and trade smart! Disclosure: Please be informed that information we provide is NOT a trading recommendation or investment advice. All of our work is for educational purposes only.
BITMEX:BVOL24HEducation
by ew-forecast
1
Trading Engulfing bars or Outside barsDefinition: An engulfing bar is a bar whose trading range totally encompasses or engulfs that of its predecessor such that it has a higher high and lower low. They develop after both down- and uptrends and represent exhaustion. They could be bullish engulfing bars which close higher than the open, or bearish engulfing bars which close lower than the open. A bullish engulfing bar forms at bottoms while a bearish engulfing bar forms at tops. Below is a gold chart illustrating a bullish engulfing bar. Notice how it has a higher high and lower low. Determining the significance of engulfing bars: The following factors are used to determine the significance of an engulfing bar. If at least 3 points are satisfied, I consider the setup a high probability one. 1. The wider the engulfing bar is relative to the preceding ones, the stronger the signal: This arises from that fact that the engulfing bar or outside bar is supposed to reflect a change in the balance between buyers and sellers. 2. The sharper the trend preceding the engulfing bar, the more significant the bar: This is because the engulfing bar represents change, therefore there must be something to change. Therefore, the stronger the preceding trend, the stronger the implied sentiment dominating that trend. 3. The more bars encompassed, the better the signal: In most situation, only one bar is encompassed. However, when it encompasses several bars, the signal that the balance has shifted from buyers to sellers at a top, or from sellers to buyers at a bottom, becomes that much stronger. The encompassed bars become a small price pattern in themselves. 4. The nearer the price closes to the extreme point of the bar that is away from the direction of the previous trend, the better: For example, if the previous trend was down and the price closes near the high, this is more favorable than if it closes near the low, and vice versa. This is because the engulfing bar is supposed to signal a reversal in the sentiment and a change in trend. The fact that the closing in this example develops near the high emphasizes the strength of the buyers, thereby adding to the validity of the signal. Note: If the close develops near the high in a rising trend or near the low in a falling trend, then the engulfing bar is not consistent with a change in psychology. In this case, it has become a consolidation, and not a reversal pattern. Notice the same gold chart that had a huge rally. See how it closed near its high. 5. The engulfing candle should be of the opposite color from the candle it engulfs. An important question to ask yourself when considering any bar pattern is: “What is the price action of this bar telling me about the underlying psychology?” Note: Not all engulfing patterns result in a reversal in trend. Some, for example, may be followed by a change in trend which can be seen after a pullback as price consolidates or has a correction. In this case, the engulfing pattern becomes a continuation pattern. Sometimes, after an engulfing bar is signaled, price can do a retracement before continuing in the direction indicated by the engulfing bar. This usually gives low risk and higher risk:reward ratio but this occasions are rare and if the retracement is more than 50%, then it is a case for concern. How to trade engulfing bars: Use pending orders. 1. Place a pending order a few pips above the high of the bullish engulfing bar and a few pips below the low of a bearish engulfing bar. 2. Stop Loss (SL) is safely a few pips beyond the opposite end of the engulfing bar. That means, if a bullish engulfing bar, a few pips below the low of the bar, and if bearish engulfing bar, a few pips above the high of the bar. This strategy gives the trade room to breathe. 3. The take profit (TP) should be on the next key level of support and resistance, or when a candlestick reversal pattern opposing the position is found. Example 1: Where to set entry parameters for a bullish engulfing bar. Example: Where to set entry parameters for a bearish engulfing bar.
Education
by Emekadavid
2
An introduction to Bar or Candlestick patternsBar patterns consist of one, two or few bars. Their usefulness lies in the fact that they can trigger signals at a relatively early stage in the development of a new trend and usually offer good benchmarks for traders to place low-risk stops. Overall, when considering these patterns, one key factor in determining their significance is the size of the pattern. Note this please because it is very important. Among other characteristics, this helps one to distinguish a high probability from low probability pattern. But size is measured relative to the preceding bars. These patterns are quite impressive to study because although they act short-term in influencing or moving price, they are quite reliable in their ability to signal short-term trend reversals. Even when a trend is long-term, they can develop at the final points in the trend just when it wants to reverse. One fact you should note is that not all of these patterns are created equal. By evaluating the criteria for the validity of these patterns, you should be able to distinguish between high probability signals from low probability ones. Only take high probability valid signals when you see them on a chart. General principles of bar pattern interpretation: Some of the general principles for interpreting these patterns are outlined below: 1. For these formations to be effective there must be something for them to reverse. That means top reversals should be preceded by a meaningful rally, and bottom formations should be preceded by a sharp selloff. As a general rule, the stronger the preceding trend, the more powerful the effect of the bar price pattern. This chart, a EURGBP chart, shows an example. 2. The formations generally reflect an exhaustion point. In the case of an uptrend, such patterns develop when buyers have temporarily pushed prices up too far and need a rest. In the case of a downtrend, there is little if any supply because sellers have liquidated their positions. That is why these patterns are always associated with a reversal in the prevailing trend. In the EURGBP chart above, notice how the momentum of the sell-off has dropped significantly and each bar had low volatility before the pattern appeared. 3. Not all patterns are created equal. The presence of one of these patterns on a chart does not necessarily guarantee a quick, profitable price reversal. Some patterns show some of the characteristics in a very strong way while others in a mild way. Therefore, you need to apply common sense to their interpretation. Take only patterns that show a high probability which some have called 5-star patterns. The USDCHF chart below shows a bullish pin bar that failed because it was trading into a barrier, resistance, when it should be trading away from a barrier. 4. Occasionally, it is possible to observe some form of confirmation closely following or even during the development of these patterns. Some examples could be the pattern being a large pattern, the violation of a trendline, or its formation at a support and resistance zone. These increases the odds that the pattern is a valid signal as well as significant. Relationship to Japanese candlestick patterns: Although these patterns were discovered when bar charts were widely used and hence the name, you could use candlestick charts for their analysis since bar charts and candlesticks share the same data presentation which is the same open, high, low, and close (OHLC) of price within a specified time. They also share a relationship to traditional Japanese candlestick patterns that are widely used for centuries. Anyone familiar with Japanese candlestick patterns would readily see the similarities and be able to use these bar patterns quickly. If you want an overview of Japanese candlesticks patterns you can read the classic book by Steve Nison on the subject titled “Japanese candlestick charting techniques.” So, when you see bar in subsequent notes, you can replace it with candlestick. Note: Make sure these patterns form tops and bottoms, that is, swing highs and swing lows, before trading them.
Education
by Emekadavid
3
Understanding the Significance of a TrendlineWe want to trade trendlines, but not all trendlines have equal importance. Whether price has touched a trendline or violated it, we should act based on whether the trendline is significant or not. The following three factors are usually considered when evaluating the significance of a trendline: the length of the line, the number of times it has been touched, and the angle of ascent or descent. 1. The length of the line: Since a trendline measures a trend, the longer the line the longer the trend it is monitoring and the more significant the trendline. 2. Number of times the trendline has been touched or approached: The larger the number of touches or approach to a trendline, the more significant is the trendline. Note that because a trendline represents a dynamic area of support and resistance, each touch or approach increases the significance of that trendline because it better represents the underlying trend. Some traders tend to ignore a move close to the line, that is, an approach, but this is as significant as the actual touch. This USDZAR trendline has two factors working for it. One, it is long, extending from March 13 to April 2 and has a good number of touches. 3. Angle of ascent or descent: A very sharp trend is difficult to sustain and liable to be easily broken by a short sideways movement. Flatter trendlines or lines with smaller angles of ascent or descent then are better in reflecting price. Since steep trendlines are likely to be violated much easily, the violation of a particularly steep trend is not as significant as the violation of a more gradual one. That is why the penetration of a steep trendline usually represents a continuation rather than a reversal break. The following chart shows a steep USDTRY (dollar Turkish lira) trend that resulted in a continuation of the prevailing trend. Measuring implications: Trendlines have measuring implications when they are broken. The measurement is calculated as the maximum vertical distance between the price and the trendline. The distance is then projected in the direction of the new trend from the point of penetration. This is known as the measuring objective. It should be noted that measuring objectives in trendlines are sometimes misleading because when a trendline violation turns out to be a reversal, objectives are usually reached and exceeded. Therefore, you should take the measuring objective as more of a minimum expectation. The chart below shows how the measuring objective can be calculated for a GBPUSD uptrend, taken from the maximum vertical distance between the price and the trendline.
Education
by Emekadavid
Trendlines and how to trade themTrendlines are one of the simplest tools in technical analysis and about one of the most effective for price patterns since they form the building block for pattern identification and interpretations. What is a trendline? – A trendline is a straight line connecting a series of ascending swing lows in a rising market or the top of descending series of swing highs in a falling market. The trendlines that are constructed by joining swing lows are called upward trendlines and those connecting swing highs are called downward trendlines. How to draw trendlines: A downward trendline is constructed by joining the first swing high in a downtrend with another swing high. When price breaks above the trendline, a trend change signal is given. The upward trendline is drawn by joining the first swing low in an uptrend to another swing low. When the trendline is broken, a trend reversal signal is given. Notice how the trend reversed when the trendline above was broken. We have said that in order to be a true trendline a line must connect two or more swing highs or lows, otherwise it is not significant. This is a fundamental point because a true trendline is a graphic way of representing the underlying trend. Trendlines can be primary trendlines or secondary trendlines. The primary trendline connects the first top or bottom with the next swing point. If price then moves sharply, this could create a second trend within the primary trendline. Then we connect the first two swing points again to form the secondary trendline. Trendlines can alert you to changing market conditions. How? By paying attention to the steepness of the trendline. If the trendline is getting flatter, it means the market is moving into a range condition. If the trendline is getting steeper, it means that the trend is getting stronger (or possibly going into a climax). Thus, you can be able to adjust your trading strategy accordingly. Also, note that trendlines are not always diagonal. There are also horizontal trendlines and these are seen in the case of some price patterns such as head-and-shoulders pattern or the upper and lower boundaries of rectangles. When these lines are penetrated, they usually warn of a change in the trend as would the violation of upward or downward trendlines.
Education
by Emekadavid
How to determine if a support or resistance will holdWhen price goes to a key level, that is, a support or resistance level, it will either hold and reverse price or it will break and be violated. There are no hard and fast rules for determining if a key level will hold and reverse price but I can give you some guidelines on what to look out for that would increase the odds that a support or resistance would hold. 1. The greater the speed and extent of the previous move, the more significant the support or resistance will be. In this case, watch out for big candles leading up to the key level. Consecutive big green candles in an uptrend or consecutive big red candles in a downtrend shows that the move has speed or momentum. Also, the candles have high volatility or the ranges are large. This big move towards the key level shows that the buyers or sellers in the previous move are overextended and they might be getting exhausted, and so would be lacking enthusiasm to continue their move at that key level. 2. Examine the amount of time elapsed. By looking at when the market touched that key level in the past and the general market conditions, it could tell you whether the market is likely to regard that key level as important. The longer the price has been away from that key level, the more significant it is that the level would hold as support or resistance because other traders who trade in higher time frames would be attracted to that level. 3. Look for strong price rejection. The presence of rejection candlesticks at a key level, like pin bars and also rejection patterns like two bar reversals, three bar reversals and engulfing bar patterns is a high probability sign that the level will hold. When you see strong price rejection at a key level, you should be confident that the level would hold as support or resistance. Some reversal strategies are based on this effect.
Education
by Emekadavid
8
Rules for determining Potential Support and resistance. 1. Swing points: Previous highs and lows These points are intelligent points where one would expect support and resistance. They are high probability points because sellers and buyers made decisions on these points in the past and it is more likely that when price gets there again, due to people’s psychology being constant, they would tend to act on these points. Buyers who bought at the lows have a tendency to take profits at the highs, and vice versa for sellers to take profits at the lows. Sometimes though, price will not respect these zones and would just break through them. That is why they are pointers or intelligent places to expect support and resistance to be. 2. At round numbers: Support and resistance often form at round numbers because these serve as psychological points on which traders base their decisions. They are often referred to as psychological levels and market orders used to be formed around these numbers. It is the human tendency when talking about numbers, to gravitate towards round numbers and this is no different for the forex market. For most of these numbers, price would tend to end in two, three or four zeros like 1.3200, 109.00, 110.00, and 1.0000. 3. Trendlines and moving averages. These are dynamic levels of support and resistance. I usually use trendlines and avoid moving averages although many price action traders use moving averages. The number of times a trendline has been touched, the more reliable it will be. That is a rule in trendlines. To draw a valid trendline though, it has to touch at least two swing highs for a downtrend, or two swing lows for an uptrend. You buy or sell at these points again if price touches them another time. 4. Gaps Gaps represent emotional points on charts. They are formed when there is a substantial difference between the closing price of the previous candlestick and the opening price of the next candlestick. They are formed when there is a strong shift in sentiment about the market, and usually due to fundamental news. Gaps can occur over the weekend or intraday. Weekend gaps are more common than intraday gaps. It is noticed that the market tends to fill the gaps that were formed, and when these happens, the gaps tend to act as support and resistance levels. 5. Fibonacci levels To every action, there is a reaction. So when price moves upwards, it usually has a correction. The same goes for price move downwards. When these corrections happen, the Fibonacci retracement tool can be used to measure where this will end for the underlying trend to continue. This tool was taken from the famous Fibonacci sequence of numbers such as 1,1,2,3,5,8,13,21,34,…. If any number in the sequence is divided by its successor, what you get is a ratio, 0.618, which is called the golden ratio. The golden ratio appears widely in nature and market participants believe that this golden ratio can be used to measure how much price will make a correction or counter trend before returning to the dominant trend. The levels are defined as percentages and many price action traders believe that the 61.8% and 50% fib retracement levels are very significant, although other levels are also important.
Education
by Emekadavid
Understanding Support and ResistanceSupport and resistance are points on a chart where the probabilities favor at least a temporary halt in the prevailing trend. Support is experienced when demand concentrates around a zone as price is in a downtrend and price finds it difficult to break below that zone. This is because traders have placed a high number of buy orders at the zone, preventing prices from going lower. Resistance acts like a ceiling on prices when prices are on an uptrend. Prices find it difficult to go above that level because traders have placed a high number of sell orders at that zone making it difficult for an upward thrust beyond that zone. This USDZAR chart illustrates areas of support and resistance on a chart. Although they are plotted as lines on a chart, we should not think of them as specific price points but as zones. A support zone represents a concentration of demand, and a resistance zone represents a concentration of supply. We need to emphasize the word, concentration, because supply and demand are always in balance, but it is the relative enthusiasm of buyers compared to sellers, or vice versa, that is important because that is what determines trends. If buyers are more enthusiastic than sellers, they will bid prices higher until their purchasing demands have been satisfied. Also, if sellers are the more anxious, then they will be willing to liquidate at lower prices, and the general price level will fall. These are the three principles to follow when analyzing support and resistance zones. Principle 1: A previous swing high or low is a potential resistance or support zone. Therefore, to identify a potential support, look for previous lows. In the case of a potential resistance, look for previous highs. Principle 2: Support can reverse its role to resistance on the way up after a violation of the zone. Some elementary psychology will be used to explain this. At the previous support, some buyers went long thinking that price will rise but eventually, price violated or broke the support zone. Now, since no one wants to take a loss, they held on to their positions with the belief that price will rise up again. When price eventually rose to the previous support zone, they closed their positions so as to breakeven, thereby creating sell orders at that zone that made the zone now resistance. Principle 3: Resistance can reverse its role to support on the way down after it has been violated. Principles 2 and 3 are what traders call support and resistance flips. Take note of these principles because they are important in the price patterns we are going to trade.
Education
by Emekadavid
Which is better: Arithmetic or Logarithmic scale charts?A market chart has two axes, the x-axis and they-axis. Where the x-axis registers the date, the y-axis registers the price. The y-axis has two methods for plotting it: an arithmetic scale or logarithmic scale. Whichever you chose will have implications for your trading. Arithmetic scale: On an arithmetic scaled chart, the spacing between price levels is equal. If price rises, like from 1000.20 to 1500.20 and 1780.20 to 1980.20 for gold, the grid spacing on the chart does not change. This is a gold chart illustrating arithmetic scaled chart. Logarithmic scale: The log chart is scaled based on percent moves. A hundred percent move or change in prices will have a larger space than a fifty percent move or change in prices because the spacing reflects differences in percentages. The same gold chart illustrating a logarithmic scale. The differences in both scales are not readily noticeable when charts are plotted on short periods of time because price fluctuations are relatively subdued. However, you begin to notice considerable differences with large price fluctuations. Because my trading is in the short term, I use the arithmetic scale. But position traders who deal on the longer term would consider using both arithmetic and logarithmic charts for their trading. That way they see both the price level moves as well as how that scales in percentage terms.
FOREXCOM:XAUUSDEducation
by Emekadavid
Identifying Trends through swing points - the 2-step approach.Using swing points i.e swing highs and swing lows, to identify trends is one of the most basic techniques of technical analysis. This is also the building block for identifying price patterns and part of having high probability setups. Swing points are the maximum or minimum points on a trend or range. A swing high identifies the rising price extreme while a swing low denotes the minimum price extreme. The concept is simple. A rising trend consists of a series of higher highs and higher lows. A falling trend consists of a series of lower highs and lower lows. The following two charts show a rising trend and falling trend using this concept. First, USDJPY chart showing an uptrend or rising trend. Next, EURGBP chart showing a downtrend using this concept. In a rising trend or uptrend, when the higher highs and lows are interrupted, we know that a trend reversal has been signaled. For a falling trend or downtrend, when the lower highs and lows are interrupted, we know that a trend reversal is about to take place. But often, people find problems with really identifying a trend reversal. For example, it is widely taught that to identify a trend reversal in an uptrend, price has to intersect the last swing low. I used to follow that approach until I ran into problems. The same goes for a downtrend where it is taught that price has to intersect the last swing high for a downtrend to confirm a trend reversal. Using this approach, one could believe that a trend has reversed on some cases while in actual fact the reversal has not been confirmed but just a half reversal. Now, I use the two step approach to confirm trend reversal. For uptrends: Step 1. Price should first of all make a lower high. Step 2. Then when price breaks the last swing low before the lower high, a trend reversal has been confirmed. Otherwise, price will get to a consolidation or trend continuation. This GBPJPY daily chart illustrates it. For downtrends: Step 1: Look for price to make a higher low. Step 2: Then when price breaks the last swing high before the higher low, you have confirmed a trend reversal. Otherwise, price will go into a consolidation or a trend continuation. Note: How significant a trend reversal is can be determined by the duration and magnitude of the rallies and corrections for uptrends, or selloffs and corrections for downtrends.
Education
by Emekadavid