Candlestick Strategies (2)

DOJI
The Doji  is one of the most important candlestick patterns. A doji formation is a single-candle pattern. It occurs when prices opened and closed at the same level. A doji represents equilibrium between supply and demand, a tug of war that neither the bulls nor bears are winning. Traders should not take action on the doji alone. Always wait for the next candlestick to make an appropriate trade.
After a long uptrend, the appearance of a doji can be an ominous warning sign that the trend has peaked or is close to peaking. The converse holds true for a downtrend. When assessing a doji, always take careful notice of where the doji occurs. If the security you’re examining is still in the early stages of an uptrend or downtrend, then it is unlikely that the doji will mark a top, but it could precede a pause in the current trend move. It can be viewed as a pivot.
“Top marker” (below) includes an example of a successful doji pattern. As shown in the daily chart, the S&P 500 started its rally from June 25, 2013, reached a high of 1709 on Aug. 2, and then on Aug. 5, the index opened at 1708 and closed at 1707.41. The open and the high were almost the same, which are the qualifications for the doji candlestick pattern.


Confirmation of a new downtrend came on Aug. 6 when the S&P 500 broke the Aug. 5 low of 1703 and closed at 1697.3. A reasonable stop loss could have been placed at the Aug. 5 high of 1709.

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Candlestick Strategies (1)

Candlestick are one of the most powerful technical analysis tools in the trader’s toolkit. They are also one of the most prevalent. Most technical analysis programs use candlesticks as the default mode of charting. Used correctly, candlesticks can give a signal in advance of much other market action. They can be a leading indicator of market activity.
But familiarity doesn’t necessarily breed expertise. There are perhaps more than 100 individual candlesticks and candlestick patterns. This is a daunting amount of information for a trader to understand and apply.
As with most things, some candlestick patterns are more useful than others. Here, we will take a look at some of the most viable for stock traders. These are candlestick patterns that experience shows have the most relevance to making consistently profitable trading decisions. Used correctly, they should increase the accuracy of your predictions.

Candle basics
For those not familiar with the details of candlestick charting, it’s important to go over the fundamentals. The difference between the open and the close is called the “real body” of the candlestick. The higher of these values creates the upper extreme of the real body, and the lower of these values creates the lower extreme. The amount the stock rose in price above the real body is called the upper shadow. The amount that the stock fell below the real body is called the lower shadow.
If the candle is green or white, it means the lower extreme is defined by the opening price and that the stock’s price rose during the period being charted. If the candle is red or black, then the lower extreme identifies the closing price, and the stock fell during the period.
Candles may be created for any time period: Monthly, weekly, hourly or even a minute. Regardless of the time frame, candlesticks should not be judged in isolation; traders should always look for follow-up action to confirm any signals during the following applicable period.

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How To Draw Support and Resistance

Do you know the most significant concepts when one thinks of forecast any financial market (Forex, stocks, futures, etc )? I believe support and resistance levels, some traders might disagree with me, but the knowledge we could get from these levels could actually help us trade with better results.

There will be three things the marketplace could do after hitting a support or resistance level :

Retrace
Change direction
Stall

Being aware what the marketplace is probably to carry out after reaching one of these simple levels, we could adapt our strategy to trade based regarding that information : about what the marketplace is probably to carry out. Therefore, we want to understand how to draw support and resistance levels and be ready to result in the necessary changes to our strategy : move your stop loss levels, close your trade, add within your trade, etc.

But first things first, what exactly are these support and resistance levels :

Support level : Is really a level during which the marketplace is rejected a minimum of twice and it‘s keeping the marketplace from reaching lower levels.

Resistance level : is really a level during which the marketplace is rejected a minimum of twice and it‘s keeping the marketplace from reaching higher levels.

Can it be important to understand why the marketplace is rejected from these levels?

No, it isn’t. I don’t care why the marketplace was rejected from a crucial level, what is vital for myself usually is to know what the marketplace is probably to carry out upon the following hours / days (following the rejection has happened ) so I will profit from it. It’s not important to work out why the marketplace moved up or down, what is vital is : whether you profited from it, isn’t it?

There could possibly be many reasons of why the marketplace is rejected from these levels : accumulation of buy orders (with a support level ) or sell orders (with a resistance level ), buyers are attracted from the lower levels (support level ) or sellers attracted from the higher levels (resistance level ), buyers think or have the market will go higher (support ) or sellers think or have the market will go lower, etc. Except for sure, nobody knows the rationale behind market rejections, but again, it doesn’t make a difference, what is vital for those usually is to know what we will do following the rejection. Plus, there isn‘t any method of knowing exactly why the marketplace topped or bottomed at certain level.

Like a side note, There‘ll continually be someone telling you what caused the rejection from the market at one important level, but now you know about the analyst or trader is simply bluffing.

3 Simple rules to draw perfect support and resistance levels

Rule No. 1 : the marketplace needs to obtain rejected a minimum of twice coming from the level (not just one, twice ).

Rule No. 2 : the greater rejections the level has, the greater important it becomes

Rule No. 3 : most recent rejections tend to be more important than less recent rejections


A chart is valued at one thousand words : )

The resistance level (blue line in the top ) it’s essential, the marketplace is rejected three times coming from the same level. If there was another resistance level near this one, with only two rejections, the one marked on blue could be more important.

Now, in regards to the support levels (both have three rejections ), which is much more important? I’d say support level B, since it is more recent than support level A. So If I‘d been trading this currency pair, I’d consume consideration only support level B.

There is definitely rule that I always follow : only take on consideration the support and resistance levels the market is really taking in consideration. Why would I act with different level the marketplace is responding to? Right?

One important thing to think about : support and resistance levels are like zones rather than levels. So don’t break your head attempting to determine places to draw your level : at close from the candlestick, at the bottom low, etc. Just draw it where it touches the foremost rejections.

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Using RSI in Forex

Relative Strength Index, or RSI, is similar to the stochastic in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 30 indicate oversold, while readings over 70 indicate overbought.

How to Trade Using RSI

RSI can be used just like the stochastic. We can use it to pick potential tops and bottoms depending on whether the market is overbought or oversold.
Below is a 4-hour chart of EUR/USD.

EUR/USD had been dropping the week, falling about 400 pips over the course of two weeks.
On June 7, it was already trading below the 1.2000 handle. However, RSI dropped below 30, signalling that there might be no more sellers left in the market and that the move could be over. Price then reversed and headed back up over the next couple of weeks.

Determining the Trend using RSI

RSI is a very popular tool because it can also be used to confirm trend formations. If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50.
If you are looking at a possible uptrend, then make sure the RSI is above 50. If you are looking at a possible downtrend, then make sure the RSI is below 50.





In the beginning of the chart above, we can see that a possible downtrend was forming. To avoid fake outs, we can wait for RSI to cross below 50 to confirm our trend. Sure enough, as RSI passes below 50, it is a good confirmation that a downtrend has actually formed

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Cup and Handle Pattern in Forex

Cup and Handle or Saucer and Handle pattern is among the strongest patterns I‘ve ever seen. This pattern doesn’t forms upon the charts too often, because unlike another patterns like triangles, head and shoulders, rectangles and… it requires a very long time to form. However, when formed It‘s so reliable and strong and generates strong and profitable trade setups.

This patterns looks exactly as it‘s named. It‘s as a cup and it is handle when you percieve it coming from the side.

Click the images to discover them in full size :

Cup and Handle Pattern
How Will the Cup and Handle Pattern Form?

Please refer towards the below screenshot while reading this article :

1. A to B : Cup and handle pattern starts forming once the market starts going down strongly. The down movement forms the left side from the cup.

2. B to C : Following a while of owning a strong bearish market, bears becomes exhausted and thus the down movement becomes slower, and we‘ll possess a sideways market for any short time period. This sideways movement forms the bottom from the cup.

3. C to D : Probably the bulls eliminate the control and also the market starts going up strongly, like when it started going down strongly at the start of the formation from the cup. This strong up movement forms the ideal side from the cup.

4. D to E : Following a while of going up, the bulls become exhausted too and thus the marketplace stops going up strongly and forms a little sideways section which happens to be the cup handle. This part is vital since it is where we will predict subsequent direction from the market. I will be able to tell you the way.
Cup and Handle Pattern Formation

Cup and Handle Pattern Formation 

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Double Tops and Double Buttoms Pattern

Forex double top price patterns usually occur after an uptrend and illustrate buyer exhaustion

- Forex double bottom patterns usually occur after a downtrend and reflect seller exhaustion

- Profit objectives and stops can be easily place on these patterns

Forex double tops are very popular among traders as they signify a successful test and price rejection from a recent new high. Found in an uptrend, the forex double top pattern consists of a run up in price to a new high and then followed by a pullback and then a retest of that previous new high. Usually, the following rally stops at or near the exact price of the previous high. In some cases, a slightly lower low is made as buyers run out of strength. 

 

Learn Forex: Double Top Price Pattern

(Created using FXCM’s Marketscope 2.0 charts)

Notice in the example above, the uptrend makes a new high and then pulls back to a level of support. Forex traders will recognize the letter “M” shape pattern formed by the forex double top pattern. As bulls take back control of the market and buy the dip in price, they push price back up toward the old high. Unable to push price back above the old high, buyers give up and prices begin to fall back to support.

Traders should then wait for price to close below the previous level of support to confirm that the pattern is truly a forex double top. Entering short with a stop above the previous high and a profit target equal to two times the stop distance is a solid way of trading this reliable pattern.

On the other hand, the forex double bottom chart pattern is found at the end of a downtrend and resembles the letter "W". Price falls to a new low and then rallies slightly higher before returning to the new low. Unable to push price to a new lower low to continue the downtrend, sellers give up and price bounces sharply from this area.

 

Learn Forex: Double Top Price Pattern

The retest of the previous low point and the subsequent rebound confirm that this was a very strong  level of support. Buyers have confidence in trading the currency pair long because the odds of price reversing is now much less. Aggressive traders may place waiting buy orders at or near the previous low in order to catch an early move higher. While more conservative traders will wait for a close above a trend line to confirm the pattern.

The double bottom can be a fast moving pattern so traders will want to see price rally after a few bars. After entering long into the market, traders will place a protective stop a few pips below the lowest low of the pattern and a limit equal to twice the size of the stop.

Very few patterns clearly illustrate the reversals in market direction like the forex double top and forex double bottom patterns. It is important to always use a protective stop when trading and waiting for confirmation of the pattern to filter and reduce the number of pattern failures that can happen.

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Harmonic Pattern

Harmonic Patterns - Are strategies that recognize price patterns using Fibonacci ratios to help determine reversal points in the financial markets.

ABCD

The ABCD pattern is an indicator that identifies three consecutive price swings. This pattern can be recognized in a shape of a lightning bolt. This pattern is unique because the difference between the swing either of low is the same distance. The Fibonacci retracement indicator is good tool to help measure the ideal AB=CD ratio.



A desirable ABCD pattern should retrace either .618%, or .786% Fib. The length as shown in the chart of B-C should be 1.27 or 1.618 Fibonacci. However, a .618% Fib retracement at Point C should result in a 1.618 distance, and .786 Fib should result in 1.27.

A profit target can be made about half or two thirds of the AB=CD move, and the stop loss can be placed under the completion of D.

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In the above example, the GBP/USD retraced to the profit target. This validated the AB=CD move to be bullish.


Butterfly Pattern

The butterfly pattern is a reversal pattern that focuses on new lows or highs. This pattern can either be bullish or bearish not only depending on price action, but the trend. Entry can be seen when the pattern has reached point D (the end) which gives confirmation of the reversal. A stop should be placed under or above the reversal area. A profit target can be put at half or two thirds of the butterfly move.

The most critical pattern is the XA leg to point B as it defines a crucial point called the Potential reversal Zone. This validates price reversing, which can confirm a trade signal. Further, the XA leg determines the calculation of B-C which is also a validation of a reversal. The ABCD pattern as shown in the chart gives confirmation of the butterfly.

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In the above example of a bearish butterfly for the EUR/USD, it hit our profit target validating the pattern and reversal.

Gartley Pattern

This is leading indicator that is illustrated through four consecutive price swings that are in a shape of a W. The start of the pattern is started from either a low or high that is called X. By defining X you can pinpoint A, B, C, and D. Unlike the butterfly pattern, the gartley is used to help identify opportunities, not a reversal in price action.

The most crucial point of the Gartley pattern is point B. The reason for this is because it defines the most reliable reversal, which is an opportunity. Point B must be at .618 Fib which can be seen from the XA leg.

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3 Drive Pattern

The three drive pattern is a harmonic pattern that is derived from the Elliot wave theory. It is unique as it does not contain X,A ,B, C or D, but instead 3 tops, or bottoms. These three price legs (alike the ABCD) signals the trend direction. These legs are considered to be the drives of the trend, and consist of Fibonacci ratios (1.13 1.27 or 1.618) that show equal movement in prices. These ratios can be seen inside at either the swing high or swings lows.

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